Showtime CEO Peter Einstein has not ruled out the possibility of conducting an initial public offering (IPO) in 2006, as the operator, which is one of the main pay-TV providers in the Middle East, weighs all of its financial options.

"As we continue to grow, the financial situation has continued to become more healthy and more robust for us, certainly in the last several years," Einstein said. "We are still contemplating and looking at very extensively an IPO. We have not made any final decisions at this point. I am not sure whether we will make a decision this year. I hope we can."

DVR Business Model

Even without the pressure of a potential IPO, Showtime faces a very busy year in 2006. The operator also is bringing digital video recorder (DVR) services to the Middle East, a move that Einstein claims will give Showtime "technological leadership" in this area. "The capacity of the box will be 40 hours of recording," he said. "We have launched a nice EPG (electronic program guide) to go along with that. The EPG will not only be available to the DVR users, but it will also be available to the majority of our users throughout the region. There will be a refundable deposit that will vary depending on whether or not you take a second subscription. With this DVR, you will be able to record on two channels and watch a third. So, what we are encouraging there is a second subscription."

The launch of DVR services could give Showtime an edge in an increasingly competitive digital television marketplace that has close to 200 million people with access to at least low levels of pay-TV services, according to a recent report from Booz Allen Hamilton. The study, released at the end of 2005, detailed huge potential market opportunities such as the United Arab Emirates, which leads the Middle East with nearly 30 percent pay-TV penetration. In Kuwait, another of the major markets in the region, penetration is around 13 percent.

In two of the Middle East’s other major markets, penetration is not as strong. Saudi Arabia has a pay-TV penetration of 6 percent, and Egypt has a pay-TV penetration of slightly more than 3 percent. According to the Booz Allen Hamilton report, there are reasons why pay-TV penetration are particularly low. In Saudi Arabia, the study cites concerns over the liberal nature of pay-TV content as well as the strength by pan-Arab free-to-view (FTV) channels, which it says "diminishes the perceived value of the [pay-TV] offering". In Egypt, the report cites "unfavorable socioeconomic factors" as well as a "strong terrestrial TV offering."

The competition from free-to-air channels also is tough. "I think the main competition for pay-TV operators is from the [free-to-air] channels who have a wide selection of content," Nadine Usta, a media analyst at Arab Advisors, said. "I think that there is a market for pay-TV, but pay-TV right now is a niche market in the Middle East."

Strong Growth

While market penetration is low, there has been strong subscriber growth throughout the last three years. According to Booz Allen Hamilton, the market has grown from 340,000 pay-TV subscribers in 2002 to more than 1 million in 2005. The study attributes this to "sustained efforts by the three pay-TV operators (Showtime, ART and Orbit) to enhance their value proposition" and says all three of them "have invested considerably in securing exclusive rights for premium content."

Showtime, Orbit and ART each bring a unique approach to the market, "Pay-TV operators are striving to find a winning strategy in niche areas because of the abundance and variety of [free-to-air] channels available," Usta said. "The operators tend to differentiate themselves by focusing on different types of content. Showtime, for example, markets itself as a medium for Western entertainment, while ART focuses largely on sports and has already secured the exclusive rights to broadcast the 2006 FIFA World Cup throughout the region. For the mass market, I think a large number of people still do not accept the concept of pay-TV. The World Cup has always been a major event in the Arab world, and for citizens of Saudi Arabia and Tunisia — whose national teams have qualified for the upcoming tournament — it will be particularly important. The question of whether or not it is acceptable to have to pay to watch the matches is already generating a considerable amount of debate in the local press."

Showtime will continue its strategy of offering the "Best of the West," Einstein said. In 2005, Showtime completed an exclusive content deal arrangement with Disney, and the operator also has exclusive channel providers such as Discovery, MTV, Hallmark and E! Entertainment. Customization is important, he said. "The channels we make are fully customized and subtitled in Arabic. There is also a tremendous amount of customisation on the third party channels. So, the Discovery channel is fully customised in Arabic. So, is Hallmark. E will subtitle this year in Arabic. We are really going to move on continuing to provide the best of international entertainment but we are also customising for the region."

With low levels of pay-TV penetration, there is no need at this stage for a diverse strategy that appeals different tiers of customers, Einstein said. "The premium market is still at such a level of infancy there is no reason for us right now to create another strategy at the lower end until such time as we approach saturation in our premium markets," he said. "We want to go from strength to strength to penetrate our core territories. We are doing that in a number of different ways. We have discovered over the last few years that our viewers in the region like to come and ‘touch and feel’ the goods. We are aggressively opening up showrooms, kiosks, etc., so people can come in and look at Showtime and talk about what packages they need. This is the best way for us to pick up subscribers. Rather than pick up the phone, most of our customers like to come in and talk about it."

In terms of new markets, Einstein highlight the possibilities for the operator in emerging markets. "We continue to see great potential in our emerging markets in 2006," he said. "In particular, we are looking to expand our dealer networks in North Africa and Iraq. In the long term, we see great potential in Iran."

IPTV and Mobile

It will be also interesting to see whether satellite pay-TV operators look to branch out into new areas of services, following models such as those send with BSkyB’s planned triple-play launch in the United Kingdom when the company completes its planned acquisition of Easynet and BSkyB’s partnership with Vodafone in the area of mobile TV.

"We not only acquire the DTH rights, we acquire the cable rights, MUD (multi-unit dwellings), SMATV, hotels and everything else," Einstein said. "If any distributor wants to have these programs, then they need to come to Showtime. We are looking at lots of different areas within the group. Our sister company Wataniya is a mobile operator in Kuwait, Tunisia, Algeria and Iraq and maybe other places down the road. We are exploring opportunities to work with them. In other countries, we are exploring bundled options with other operators for mobile subscription."

However, Einstein is not sure how lucrative the mobile TV market is for someone like Showtime. "We are actually doing some testing on delivery and how we deliver promos and snippets of programming right now, which I think is the predominant way of using the mobile for video," he said. "I am not sure anyone is ready to watch a two- hour movie on their mobile phone right now."

Showtime’s Internet Protocol TV (IPTV) strategy also is starting to take shape, Einstein said. "We have another sister company called Shownet which is an Internet by satellite operator, and we are exploring options with them," he said. "It varies in each country. We operate in about 20 countries but we are looking to offer a bundled Internet option as well as subscriptions. We do that already in Kuwait. We are always exploring different ways of delivering Showtime to the various markets."

In terms of high-definition (HD) services, Einstein could not put a timeline on when this will happen in the region. "HD will be integrated into the system as we go along," he said. "Currently, the capability of HD in the region is limited. So we are moving towards that and by the time we are fully up to speed on HD, it will be the right time to go to market."

Contact, David Westover, Citigate Dewe Rogerson (for Showtime), email, [email protected] Nadine Usta, Arab Advisors, email, [email protected]