cable industry

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Cable Television Industry in Korea:Today and Future

April 8, 2014

Yoo S. Yang, Ph.D. ()Chung-Ang University ()

Seoul, Korea

History 1995 Cable TV Service launched:

48 SOs with 24 PPs and Terrestrial broadcast channels(KBS, MBC, SBS)

1999-2000 Deregulation of the Cable Industry Vertical and horizontal integration allowed (MPPs, MSOs, MSPs) Licensed PPs (news, home-shopping) and Unlicensed PPs (registration only) SO Ownership 33% allowed to conglomerates, foreigners, press

2003 10 million subscribers 2005 Digital Cable TV service launched 2007 VoIP service 2008 15 million Subscribers (80% of household) 2008- 2010 Deregulation of the Media Industry

Convergence of Telecommunication and Broadcasting 2008 IPTV launched 2011 Four new general programming channels (GPCs) launched

2013 14.8 million subscribers (6.2 mil. Digital/ 8.6 mil. Analog)

Multi-channel cable service launched in 1995 with 48 licensed system operators and 24 licensed program providers.However, the 1998 financial crisis in Asia brought critical damage to the cable industry and massive deregulation of the cable industry was conducted in order to restructure and reshape the cable industry for survival and sustainability. Due to the deregulation, the cable industry showed a remarkable growth, reaching the target of 10 million and 15 million subscribers in 2003 and 2008 respectively.

The second wave of deregulation in 2008 aimed to reform the media industry that has been heavily dominated by the three terrestrial broadcaster groups, and to introduce strong competitors into the media market to drive digitalization of the media infrastrucutre. Three newly licensed IPTV service operators, subsidiaries of telecom companies, and 4 general programming channels majority each owned by one of the four major newspapers.

As of December 2013, Koreas cable industry boast of close to 14.8 million subscribers.

Cable Industry in Korea Five vertically and horizontally integrated cable media groups (MSPs:

Multiple System Operators and Program Providers) 92 system operators(SOs) in 77 franchise areas 264 program providers(PPs) now in service

Multiple System Operators

Multiple Program Providers

channels

3

92 System operator (SOs) are providing service in 77 franchise areas5 MSOs running 77 SOs dominate the cable marketThese MSOs are vertically integrated, running MPPs and strongly influencing the channeling business in Korea. 264 Program Providers (channels): Each broadcast network has multiple PPs as its subsidiaries. Major MSOs also run multiple PPs.

There are 12 Licensed PPs (6 Home-shopping channels, 2 News Channels and 4 General programming Channels), and the rest are unlicensed but registered program providers.

MSP(multiple system operator and program provider) is actually a media group that are vertically and horizontally integrated and exert dominant market power following the industry value chains. Since terrestrial broadcasters are in fact very highly integrated (from platform, content production to cable program channels), these MSPs are now improved position to effectively compete against the terrestrial media groups in Korea.

Cable TVs important role in Korea

Critical Access to Terrestrial Broadcast Programs

# of Employees

Cable TV hires 17,500 employees in Korea

- SOs : 4,846- PPs : 12,654 employees

Broadcast television networks employ13,691 workers

7.9%

69.1%

Source: Television Viewing Behavior Study (KCC 2012)

Cable Satellite Terrestrial broadcast

IPTV no TV

4

Despite the dominance by the broadcast networks in the TV ad market, Koreas cable TV companies have been playing an important role.

First of all, the cable industry has been and will be the most important delivery medium for the terrestrial broadcast networkWithout the Cable networks, Korean viewers cannot watch programs aired by the terrestrial broadcasts.In 2012, 89.1% of television households watch TV thru Pay TV networks, only 7.9% directly.

Secondly, the cable television industry in Korea employs 17,500 workers now, hiring more than satellite and IPTV network operators. Cable program providers (PPs) employs almost the same as the Broadcast network operators.

Cable Industry: Revenues

36%

48%

4%12%

PPs Annual Revenue in 2012

Program ChannelsHome shooping channels

Total Revenu

eUS

$ 5.3 bil.

1,054 1,132 1,253 1,487 1,691 1,8161,937 2,122 2,3201,581

2,057 2,3502,761 3,053 3,300

3,9604,717

5,548

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

Annual Revenues by Broadcast Networks in Korea [unit : billion KW,%]

television broadcast networks Cable television networks

Program Providers Satellite television networks*

IPTV

Year 2013SOs: US$ 3.2 bil.PPs: US$ 5.9 bil.

