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Pay TV Bundling Helps Drive Telefonica Growth in Core Market Spain

2016 results show Telefonica bundled service revenues-per-client, mostly involving TV, rising a notable 11.5% over 2015

MADRID – Telefonica, a test case for telecom diversification into TV, has consolidated growth in 2016, posting operating profits of €15.118 billion ($15.95 billion), up 14.3% on 2015.

Part of that growth, moreover, has come from TV as Telefonica’s quad-play Fusion offer of fixed telephony, TV, mobile and Internet proves a growth driver in Spain, one of Telefonica’s big core markets.

Acquiring Spain’s biggest – but stagnating – premium pay-TV operator Digital Plus in 2014, Telefonica’s drive into TV continues to show results, at least when TV is bundled in larger offers, especially involving fiber-optic broadband.

By Dec. 31, 2.9 million of Telefonica’s 4.3 million Fusion clients subscribed to TV, up from 2.6 million a year earlier, according to an IHS Technology analysis.

Average revenue per customer for Fusion clients stood at €81.6 ($86.1), 11.5% higher than in 2015, Angel Vila, Telefonica’s chief financial officer, said on Thursday during a conference call with analysts.

60% of the 2016 Fusion client revenue uptick came from rate upgrades, 40% from up-selling customers, Vila added.

Fusion’s total revenue numbers are up 80% year-on-year. One third of the rise is due to an increased Fusion subscriber base, two thirds to the 11.5% increase in average revenues per client.

“Increased penetration of TV is the next move,” Vila added, looking forward to 2017, saying that increased penetration of TV, fiber optic delivery, data transfer and more-than-one mobile lines per Fusion contract were “the features we are using to drive our revenues in Spain.”

Given such figures, TV is most certainly a growth driver for Telefonica in Spain. But its success comes from a few caveats.

“Premium priced pay TV has not been successful in Spain in a country where piracy is very high,” said Maria Rua Aguete at IHS Technology, pointing out that Fusion’s average revenue per customer of $86 is not just television but bundled services.

“With Telefonica in Spain, you are getting a very good deal. TV is being bundled almost for free,” she added, pointing out that the subscribers to Digital Plus, a true standalone TV service hit a wall for many years.

“Bundling TV with fiber and mobile works in Spain. Offering premium TV at premium prices has never worked, Rua Aguete added.

Another question is just how exportable Telefonica’s telco-TV business model may be. In the U.K., with a far more competitive pay TV market thanks to Sky, Vodafone has come late to the party and still has to offer a quad-play offer.  Although owned by Telefonica, U.K. telco O2 does not offer TV.

Telefonica’s 2016 full year results come as Telefonica’s pay TV division Movistar Plus is readying its first original drama series, to launch from this fall in Spain. So another key question will be how they may contribute to a new wave of both pay TV subscribers and up-selling at Telefonica.

Spain represents 44% of Telefonica’s global operating cash flow, Brazil 21%, the rest of Latin America 15%, and Germany and the U.K. 10% each. Energized by pre-payment mobile take-up and higher-speed broadband, Latin America outside Brazil proved another 2016 growth driver, Vila said.

One of the main market concerns about Telefonica continues, however, to be its imposing debt mountain. This had been pared down to €48.595 billion ($51.3 billion) at the end of last year. Telefonica sold 40% of its Telxius towers and cables business this month to private equity firm KKR in a deal valued at €1.27 billion ($1.34 billion). It offloaded Argentine broadcaster Telefe onto Viacom for $345 million in late 2015.

But, while Telefonica executive chairman Jose Maria Alvarez Pallete argued on Thursday that organic growth, twinned with cheaper financing costs, will help reduce debt going forward, analysts will continue to ask if Telefonica will dispose of further assets this year.

Dented by the costs of a voluntary retirement scheme in Spain, net profit at Telefonica for 2016 came in at €2.369 billion ($2.5 billion).

Buoyed by lower costs than expected in Spain, Telefonica stock rose 3.2% in morning trading to €9.6 ($10.1).

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