01 Jan 2005

It was only three years ago that piracy was such a big problem for two of the biggest pay-TV operators in the Middle East that they were literally begging their conditional access supplier to do a card switch-out. The experience was a difficult one and it cost the operators a small fortune, but then this is one market where small fortunes are not that hard to come by.

Pay-TV in the Middle East has been in large part an exercise in local politics, local egos and local fortunes. Local sheikhs and royals, all with deep pockets and big ambitions, control the three majors of the pay-TV landscape: ART, Orbit and Showtime. Pay-TV may have launched a decade ago, but subscriber growth has been a closely guarded secret and not really all that important given the disposition of the owners.

But it seems as if the veil over Middle East pay-TV economics is set to be raised with the first-ever initial public offering of a local pay-TV operation. The operator set to take the plunge - likely later this year - is Showtime, or Showtime Arabia as it is called to distinguish it from its US sibling.

Both Showtimes count Viacom as a parent and the head of Showtime Arabia is an ex-Viacom executive. Their logos are the same and the focus since launch for the Dubai-based Showtime has been on western movies and western entertainment. So this month it's showing Kill Bill and Mona Lisa Smile, among other Hollywood offerings, across three branded movie channels in addition to a 10-channel pay-per-view offering and a two-year-old Arabic-language movie service that airs more 'classic' fair, for instance running Egyptian films from the '60s and '70s. This strategy has attracted an estimated 300,000 subscribers (the company will not, of course, confirm its numbers), which in the context of the Middle East is not bad.

However, last summer the people running Showtime Arabia's marketing, sales and packaging strategies penned a landmark deal with rival pay-TV operator ART to jointly sell their packages. The arranged marriage is all about leveraging the strengths of each: ART is known for its sports line-up and Arabic-language programming, while Showtime is known for imported US movies and entertainment programming. Although the companies will not reveal figures, the new dual package, which costs a hefty $75 (€57) a month, has proved one of the best drivers of subscriptions since launching last August. It contributed to making 2004 Showtime's best ever year in terms of new subscription sales and net growth since it began operations in 1996, according to a company executive.

With a rocket booster on subscriber growth and a new manager to handle churn brought in last year from BSkyB, a beauty parade has been underway since late December to pick the underwriters for the IPO. Kuwait Projects Company or Kipco (one of the investment vehicles for the Kuwaiti royal family), which owns about 80% of Showtime Arabia, is driving the process and has already told its own investors that the pay-TV operation has the highest ARPU among the three Middle East pay-TV operations at between $52 and $55 a month.

Churn, which has been and continues to be a problem, last year fell some 22% from 2003 levels, according to the company (again, Showtime will not reveal an exact churn figure). The value of the company is still unclear, although $1bn has been mooted. The IPO process will provide a new kind of benchmark for Middle East pay-TV and will help Viacom realise some value from its long-term and rather unusual investment.

Unusual because Viacom is not typically in the platform business, preferring to provide programming to attract the eyeballs of subscribers (Viacom's chairman Sumner Redstone loves to talk about eyeballs). But Redstone has been very supportive of Showtime Arabia, even though the US company may now look to add some cash to its bottom line from the IPO.

Yet problems for pay-TV in this region remain, one being the amount of free-to-air TV on offer. There are hundreds of free channels across what Showtime Arabia considers to be its core footprint of Saudi Arabia, United Arab Emirates, Kuwait and Egypt. And it's not just Al-Jazeera. MBC has the local version of Big Brother and Who Wants to be a Millionaire? Future TV has the local version of Pop Idol. The local Star Academy is on LBC as is the local version of The Apprentice.

And of course piracy continues to be an issue. The newspapers in Beirut list Showtime's films even though the company actually counts very few paying subscribers in Lebanon! Of course Showtime is working hard to cut piracy. But in the final analysis a certain amount of faith and hope must also enter into all of this - from the piracy issues to the IPO itself.