Home shopping channels account for almost 50% of the total revenue among program providers.

2004 2005 2006 2007 2008 2009 2010 2011 2012

Cable market in Korea has been steadily growing over the past 10 years, showing 17% annual growth rate on average. In the year 2013, total revenue of cable system operators reached US$ 3.2 bil. from year 2012s US$ 2.2 billion, while PPs recorded US$ 5.9 billion from US$5.3 bil. In 2012.

Out of US$5.3 billion earned by program providers, home-shopping channels account for almost 50% of the total. Korea now has 6 home-shopping channels (CJ oshopping, GS Shop, NS, , , &).

Cable Network Subscribers (2008-2013)

Five MSOs, running 77 SOs, account for 80% of the cable subscribers in Korea.

1.9

6.2 mil

15.2014.86 mil

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

2008 2009 2010 2011 2012 2013

Mill

ion

subs

crib

ers

A. Cable networks D. Cable networks Cable networks Total

13.3

8.6 mil

Total number of cable subscribers has been slowly decreased over the past six years from 15.2 million down to 14.8 million subscribers.Five MSOs, running 77 SOs, account for 80% of the cable subscribers in Korea.

About 40% of 14.86 mil. cable subscribers are digital cable network subscribers at the end of the year 2012, and analog subscribers are switching to digital services now. Industry expects that the number is quickly getting larger recently as Cable System Operators invest more in digitalizing the system.

However, analog subscribers are strong target market both for IPTV and D. cable operators.

Despite the decrease of subscribers, SOs and PPs revenue UP!!!

15.2 mil 14.8 mil.Cable TV

Subscribers

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

2008 2009 2010 2011 2012 2013

US$ 3.2 billion

US$ 5.9 billion

Unit: Bil. Won, 10,000 households

US$ 2.1 billionCable SOs Revenue

PPs revenue

US$ 2.8 billion

Despite the slight decrease in total number of subscribers from 15.2 million down to 14,8 million, the cable industry shows sharp increase in their total revenue over the past 5 years.

Why?

Digital cable subscribers with higher ARPU, compared to analog subscribers ARPU.Consistent revenue from broadband services

TV Ads market

Year 2012

A major source of revenue, the TV advertising market in Korea, is seriously dominated by the terrestrial broadcast groups KBS, MBC, SBS and their subsidiaries that runs multiple cable channels.

Based on their original content production power, these media groups account more than 60% of the total TV ad revenue in Korea, while the cable industry as a whole accounts for 39% only.

Digital Services by the Cable TV

interactive services Smart Broadband Services UHD Channels on Cable OTT services

Here are digital services offered by the cable industry these days in Korea.

Digital Cable Network Services in Korea

VOD(movie/TV drama) TV shopping Cloud-based consolgames

Interactive learning TV garaoke TV stock trading

10

Started in Feb. 2005, the cable operators now provides interactive services and have more than 150,000 video programs.

Digital cable services include not only VOD but also TV shopping, Interactive games, interactive learning, TV Garaoke and TV stock trading.

Smart Broadband Services

App Store

Personalized VOD service Web-browsing

UPPER BODY(App)

Back 11

Since 2012 smart-broadband services were offered by the system operators on a trial basis, ad is expected to provide full service in 2014.

Also, the cable industry undergoes a joint project to build a HTML5-based TV App-store for SOs in Korea.

UHD Channels on Cable

12

In July 2013, five major system operators demonstrated UHD service for the first time and opened a UHD channel in the beginning of the year 2014.

By the end of this year, the industry expects to run commercial UHD channels and UHD-quality VOD service.

OTT services by Cable Operators

13

CJ Hello visions tving secured 5 million users in two years, providing live-streaming video of major broadcast network and cable channels as well as VOD services.

C&M introduced pooq in alliance with MBC

HCN introduced Every On TV in alliance with Pandora TV

Government Regulations in Korea

Two Regulators now on the Cable industry

Communications policies Pay TV network policies (Cable, IPTV,

Satellite, Program Providers)

Licensing and Re-licensing of terrestrial broadcast networks and general program channels

Ex-post regulation of broadcast business (illegal behaviors)

Korea Communications Commission

Ministry of Science, ICT and Future Planning

15

The cable industry in Korea is now directly regulated by two separate regulatory bodies, Korea Communications Commission and the Ministry of Science ICT and Future Planning.

