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Leadership candidate DirecTV appears willing to enter markets it can lead. Alexander Hast spoke to Hughes International president Gareth Chang in Los Angeles He does not have much time to spare these days. Gareth CC Chang is president Hughes International, corporate senior vice president Hughes Electronics and chairman DirecTV Japan. The project he has direct responsibility for is still in its start-up phase and is taking up a lot of his time. Japan is the third market that Hughes DirecTV wants to conquer by the end of this year. After the successful launch of the direct-to-home digital satellite service in the US market and the start-up of DirecTV Latin America about a year ago, the land of the rising sun is the next target for the communications giant. For Hughes the founding of DirecTV signified its first step into the consumer market and the entertainment business. A step it definitely does not regret. DirecTV Latin America is now trying to find partners in Spain, that can provide content for the new market. Otherwise, Europe is not on its schedule for the time being. The aim is for leadership in the three target markets of the US, Latin America and Japan. As soon as that goal is achieved, DirecTV is likely expand into other markets. C&SEu: Are you following the US model for DirecTV in other markets?
C&SEu: Which systems do you use? Chang: We use MPEG and the News Corp [News Digital Systems] conditional access. C&SEu: But Rupert Murdoch, through News Corp, is your competitor in Japan? Chang: He is also a customer. Murdoch has the Fox network here in the US and when the cable companies would not broadcast his affiliates, we transmitted them for him. He also supplies content to us in the US. When he needs satellites, he buys them from us. It is a business relationship. As you know he has BSkyB in the UK and in Japan, he has JSkyB. He started out 50:50 together with the Softbank and there are now two more partners; Sony and Fuji TV bringing his ownership down to 25 per cent. C&SEu: How difficult is the competition? Chang: There is heavy competition everywhere. Sometimes we forget that we not only compete with the people in the DTH market, but also in cable television and with local broadcasters. Really we are competing with pay-TV and free TV, which is also moving towards digital. Competition is always tough. Over time, there will be some kind of consolidation occurring. How you consolidate is a different issue. An example is Murdoch who could be very strong in the US... C&SEu: ... and 'consolidated' with Primestar after playing with Echostar... Chang: Murdoch evolved his strategy to his advantage because he is a very strong content provider. But trying to be a content provider and a platform provider is challenging for him. It takes billions of dollars to compete. And every competitor plays to his strength. C&SEu: There are supposed to be activities in Spain. Can you tell us more about your plans? Chang: We always look at opportunities to participate worldwide. We are carefully watching the activities in Spain and we continue to be interested if there is a way to collaborate. Right now, the interest is between our Latin American operations and any synergy there might be with Spain. C&SEu: Are there any contracts yet? Chang: I cannot comment on this. C&SEu: Do you intend to bring DirecTV to Europe? Chang: As you know the European TV business is much more mature than in many parts of the world. In Germany and France there are very good cable services. Even though we have a strong concept we find that market to be more difficult. Mre are still deciding how to work best in that part of the world. We have a lot of encouragement from the new areas in Eastern Europe. But the critical thing for our business, of any business is, we have to have enough financing and enough paying customers. We are in a pay-TV world. In time, the market will take off and we are looking for opportunities to co-operate. One of the things we have to be careful about is that we are committed to a leadership position in the US. And to be number one is not easy, especially when you intend to be leaders on all three markets [the US, Latin America and Japan]. This is taking a lot of our attention. As soon as we make it, you will probably see us venture out beyond that point. C&SEu: But there used to be plans to launch in Europe. Chang: There were plans at the time when we were sorting out opportunities. We are always engaging in discussions. If you look at the business - it's not yet at all clear how the game will play out. One of the important things we have learned is: putting a satellite up is not difficult for us, putting up the best uplink centre in the world is not difficult. Delivering content is not difficult either. What is tough is competitive cost on content. If the content is too expensive, the consumer cannot afford to pay for it. How do we develop a system in business that provides reasonable coverage return to content people but at the same time how do we deliver it through our investment on platform and packaging to the consumer, so the consumer thinks it is reasonable. This problem is the same in Europe, in Latin America and in Asia. So, my biggest concern is how do we deal with the content issue. C&SEu: for Germany, you would not
