Philippine pay-TV dynamo Cignal TV shows no signs of slowing down. The five year-old DTH service is on course to hit 890,000 subs in 2014 after nudging past the 600,000 mark 12 months earlier, an impressive 48% growth trajectory. Cignal executives are eying a million subs in 2015, and two million before the decade is out.

The pace is driven by PLDT, Cignal’s ultimate owner and the largest telco in the Philippines. “The pressure is always on us whenever we present to the board to become a clear leader in the pay-TV industry,” says Cignal’s MD and COO, Annie Naval. “The benchmark is how well they’ve done in the telco business. Market share has always been one of our key priorities.”

PLDT has set its sights on being a major player in media as well as telecoms in a converging world, investing in both free TV, via third-placed terrestrial channel TV5, as well as pay-TV.

TV5 is struggling but Cignal is making good progress, with subs numbers accelerating past its main rival, cable operator SkyCable, making Cignal the most popular pay-TV service in the country.

However, the real prize and challenge for Cignal – overtaking SkyCable by revenue – remains some way down the line. While Cignal’s rapid expansion is resetting the competitive landscape in the Philippines, the company has yet to break even. Naval and her team must keep a watchful eye on profits as well as revenue, without losing too much momentum along the way.

Revenue rivalry

Meanwhile, SkyCable has been consolidating its own position, buying second-placed cable network Destiny to offset slowing organic growth, while digitalizing analog networks to broaden its services. The strategy is reaping rewards through high-Arpu broadband sales as well as increased ad revenue for the operator, which already caters to affluent homes in major cities.

Cignal has successfully targeted the uncabled market, attracting most of its customers from outside the capital Metro Manila, SkyCable’s stronghold. However, most of these households have opted for cheaper prepaid tiers, which have to be renewed each month.

While these are priced at a premium to provincial cable networks and other DTH operators, irregular payments can still hinder Cignal’s pursuit of revenue and profit. SkyCable subs, by contrast, all commit to a lock-in period, shoring up the cable company’s financial advantage.

Pay-TV penetration is still low in the Philippines, at around one in seven TV homes, offering plenty of space for future expansion. Sign-ups from prepaid subs will still contribute heavily to Cignal’s expansion, especially if the domestic economy – the fastest-growing among Southeast Asia’s main markets in 2014 – remains buoyant.

Nonetheless, Cignal executives see postpaid subs making a bigger contribution in the future, rising from 37% of the subscriber base in 2014 to 45% by the end of 2015, and to about 55% in 2016.

This shifting balance should keep Arpus relatively flat for Cignal, even as its subscriber base continues to grow. Upselling opportunities mainly exist within the postpaid or prepaid tiers however, rather than crossing over between the two.

“We’ve done some programs to encourage subs to upgrade and we’ve seen some pretty good results,” says Cignal’s head of marketing and channel management, Guido Zaballero. “Moving from prepaid to postpaid is more difficult. There really is a market that goes for postpaid, and a different market that goes for prepaid.”

More HD channels will heighten Cignal’s appeal for postpaid subs but limited satellite capacity makes it difficult to juggle the needs of both postpaid and prepaid subs. More wriggle room will help. The DTH operator plans to start swapping out boxes that use Mpeg-2 compression technology, mainly deployed among its lower tiers, in favor of the more efficient Mpeg-4 standard, a gradual process starting in 2015 and likely to complete in 2018.

Cignal’s subs growth took off after reaching critical mass in 2014, largely due to word-of-mouth recommendations rather than formal marketing, supported by an expanded distribution network.

Rising scale also gives Cignal the opportunity to start a new phase of business development, anchored around a stronger brand and a greater emphasis on marketing in tandem with a bigger portfolio of value-added services (see panel at foot of story) and a small but growing portfolio of in-house channels.

The main focus for now however is sustaining subscriber growth, while keeping costs under control. A key milestone is breaking even after Cignal’s finances turned net income positive in 2014 and Ebitda positive in 2013.

“We will have some effort to build the brand equity, but not really in a major way yet,” Zaballero says. “When we hit half a million subscribers, we thought okay, we’ve got the scale, but then we realized we should up the targets because we don’t feel the strength yet.” It’s mostly a matter of timing and trying to balance expenses, Zaballero adds. “As we start to build the base, the cost of the content starts to go up as well. We are trying to manage the cost internally and with our partners.”

Cignal operates two in-house channels at present, Hyper, which focuses on sports, and a lifestyle offering called Colours, but is planning to launch a third, a dubbed movie service, in 2015. At the same time, the two existing channels will reduce their reliance on imported content from the US and Australia, in favor of more local productions.

With a good mix of international channels in place, these in-house offerings, which are also distributed by provincial cable operators in a bid for more ad revenue, are increasingly key for future growth. “It’s very important that we focus on getting scale and a bigger share in every region in the Philippines,” Naval says. “Looking forward, we are going to invest seriously in developing our own content.”

Hyper is proving expensive to run as a pure-play sports service however, especially with rights-holders looking for exclusive deals. It will be relaunched as a male-oriented sports and entertainment offering in 2015, with sports on for about 40% of the time.

SkyCable has a bigger suite of in-house channels, leveraging the production capabilities of its owner, domestic broadcast major ABS-CBN. Furthermore, ABS-CBN has been busy testing broadcasts of digital terrestrial television (DTT), a new and potentially disruptive technology that will deliver more channels and a clearer picture nationwide – due to start rolling out in the Philippines in 2015. A possible pay DTT service from ABS-CBN could shake up the pay-TV landscape, although no formal plans have been announced.

Should such a service launch, provincial cable networks and cheaper DTH services are likely to be affected first. Cignal executives are still keeping a close watch on the potential threat, which has prompted Cignal’s planned Mpeg-4 upgrade, to give lower-tier subs more channels. “We’re keeping an eye on it, because ABS-CBN could really innovate and start to move it upwards,” Zaballero says. “It would all boil down to the quality of our channel lineup.”

This article also appears in the Q3 2014 edition of Media Business Asia magazine.