KCC takes charge in licensing/ re-licensing of terrestrial broadcast and, interestingly enough, newly licensed general program channels and news channels.

Most of detailed rules and regulations now belong to the jurisdiction of the newly organized Ministry of Science ICT and Future Planning.

*** Recently, as the industry get more competitive and growing dominance by the major media groups, FTC is investigating possible anti-competitive behaviors of market dominant players in the media industry. As the media industry gets more market oriented and deregulated, there is a growing tendency that market players take their own actions under the rules of the market, rather than relying on the coordination efforts or guidelines by the regulators. On content control? Self-regulatory approach by pay-TV operators.

Regulations on Pay TV Network Business in Korea

Cable Network Satellite Network IPTV

Cross-ownership Maximum 33% of cross-ownership No cross-ownership regulation

Market Shares

Limit 1/3 of 77 franchise areas Limit 1/3 of total cable subscribers Now same as IPTV (2014 revised)

No limit Limit 1/3 of total Pay TV network subscribers

Max.Subscribers* 5 million 8 million No limit 8 million

* Assuming 15 million Cable subscribers, and 24 million households of Total Cable and IPTV subscribers

Broadcasting Act Internet Multimedia Broadcast Services Act

16

Currently, Korea has differential restrictions on different network types of the Pay TV business now, as you can see in this slide to name a few. More detailed differences are clearly found as we follow down to the lower level of the legal system which is composed of Act Enforcement Ordinance (Presidential Decree) Enforcement Rules Ministry Notifications.

IPTV is regulated under a separate act, Internet Media Broadcast Services Act, which favors IPTV operators over existing terrestrial TV or cable TV broadcasters.Here shows how the Broadcasting Act and Internet Multimedia Broadcast Services Act regulations on operators ownership by foreigners, cross-ownership and subscription share in order to prevent market monopoly.Very recently, a few months ago, KCC and MSIP revised the ordinance for fair competition between the cable and the IPTV. Now the vertical and horizontal integration thru mergers and acquisitions is expected in the cable industry in order to raise competitive capabilities.

The next slide shows how urgent it is for the cable operators in Korea to proactively attract its current analog subscribers.

Pay TV subscribers by Network

0

5

10

15

20

25

30

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

A. Cable networks

D. Cable networks

Cable networks Total

IPTV

Satellite networks

Relay Cable networks

total

The total number of Pay TV(Cable, IPTV, Satellite) subscribers is 27 million, steadily increasing and is expected to grow due to the increasing trend of single-headed households recently. The average size of household in Korea is now 3.4 down from

The cable subscriber is now about 15 million, still more than 55% of the market. However, take a look at the remarkable growth of the IPTV.

The number of IPTV subscribers surpassed that of digital cable subscribers in 2011, and rapidly increases now, threatening the future market position of the cable industry in Korea.

IPTV expects to have more than 10 mil. subscribers by the end of the year 2014.

Challenges and Opportunities

Rapid penetration of IPTV services Digital Content fee charged by

KBS, MBC, SBS and Newly licensed media channels

The rise of OTT(over the top) service

KCCs intention to relax restricitions on terrestrial TV advertising

Switching to Digital Cable (14.8 million households as captive market)

New digital services (MVNO, VOD, Home Security)

A pending Special Bill to support Digitalization of the Cable Industry (2014)

Deregulation on the cable industry KCCs agreed to the License

Fee Hike for KBS along with the plan to halt advertising on KBS

Challenges:

The most urgent and continued challenge faced now is the IPTV services, targeting about 8 million former analog cable subscribers and new single-headed households. IPTV operators extends their experiences and marketing power. The second, thought settled down temporarily, is the push by the terrestrial broadcast raising the digital content fee to SOs. Already in 2010 and 2011 the district court, ruled out favoring the terrestrial broadcasters in three cases, putting more weight on copyrights protection. Terrestrial broadcasts demand Digital content fee based on the number of digital cable subscribers, as they have charged to IPTV operators. The only bargaining tool for the individual SO is to find a way to technically avoid or legally bypass the current signal conversion requirement for retransmission. The rise of OTT service and nScreen services has not brought strong damage to the cable industry yet. However, the tide of digital innovations cannot be avoided.Recent intention of KCC to relax restrictions on terrestrial broadcast advertising cast even more serious threats to cable program providers, since TV advertisement has been already dominated by the terrestrial broadcast media groups.

