Driven by the growth of direct-to-home satellite (DTH), Indonesia’s pay-TV industry added 776,000 net new customers in 2012, the largest growth in Southeast Asia. Market leader MNC Sky Vision (MNCSV), had 72 percent of new additions and ended 2012 with 71 percent market share overall. In its latest research report, industry analysts Media Partners Asia (MPA) express confidence about the medium term growth trajectory of the market.

Key drivers, according to MPA, include:

– Investment in local content and new distribution to meet rising demand from homes outside Jakarta;

– Aggressive pricing led by MNCSV’s lower priced brands (i.e. Top TV) and new players such as IMTV;

– A robust macro outlook, powered by 6 to 7 percent GDP growth, the formation of new homes and a rising middle class.

An important risk, however, is the growth of free digital terrestrial television (DTT), which may proliferate after 2016 and limit pay-TV’s long-term growth curve.

MPA forecasts indicate net new pay-TV subscribers will average 1 million per year during the 2013-2015 period, but says that there will be a slow deceleration between 2016 and 2018. Pay-TV subscribers, according to MPA, will climb from 2.4 million in 2012 to reach 7.1 million by 2017 and 8.7 million by 2020 with penetration scaling up from 7 percent to 18 percent and 21 percent, respectively.

As pay-TV’s appeal broadens and subscriber growth accelerates, monthly ARPU will fall further from $12.5 in 2012 to $10.8 by 2017 before stabilizing at $10.7 by 2020. Total pay-TV industry revenues will grow at CAGR of 22.5 percent between 2012 and 2017. By 2020, total pay-TV revenues will reach close to $1.2 billion. The macro situation is very much supportive of pay-TV’s growth. According to government data, 45 million people were in the middle-income class in 2012 and this number is expected rise to 170 million by 2030.

At end-2012, pay-TV subscribers totaled 2.4 million, 7 percent penetration of TV households and still only 10 percent of the addressable market for pay-TV. Monthly ARPU declined by 8 percent in 2012 to $12.5 while DTH was the major distribution platform with 87 percent market share.

Major players include MNCSV, which has 71 percent market share through DTH brands including Indovision, Top TV and Oke Vision; First Media, which has 10 percent market share through its cable network; Telekom Indonesia, which has 9 percent market share, largely driven by DTH services under Telekom Vision; Aora, a DTH platform with 161,000 subscribers; NexMedia, a DTT platform in Jakarta with 2 percent market share; and other platforms (1 percent market share), led by Orange, a DTH brand which has 10,000 paying subscribers. New players are expected to launch commercially in the second half of 2013 and 2014, including most notably IMTV and Viva Sky.

While subscriber growth remains robust in Java area cities (i.e. Jakarta), increasingly new customers are coming from major cities in Sumatra and Kalimantan areas. This is exemplified by the rapid growth of Top TV, an MNCSV brand, which is priced to meet demand from ex-Java customers Broadly, the demographic shift will likely increase the need for aggressive pricing of pay-TV content and a requirement for more local and regional content.

Sales and distribution cannot be underestimated and is one of the key drivers of MNCSV’s success. Typically, MNCSV acquires 70 percent of its gross additions via internal channels, through a diversified network of internal sales teams consisting of more than 1000 sales staff. MNCSV’s control of its sales teams (i.e. the internal teams) means it has avoided the churn and subscriber authentication issues that have hurt other players in the past. The scale of its teams means that the company is also investing in ex-Java subscriber acquisition. Aora is also following this trend. IMTV will leverage Lippo’s distribution assets Matahari and Hypermarket.

Content dynamics are varied but one overriding trend dominates: FTA terrestrial channels far and away remain the most popular in consumer homes. The popularity of FTA is due to the demand for first window local and international content. MNCSV benefits from leveraging the MNC library to program more than 15 exclusive local channels, a number of which rate well. Branded networks, dubbed and/or subtitled in Bahasa, are also popular, most notably kids channels owned by Disney; entertainment channels owned by Sony and Fox; movie channels from HBO; and factual channels from the BBC, National Geographic and Discovery.

Vivek Couto is the Executive Director of Media Partners Asia. MPA (www.media-partners-asia.com) is a research and consulting firm for media and communications services in Asia Pacific with offices in Hong Kong, Singapore and India.