Brazil: Three scenarios for 2003

The Pay-TV industry is recently established in Brazil. It began in 1993 and the law regulating it was passed in January 1995. Its growth has been so sudden and forceful that even the government itself has no idea exactly its dimensions. To the varied participation in the business – national, foreign and mixed operators – is added the interest of manufacturers of decoders and other technologies to settle in the country.

Today this market already has 2.3 million associated homes, distributed in 103 operating units that provide service. There are 87 cable companies, 12 microwave companies (MMDS) and four satellite companies. The most powerful companies, such as NetBrasil, Unicabo, RBS Cabo, Globo, TVA, Sky Net, KTV, DirecTV or Digisat have more than one operating unit.

Its focus is on only 80 municipalities, but the Ministry of Communications has already opened a public bidding process to allocate licenses in another 300 cities, whose operators will start operations in early 1999.

Compared to any other latin American nation, this market in Brazil seems to have no limit: there are 38 million households with televisions; and if you consider the 2.3 million associated with some type of pay TV – cable, microwave or satellite – you are facing a penetration level of 6%. In turn, Mercosur is an unexplored market of 200 million consumers, which is offered as a more than desirable target for the television industry.

ABTA (Brazilian Subscription TV Association) forecast three scenarios for its market in 2003. In the optimistic scenario, Brazil manages to approve all its administrative and fiscal reforms, inflation is low and the real remains stable; as a result, there will be 16 million customers and a differentiated programming offer is foreseen without transferring additional costs to the user, who today pays, on average, 40 reais – 38 dollars – per month.

The second scenario, neither optimistic nor pessimistic, has the reforms approved, but not to the taste of the government; and reaches 12 million users. In the pessimistic scenario there are no reforms and inflation and the unstable political situation return, in which case, the number of associates would remain at eight million. That is, even in the worst scenario the market will grow almost 350%.

A key factor for the development of Pay-TV is the availability of set-top boxes and their price. When operators started operating, three years ago, they managed to get the government to exempt set-top box manufacturers from an import rate of 21%. The rate remained at zero until September 1997, when the authorities considered that there was too much permissiveness – there were already 3,600 products excepted. The government thought of re-taxing set-top boxes at 21%, but the pressure from the Pay-TV sector was convincing enough to bring the rate to 5%.

Abta's attitude did not mean that Pay-TV operators opposed the 21% rate – which would have stimulated the domestic production of the device, and even the installation of foreign companies in Brazil. The problem is that the time from installation to the start of production is large, and in the meantime the service was going to have to continue to be provided.

The decoders used in Brazil come mostly from Mexico, Taiwan, Korea and the United States. "We would approve a national company to produce set-top boxes, but they cannot leave us subject to that one local supplier option. I would like a product with prices according to the international market and that is also of good quality", explains Marcelo Sirotsky, Director of Participations of RBS Cable, a company associated with the Globo Network.

The truth is that a rate of 5% seems balanced enough to allow imports to continue and, at the same time, stimulate local production. For example, General Instruments is in advanced negotiations to settle in Brazil during 1998. Its idea is to serve not only the Brazilian market but Mercosur, taking advantage of zero import rates within the bloc. And knowing that if Mercosur does not work, the Brazilian market, with 140 million inhabitants, never ceases to be a good business.

"If the conditions are created, there are many companies like GI that will arrive in the country," says Alvaro Pacheco, director of General Instruments for the region. According to him, once installed they would manufacture their entire line of products, which they could even export to the United States.

"As the government is unaware of our activity, it is natural that it has never established a policy to meet our interests and needs," says Antonio Carlos Menezes, director of institutional relations at Net Brasilia. The government, according to him, would be very wrong if it did not pay more attention to the sector. "We have already invested more than US$2 billion in the country. 20,000 direct jobs and 40,000 indirect jobs were generated. If everything goes smoothly, in the next two years we will invest 3,000 million more."

Menezes says such an investment can create 30,000 more jobs. "Net Brasilia has already created 400 direct jobs and we mean the government $200 million in tax revenue." When the subscription TV industry began operating in Brazil in 1993, it had 250,000 customers and US$125 million in investment, employing 800 people. Today there is US $2 billion of investment, 2.3 million associates and 20,000 workers.

"The problem is that the government does not yet have a defined policy for the sector. In addition, we have many direct taxes on turnover and our profitability is not so high as to support them, because it does not exceed 20%," adds Menezes. "It is necessary for the government to define its attitude towards the sector and to offer us an adequate tax program, because so many taxes depress activity."

The Brazilian Pay-TV market is also on the starting line to enter to dispute the Internet market with cable modem. With 40,000 kilometers of broadband network, the sector already has the main tool to transmit voice, signals and video with the best quality.

If brazil had anything, it was in having arrived late. The first networks began to be built in 1991 and 1992. Unlike the United States, for example, which today has an old network that needs to be renovated, Brazil started the game with the modern HFC system – Hibrid Fiber Coaxial. Large cities are covered by fiber optics and only small stretches of coaxial. They are networks of 500 and 750 Mhz, which allows bidirectionality in the transmission of data. According to North American specialists, the Brazilian is one of the most modern networks in the world.

Since the telephone network is of poor quality and slow in transmission, cable modem would produce a great stimulus to the Internet, with better service and more competitive prices. The Ministry of Communications and the National Communications Agency are being pressured by society and the government itself to authorize cable modem service in the country.

One of the most important Pay-TV companies is already testing the network and doing noise attenuation experiments for when the starting flag goes down. Now it only remains to wait.