Mexico’s TV Azteca Struggles to Keep Up With Changing Media Landscape

Azteca TV Changes
pablo iglesias for Variety

Mexico’s broadcast industry has fallen on hard times, but no network is facing a tougher challenge than TV Azteca. Caught in the whipsaw of the country’s rapidly changing media landscape, with laws designed to break the TV duopoly market leader Televisa and Azteca have enjoyed for decades, the network’s outlook is worsening amid plunging ad revenues, soaring costs and stinging competition.

The ailing broadcaster, Mexico’s second-largest, saw nine-month earnings before interest, tax, depreciation and amortization plunge 50% as a slumping peso increased production costs. Domestic ad spending has fallen 10% amid a sluggish economy, further unnerving investors, who sent Azteca’s shares down 57% last year.

The TV giant also has new leadership: Billionaire owner Ricardo Salinas (whose fortune was halved last year) appointed his 32-year-old son Benjamin Salinas as CEO in October.

Benjamin has been responsible for such short-lived programs as gameshow “Asgaard,” which features costumed contestants vying for prizes in a show colored by Norse mythology; sci-fi-tinged drama “Drenaje Profundo” and action series “La Teniente.”

Unam U. sociology professor Raul Trejo says Benjamin Salinas “has a history of leading very bad programming.” His  track record has not inspired confidence in his ability to jump-start innovative content, which TV Azteca desperately needs.

“It’s been a very difficult year for both Azteca and Televisa, but especially for Azteca.”
Jorge Bravo

Notes Jorge Bravo of industry consultant Mediatelecom in Mexico City: “It’s been a very difficult year for both Azteca and (rival broadcaster) Televisa, but especially for Azteca. They are not growing, telenovela production is stalled, they don’t have a pay-TV distribution platform, and while they are working to improve news, it’s not enough.”

Azteca posted a $127 million nine-month loss compared with a $6.5 million profit over the same period a year ago.

A weakening peso hiked international content and production costs to 71% of revenues from 60% year over year. Azteca imports a large chunk of its content for flagship Channel 7 from Disney, Fox and Sony. Its other channel — Channel 13 — airs mostly local soaps.

Meanwhile, Mexico’s 2013 telecom and broadcasting reform will bring new digital rival Cadenatres to the fore this year, further pressuring Azteca’s domestic sales, which account for the bulk of its revenues.

“Cadenatres is not going to affect Televisa’s dominant position, but it could start denting Azteca’s,” Bravo adds, noting that the digital network is expected to account for 8% of the TV audience in five years.

Azteca’s main problem seems to be its snail-like reaction to a rapidly changing market, which the reform laws have shaken up through monopoly-busting regulations, new digital channels and an analog-to-digital switchover — the so-called Apagon Analogico, which was scheduled to take effect Jan. 1, though that action has been delayed.

Analysts say Azteca is moving too slowly to take on rising pay-TV competition from much-nimbler Televisa — the world’s largest Spanish-language broadcaster — and growing favorites like Netflix. For instance, Azteca’s Totalplay pay-TV unit has so far drawn just 45,000 users, generating only 10% of group revenues; Televisa has 10 million pay-TV subscribers.

“There is a huge opportunity to grow Totalplay, as well as Azteca’s fiber-optic Internet and pay-TV businesses,” Bravo says, but adds that the network needs to invest $400 million by 2018 to flesh out Totalplay. “Televisa has 62% of the pay-TV market, followed by Megacable,” and there is rising competition from Cablevision and Axtel. According to Bravo, Azteca has less than 1% of the pay-TV market, even though it controls 30% of the open-air spectrum. Televisa, in turn, controls 70% of the open-air market.

TV Azteca By the Numbers
It was a rough 2015 for Mexico’s No. 2 broadcaster.
50% Drop in TV Azteca’s nine-month earnings before interest, tax, depreciation and amortization
9% Percentage TV Azteca’s domestic ad revenues have fallen in the past year
45k Subs for Azteca’s Totalplay pay-TV unit
10m Subs for Televisa’s pay-TV subscribers
30% Percentage of open-air spectrum controlled by TV Azteca
70% Percentage of open-air spectrum controlled by Televisa
1% Azteca’s share of the Mexican pay-TV market

To diversify its business, Azteca executives have indicated the firm may participate in a $7 billion broadband network auction in January that could enable it to lease broadband capacity to others, sharply boosting revenues, Bravo says. Details about other auction participants are forthcoming.

Already, Azteca is successfully operating fiber-optic nets in Peru and Colombia, where it leases big-data capacity to others.

“This is what they need to be focusing on,” says a Mexico City-based analyst who requested anonymity, mirroring several others who asked to remain anonymous.

Boosting Totalplay in those markets also would help Azteca turn the corner. “They need to stop trying to make content for Mexico,” says another analyst. “That strategy is lagging, and they can’t compete with Televisa.”

Azteca’s spokesman Daniel McCosh declined to comment; however, Bruno Rangel, the investor relations director at TV Azteca parent company Grupo Salinas, has said the company will remain focused on making “attractive content for large audiences” targeted by Mexican and U.S. advertisers.

Analysts say Azteca must strike more and better carriage deals with key content distributors like Megacable or America Movil’s Claro network. “Azteca has good sports, novelas and movies, but nowhere to sell them,” Bravo says. “Totalplay is not sufficient. They need other pay-TV platforms to sell their signal.”

Azteca appears frozen in time, unable to produce more premium content to entice viewers, observers say.

“They continue doing the same cheap and low-quality programming,” says Trejo. “Mexicans are migrating to cable and satellite TV. For the first time in 25 years, Mexico is getting a new channel (Cadenatres). (Azteca’s) strategy is no longer working.”

With domestic ad revenues for Azteca and Televisa down 9% and 10%, respectively, in 2015, Fitch Ratings analyst Alvin Lim says Azteca must find a way to offset the shortfall. “They really need to raise (ad) prices, or it will be difficult to improve the business,” Lim says. “If they can do this, control their program costs and renegotiate terms with content providers, they could do better — but we don’t see material improvement in 2016.”

On the bright side, Lim says Azteca’s 3.6 billion peso ($207.8 million) cash balance and absence of maturing debt until 2018 means it has some short-term leverage to streamline its franchise.

Despite the tougher market, Bravo forecasts that overall ad revenues for the sector could increase 5% this year, though the largest portion of that increase will go to digital nets.

But unless it makes big changes in 2016, Azteca is likely to miss out on opportunities in the ever-changing and lucrative Latin American TV market.