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Faced with a contracting telco market in Europe, Spain’s Telefonica did what seems logical: It bought the country’s largest pay-TV operator. Now the telephone and Internet giant can settle into what seems like a growth market — content creation and delivery.

Completed this month, Telefonica’s purchase of Distribuidora de Television Digital, the company behind pay TV giant Canal Plus Spain, represents the country’s biggest media deal in years, a pact worth some $1.4 billion. Telefonica’s big moves may breathe some life back into  Spain’s media and entertainment sector, which shrunk 26% to €16.9 billion ($22.8 billion) in sales over 2007-13, per a report from consulting firm Arthur D. Little.

The buy is also good news for Hollywood. Telefonica, like its rival Vodafone (which just paid $10 billion for Spanish cabler ONO) is likely to buy more foreign movies and TV series — as well as ramp up the creation of original content — to increase its pay TV subscriber base.

Illustration by Pablo Iglesias for Variety

Under company president Cesar Alierta, Telefonica has grown into one of Europe’s biggest telcos, with $78.9 billion in revenue and $26 billion in operating income last year.

Analysts see the logic in the DTS buy, citing the fact that Europe’s telco sector will shrink 1.6% by 2016, according to the Arthur D. Little report.

“It does make sense for a company with Telefonica’s position in telephony to add on a pay TV business,” says Tim Westcott, principal analyst of TV at IHS Technology. Westcott cites the success of U.K. telco giant BT Group, which moved into TV to protect its leadership position as an Internet service provider, by buying multiple sports rights, such as the UEFA Champions League soccer, in a deal that kicks in next year.

With DTS, Telefonica gets Sunday night’s big La Liga soccer match and firstrun U.S. series rights and output deals with most Hollywood studios, plus a subscriber base of 1.6 million, repping 40% of Spain’s pay TV market.

Javier Borrachero, a telco analyst at Madrid’s Kepler Cheuvreux, says that Telefonica is aggressively launching and deploying its fiber network to counter competition and grow its content delivery systems on the platforms it offers, using content from its DTS-Canal Plus purchase, with a target of building out to 7 million homes. He adds: “Telefonica also needs to use its satellite delivery to fill in coverage gaps in (less populated parts of) Spain, where fiber network rollout makes little sense, before Vodafone has a competitive offer.”

The big question is what additional content Telefonica will target.

Sports is a proven draw to subscribers. The company already has bought pay TV rights for Grand Prix motorcycle racing, Formula One and Spain’s qualifying matches for the 2018 soccer World Cup.

Having lost out on rights to 2015-2017 Champions League soccer to a free-to-air/pay TV bid from Atresmedia and pay TV bouquet Gol TV (which is owned by multimedia giant Mediapro Group), Telefonica likely will be willing to pay a premium for rights to top Spanish soccer clubs such as Real Madrid and Barcelona, whose TV rights are available starting in 2015-16.

Telefonica Studios, through its Argentine TV net Telefe, already has proved successful in co-producing movies, backing such pics as Jose Juan Campanella’s “The Secret in Their Eyes” and Damian Szifron’s Cannes competition player “Wild Tales,” both Sony Pictures Classics pickups. Still, access to sports programming likely will determine other needs.

“All Spanish telcos will need content. But Telefonica’s demand for Hollywood product could depend on what exclusivity it can get with sports rights,” says one analyst, noting that the more such rights Telefonica can secure, the less premium content it will need to fill out its schedule.

— Emiliano de Pablos contributed to this report

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