DirecTV Latin America has become a pay-TV giant in the region with more than 8.2 million subscribers. The operator now is embarking on a new strategy targeting emerging middle classes in the region. CEO Bruce Churchill discusses the 2010 performance, the next phase of growth and why Colombia could be an exciting market for pay-TV.

VIA SATELLITE: How have you built your subscriber base?

Churchill: We have three platforms, one we call Pan-Americana, which is Spanish-speaking South America. We pretty much operate throughout the Spanish-speaking part of Latin America, except for Bolivia. The big territories are Venezuela, Argentina and Colombia. That is a wholly owned subsidiary of DirecTV. There, we have 3.2 million subscribers. In Brazil, we own 74 percent of the operating company, and there, we have 2.3 million subscribers. In Mexico, where we are the minority shareholder, we have a percent share, we have 2.8 million subscribers.

VIA SATELLITE: How has the economy affected operations?

Churchill: The Latin American economies, with the possible exception of Mexico, are not so really tied to the United States but are more tied to countries in the emerging world, specifically China. So even though there was worldwide concern at the end of 2008 in Latin America, Latin America bounced back much more quickly. The reality is they were not as affected. Those economies do not have huge consumer credit issues. You didn’t have a credit bubble or anything like that. The fundamentals, in fact, were always quite strong.

In hindsight, there really wasn’t even a reason for a stalling in Latin America, but I think it was more psychological than real. Even 2009 was pretty strong for us. 2010 was particularly strong for us, and that could be explained due to the World Cup. As you know, in Latin America, there are three main sports, football, football and football. The World Cup generated a lot of excitement, encouraged people to buy TVs for the first time or upgrade their televisions to HD. That created a lot of excitement. We rode the wave of that excitement.

VIA SATELLITE: How important are the addition of HD channels in your business plan?

Churchill: I don’t necessarily think we will see a huge ramp-up in the number of HD channels we offer customers. In Brazil, for example, we offer 35 HD channels in our top package. If you look at our competition, they may have 23 HD channels. This is a cable operator, so we are the clear leader in Brazil offering HD services. In Mexico, we have 25 HD channels, which is ahead of the cable competition. Pan-Americana varies country by country, but we have roughly around 15 HD channels and we are on a par with everyone else. There is still a lot of growth there to be had, but there is still huge potential for HD growth.

VIA SATELLITE: Are local broadcasters producing HD?

Churchill: The initial HD product came from international broadcasters, as they were already producing HD for other markets, so there has been more international than local content available. Local broadcasters have really only been gearing up to get into HD. When that happens, you will see us reach 50 channels, but, at the moment, there are still several countries in Latin America that have still not defined what their HD or broadcast standard is going to be, so that is going to limit FTA HD broadcasts.

VIA SATELLITE: Are you still accepting new SD channels?

Churchill: We still have a very broad and robust SD channel offering. Most new channels that still come in the market today are still SD.

VIA SATELLITE: What are your demands for satellite capacity?

Churchill: I think we are fine in the near term. We have actually launched several new satellites. We had a new satellite for our Brazil business. It came online around two years ago. It had initial capacity built into it. As regard to Mexico, we launched a new satellite in January [2010], so we have doubled the capacity for Mexico. For our Pan-Americana platform, we have quite a bit of capacity, but we have got more capacity out of that by investing in more significant compression technologies. We have added capacity that way, so in the near term, we don’t see the need for additional capacity in Brazil and the Pan-Americana platform for at least another three years.

VIA SATELLITE: Is it too early to be thinking about 3-D TV?

Churchill: It is not even on the horizon. It is still all about HD. We have around 2.3 million subscribers in Brazil, but only 350,000 have HD. In Brazil, our HD product only comes with PVR. It gives you a sense of where we are with the things. That is only around 15 percent of that market. We have a million subscribers that have advanced products in Pan-Americana, but a third of those are SD DVRs. It is still very early days in HD. Some countries have not even defined the HD standard yet, so it is hard to even imagine 3-D.

VIA SATELLITE: What will be your major launches in 2011?

Churchill: The real action in our markets in 2011 will be at the other end as we move down the pyramid and the demographics and move more into the middle classes. Historically, pay-TV has been more for the A and B classes in Latin America. We have made a concerted effort, along with our competitors, to move into the C and D classes. As an example, if you take a country like Brazil, pay-TV penetration is still only at around 16 percent. The reason for that is that it has been a product for the upper and upper-middle class.

This year, we have done some repackaging and have introduced a couple of new products at lower price points to address the fast growing middle class in Brazil. If you were to look at the size of the middle class in Brazil, and the growth there, there have been 30 million people added to the middle class in the last five to six years. The favorable economic story that is going on in Latin America, coupled with the favorable demographic profile is good for us. Typically, these countries have young populations, so around 70 percent of the people are under the age of 40. These countries are moving into a place in their history where large numbers of people are moving into their high-earning years. There is tremendous economic growth, and this is creating a burgeoning middle class and that is where the action is going to be. I think a lot of our growth will be in the middle class.

VIA SATELLITE: Does this take a different sales approach?

Churchill: You have to price things differently. It is not a case of lowering prices, because we don’t want to cannibalize our existing subscriber base. We have been working with programmers to put together lower-end packages with few pay channels but still to try and make it sufficiently compelling for people. In Brazil, we have created completely different communications strategies. The kind of advertising we have run is very different. Even organization-wise, we have created different sales structures, separate advertising teams, etc. Probably, where we have taken the biggest leap in terms of a change in method of operations when targeting the middle classes, is that we offer a prepaid product. We have done this in our Pan-Americana part of our operations. You can buy a kit off the shelf, install it, gain a month’s programming and you can top up the way you would with a cell phone. With a lot of people that is an attractive option.

VIA SATELLITE: How many prepaid customers do you have?

Churchill: It depends on how you count it. When we do our financial reporting, we only count those subscribers who are on at that moment in time. The last time we reported, there were 500,000 prepaid subscribers at that time. What is interesting to us about the prepaid model is if you look at all the prepaid kits we have sold since we launched this three years ago, we have sold around 1 million kits. At Sept. 30, only around 55 percent were actually active. Those were the ones that were on and subscribing to DirecTV, but if you look back from that moment in time and look and go back 30 days and ask what percentage of people had been on for some period of time, that number jumps to 65 percent. If you go back 180 days, it jumps to 80-plus percent. What that means is that the million kits we have sold over the last three to four years, sometime in the last 180 days, some 800,000 of them have used the service.

VIA SATELLITE: What country outside of Brazil and Mexico has the strongest potential growth for pay-TV?

Churchill: We have around 400,000 subscribers in Colombia. It has been an industry that we have described euphemistically as informal, which is another word for piracy. There are analog cable operators who do not have conditional access who are distributing to many more subscribers than they are admitting to. They are paying programmers for fewer subscribers than they are distributing to. They don’t pay the government taxes on the full number of subscribers they are distributing to. That creates competitive problems for people like us, but what has happened in Colombia is there has been more emphasis on law and order. The industry is becoming much more formal and structured. Telmex has come in and bought a lot of cable systems. The market has become much more formal, and Telmex will come in and start to run it like a proper business. They will start paying programmers and the government taxes. Therefore, it charges more to customers, so we become much more competitive. We saw this happen in Argentina, and now I expect to see the same thing happen in Colombia. That market today has a little more than 3 million pay-TV households. There are some people that estimate that there are as many as another 3 million more unreported households in Colombia.