have the content right now anyway... Chang: Leo Kirch has a lot of content... C&SEu: He has loosened his grip on DF1 in a sense... Chang: It is the same problem: Can you put up a system and get enough revenue to cover the investment? C&SEu: If you have good marketing, yes. Chang: It takes more than just good marketing, because you cannot sell something that people can not afford. Good marketing is certainly required, but if you are charging people $100 to 200 a month... C&SEu: He did not charge as much as that... Chang: ... that is why he is losing money. C&SEu: But he is not selling subscribtions either... Chang: It is also an issue of how you couple DTH content delivery to cable delivery. I think that is a real issue in Europe especially in Germany. I can see that Deutsche Telekom, DF1 and several platforms combined might offer some affordable content. And that could be a very good business. The economy is there to do that. When you have fixed costs - the satellite costs X dollars, the broadcast equipment is fixed too - the biggest variable is content. As long as that price keeps going up, we are going to continue to have problems. To me that is the biggest barrier right now. The issue to me, the biggest variable in success or failure to our kind of business is how price competitive we can be on content. And we are talking about 100 channels 24 hours a day. C&SEu: Where do you see the position of DirecTV in the US market? Chang: DirecTV is right now the largest DTH service in the US market. We passed Primestar about a year ago. So, we did the marketing and packaging correctly. The US market continues to be competitive. Cable is very mature also, and the networks are improving. So we are continuing to increase our subscribers and by the end of the year, we should have more than three million subscribers. That is going to become a sizeable business for the new Hughes. C&SEu: The new Hughes? Chang: Our defence business is merging with another defence company. Delco Electronics will be merging with another component of General Motors to form a different company. So by 1998 the new Hughes company will only have satellites, wireless communications, including mobile phones, and DirecTV. You will see us more focused on Direc.TV in all three markets in 1998. If we sucessfully manage all three, then it is very likely you will see us move elsewhere. C&SEu: How much potential do you see in these three markets? Chang: In the US, it could be immensely successful because certain consolidations have already started. Murdoch is moving to Primestar, through we are still very much in the lead, Echostar has serious financial problems. I think in this race the strong one will survive. With DTH we are in a niche - cable will remain strong – and we are going to be number one in our niche. DirecTV Latin America just started in 22 countries. Cable is very hard to do in Latin America, so DTH satellite broadcasting has a tremendous advantage in this market. We are working on the content issue. How much Latino, Spanish, Portuguese content can we put in - that is why there is a connection to our activity in Spain. I see we are approaching 100,000 subscribers and we are just beginning to take off now. I am very optimistic about Latin America and about the US. In Japan, we have some local competition, but I worry more about the regulatory side. How hard can we push the development of new Japanese content? Especially in a copyright sense. When the Japanese develop a movie, a particular entertainment programme, there are very many small owners to the content. So, it is always difficult to negotiate copyrights for local Japanese content. But with our satellite system and with only one local competitor at this time I think we will do all right. The only thing that worries me is how much local Japanese content can we have, so that the local consumers will continue to expand. NHK, the Japanese public broadcaster, has two channels on satellite and two terrestrial channels. It has close to 8.7 million customers. Of course, people do not pay much for that. It is about $10 (£6) per month for the two channels. I am encouraged because people watch those two channels. So if I offer 100 channels, I am hoping that at least as many people will come and watch. The first year – since October of last year - PerfecTV was able to get about to 360,000 subscribers until September this year - in just 11 months. It shows me that there is enough interest in Japan. That is not a bad number to start with. We will launch by the end of the year and I hope that in 12 months we can do better than they can. C&SEu: In percentage terms how much of the content will be Japanese? Chang: It will be about 50 to 60 per cent Japanese, the rest will be western content. Japanese love western movies, US movies, entertainment, music, so a big portion will be coming from the western world. CABLE & SATELLITE EUROPE NOVEMBER NINETEEN NINETY SEVEN - PAGES 43 - 46
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Satellite
DirecTV
Chang: Our three years of success in the US are
very important. This is our history, we've experienced a massive
learning curve for the global direct-to-home business. In Latin
America, we reach 22 countries with different languages and
different tastes. So, in that market we are learning how to fit
Western content to match local content and offer it as a package.
Each country is a little different but at the same time all enjoy
many common channels, which we can offer at competitive rates.
The third DirecTV project is DirecTV Japan. In a country with 40
million households, we think half of them will be potential
customers. Because we are a very strong satellite provider - we
actually build close to 60 per cent of all commercial satellites
around the world - the satellites in Japan were mostly built by
Hughes. And of course, the people, who wanted to enter the
business, wanted to partner with us to support them. One of the
companies in Japan, which also uses Hughes satellites, is
PerfecTV. It was formed by major trading companies and is a
platform company. Anyone who wants to transmit content can apply
for a licence and transmit through one of the PerfecTV programme
packages. We have taken a slightly different approach for DirecTV
Japan. Mitsubishi is our customer, it bought the satellite from
Hughes. In turn DirecTV Japan leases transponders from Mitsubishi
and we work with several Japanese partners to produce the
Japanese service. Each partner has its own licence application -
right now there are seven partners - and each one of us could
have up to 12 channels. We have been able to make arrangements
between the partners and work together in putting the package
together. It is not exactly the same as what we are doing in the
US but the business concept is very close. We have just finished
that approach and we should be launching in Japan with around 90
or 100 Channels by the end of this year, due for mid-November
using 16 Transponders with a compression ratio of 6:1.