Operational momentum has weakened at Korea’s largest pure-play pay-TV operator, as the service looks to its parent for strategic support and renewal.

Hybrid DTH/IPTV operator KT SkyLife (KTS), so strong on subscriber growth between 2010 and 2012, continues to see its momentum slow and business case weaken, a trend that first started in 2H 2013.

KTS added 390,000 net new customers in 2013, versus 529,000 in 2012. In 2014, subscriber growth will sharply decelerate to below 100,000, according to industry analysts Media Partners Asia (MPA).

For the first nine months of this year (through to end-Sept.), the company added 77,136 customers.

Much of the slowdown is due to a real brake on momentum at Olleh TV SkyLife (OTS), a bundled DTH/IPTV service bringing together SkyLife’s satellite channels with KT’s IPTV-based VOD services. OTS accounts for ~55% of the KTS customer base.

Standalone DTH subs from SkyLife have been contracting for some time, although the rate of decline somewhat slowed this year.

At the end of September 2014, KTS had 4.26 million customers, about 15% market share.

RECOVERY & UNCERTAINTY

One major factor behind the current slowdown is churn to rival IPTV and digital cable operators, as contracts expire for three-year old customers and as KTS migrates its SD customer base to HD. The migration should complete by year-end.

In addition, planned rollout of a Dish Convergence Solution (DCS), a product that management has identified as a major future driver, has been delayed with no real timeline in sight.

Under DCS, KTS can set up satellite antennae near buildings that are unable to install satellite dishes. The antenna can pick up TV signals and transmit them to subscribers using KT’s broadband network instead.

DCS has an addressable market of 3-4 million households in Korea. KTS could potentially capture 10-20%, but the proposal has met resistance, and the regulatory approval process has been slow.

A revival in KTS fortunes will depend on parent company KT allocating funds to drive OTS services with a bigger push in sales & marketing, as well as invest in newer services such as Ultra HD.

Under new management, KT is undergoing broad restructuring. Support for KTS may come through more on the cost savings side rather than aggressive investment, especially as KT appears to want to maximize profits from its media entities, including KTS.

KTS is also eyeing future growth through Ultra HD broadcasts, capitalizing on KT’s high-bandwidth fiber broadband network.

THE COMPETITION

In the meantime, KTS competitors in IPTV and cable are facing some encouraging prospects for value creation and enhanced scale.

But there’s still a long way to go.

KT continues to lead the IPTV market, adding ~71,000 IPTV subscribers a month (versus ~80,000 on average over the past two years).

SK Broadband, however, is catching up fast (in terms of net additions), ratcheting 60-70,000 new customers a month in 2H 2014 (the company added 68,000 new subs in August). The company is expected to breakeven on IPTV in Q4, on a total base of 2.7 million subs.

Momentum in cable is trickier. Its future is largely anchored to greater Arpu growth in pay-TV, stability in broadband revenues, and consolidation.

Digital penetration of cable subs is expected to reach 50% by end-2014. Full digital conversion for all 14.7 million cable subs will likely complete only by end-2018.

Seoul will complete digitalization by the end of next year, according to trade body Korean Cable Television Association (KCTA).

The key is higher pay-TV yields, depressed historically due to low analog fees (US$4-5 a month) and price disruption from players such as KTS.

Price competition was evident for much of 1H 2014, although this may rationalize going forward. Cable operators are also expanding VOD deployments, generating higher yields from these services as the paying ratio increases.

Meanwhile, cable M&A should intensify over the next 12-24 months, with new regulations on market share coming into force. 

Operators such as CJ HelloVision, Tbroad and Hyundai Communications Network (HCN) are looking to buy smaller or independent cable networks, while these groups, along with telcos such as SK, continue to circle over larger acquisitions such as C&M, Korea's third-largest MSO.