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Telefonica’s Movistar + Focuses on High-Value Clients in Content Drive

High-end original series creation, and premium sports, become part of a drive to upsell to clients as average multi-play client revenues hits new heights

MADRID — Telefonica shares rose 3.3% to €7.6 in early morning trading on July 26 as the telecom delivered a solid set of second quarter results across business, core territories and key metrics, with revenues at €12.1 billion ($14,.25 billion),a drop of 6.3% due to foreign exchange markets, but up 2% in organic terms.

That growth includes pay TV in Spain, where Telefonica, via pay TV division Movistar, + added 7,600 customers from March through June, according to IHS Markit. That compares to 51,200 net pay TV additions same period 2017. Customers for Fusion, a Movistar +’s mobile-fiber-TV offer launched in 2015, are also up by 38,000. Again, that’s down on 2Q 2017, where Movistar + scored 101,000 net extra clients.

But, as pay TV subscriber growth appears to be slowing, in its push into original series creation and content ownership, where it recently scored major soccer rights, Telefonica looks to be refocusing its priorities.

“Pay TV is growing in Spain but the growth has slowed down,” said María Rua Aguete, executive director of Media, Service Providers & Platforms at IHS Markit.

However, she added, average revenues per client (ARPU) of Fusion clients has increased significantly over the last 12 months from €84.8 ($99.5), second quarter to a “fantastic” €89.5 ($105), May-June 2018.

“This is a result of investment in premium content which is allowing Movistar + to upsell more expensive packages to current subscribers,” Rua Aguete added.

When it set out to launch its first original series late last summer, Telefonica hoped to drive a huge increase in pay TV subscribers in Spain, whose market penetration was as low as 35%. Now, during a conference call with analysts on Thursday, one recurrent theme of executive chairman José María Alvarez-Pallete and CEO Angel Vilá’s comments regarding Spain was Telefonica’s aim of, and success at, increasing the number and spend of high-value clients.

“Spain is a low pay TV penetration market. Gaining new subscribers is still a difficult market challenge. People in Spain aren’t willing to pay for content unless it is exceptional,” said Rua Aguete. “So rather than earning loads of new additions, Movistar +’s strategy is to upsell more premium content to current subscribers.”

The key question in Spain’s new content scenario, which analysts came back to time and again on the Thursday call, is if rival Vodafone’s decision not to buy a wholesale offer of Spanish soccer rights from Telefonica could ultimately prove net positive to the latter.

After Movistar + executives spent months complaining about the cost of soccer rights in Spain, Movistar + moved smartly late June to pay €980 million ($1.1 billion) for each new LaLiga season over 2019-22, €360 million ($420 million) each Champions League and Europa League season starting this September. The deal sees soccer rights costing 5% more in the 2018-19 season, before their cost comes down for 2019-20, Vilá told analysts on Thursday.

By law, Movistar + is obliged to offer premium content it acquires to rival telcos Orange and Vodafone. On the soccer rights, Orange  has proved a buyer, Vodafone passed.

“There’s a clear differentiation in pay TV operators strategies in Spain. Vodafone is focusing more on its Netflix and HBO deals than sports rights,” Rua-Aguete commented.

The big question is how many of Vodafone’s 300,000-400,000 soccer subscribers may migrate to Telefonica, becoming Movistar + premium customers.

“I’m sure a proportion will go to Telefonica,” said Aguete. The question is just how many.

Telefonica remains the No. 1 pay TV player in Spain with 3.9 million customers. Netflix has 1.8 million, Vodafone 1.2 million, according to IHS Markit estimations.

Pictured: José Maria Alvarez-Pallete

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