Policy and Regulations

Government View II: Media as Creative

Satellite

sponsorshipSubscribers

PrivateCapital Inflows

MarketCompetition

DeregulationTransparency

IPTVSOsPPs

Cable TVSOsPPs

Digital Mediaservice

infrastructureTerrestrialNetwork TV

TV advertisers

Better regulations for the creative

industries.Pay TV

Upgrading the Nations Digital Media Service infrastructure thru fierce competition among network operators is the underlying objective of this huge changes in the media industry.In Particular, the Korean government expect the cable industry to speed up its digitalization and to encourage the content creators thru better regulations on the industry, under the current initiative of deregulation started in March 2014.Korean policy makers, particularly MSIP(the Ministry of Science, ICT and Future Planning), view the media industry using the same framework used in the Information Communication industry, so called C-P-N-D framework.By introducing IPTV service in the pay TV market in Korea, the government has shifted its strategic focus from effective competition in the platform business to digital network and content since the year 2008.Introducing IPTV means opening the pay TV market to telecom companies with formidable competitive market capabilities and is a signal to continue reform the media industry under the initiative of Creative Economy.Under this framework, the cable business belong to content-platform-and network in which the words openness, competition, fair trading, global standards, transparency, market dominant players are commonly accepted in the market.

Following this conceptual framework, we can safely predict the direction of government policies.

Since few key players are already vertically integrated very effectively under the previous complicated legal system, Korean government already started a reform in the broadcast business by introducing long-forbidden competition from the private sector, followed by breaking the 30-year-long monopoly in the TV ad media buying market.

Government Policy Direction New Initiative to Better Regulate the Business by the Government

(March 2014) Deregulate if not necessary. Improve the regulation if needed.

KCC and MSIP on the Cable Industry Shift from the terrestrial network centric approach to develop the content

industry and the TV advertising industry Competition

in the media buying market by allowing private media representatives 4 New General Program Channels(GPSs), whose programs SOs must carry, to promote both

content creation business and competition with the broadcast networks.

Global standards in regulating the cable industry Relax ownership restrictions on cable business Open the domestic market to foreign competition Relax or eliminate detailed restrictions on advertising, programming, etc.

the same regulation on the same services Principle Fair Competition among non-terrestrial TV services (Cable TV, IPTV, Satellite

TV)

The direction of Korean government policies on the cable industry is clear under the new initiative to Better Regulate the Business released in March 2014. The principles here are simple, as long as I understand. One is Deregulate if not necessary and the other is Improve the regulation if needed.

Korean government shifted its focus from the terrestrial network to develop the content industry and the TV advertising industryCompetition in the media buying market by allowing private media representatives4 New General Program Channels(GPSs), whose programs SOs must carry, to promote both content creation business and competition with the broadcast networks.Global standards in regulating the cable industryRelax ownership restrictions on cable businessOpen the domestic market to foreign competitionRelax or eliminate detailed restrictions on advertising, programming, etc. the same regulation on the same services PrincipleFair Competition among non-terrestrial TV services (Cable TV, IPTV, Satellite TV)

Desired Direction of Regulations for the Cable Industry

For Fair Competition and Diversity of Broadcasting (consumer benefit), Same Service, Same Regulation is desired when integrating the

two separate acts next time (the Broadcasting Act and the Internet Media Broadcast Services Act)

From price competition to service-based competition is more desirable in the Pay TV market bloody price competition lowers down the ARPU of the Pay TV

industry Focus more on substantial investment for quality improvement,

rather than marketing expenditures

27

Thank You !

Cable Television Industry in Korea:Today and FutureHistory Cable Industry in KoreaCable TVs important role in KoreaCable Industry: RevenuesCable Network Subscribers (2008-2013)Despite the decrease of subscribers, SOs and PPs revenue UP!!!TV Ads marketDigital Services by the Cable TV Digital Cable Network Services in KoreaSmart Broadband ServicesUHD Channels on CableOTT services by Cable OperatorsGovernment Regulations in KoreaRegulations on Pay TV Network Business in KoreaPay TV subscribers by NetworkChallenges and OpportunitiesPolicy and RegulationsGovernment View II: Media as CreativeGovernment Policy DirectionDesired Direction of Regulations for the Cable IndustryThank You !