Market Insight

Telefónica restructures converged bundles in bid to turn around pay TV losses and expand original content reach

July 11, 2017


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Telefónica has introduced two new converged bundles, Movistar Fusión #0 and Movistar Fusión Series. Launched on July 9 2017, the bundles will bring an array of content and advanced features, such as network recording and seven day catch-up, to a wider audience. Prior to Fusión #0 and Fusión Series, Telefónica’s cheapest quad-play bundle (Fusión Contigo) started at €55 a month.

Our Analysis

Telefónica’s pay TV subscriber numbers peaked at 3.755 million in June 2016. Since then, Telefónica has seen its TV base decline to 3.616 million at the end of March 2017. In the same period, Orange added 156,000 pay TV subscribers, reflecting the tough competition in Spain’s quad-play market.

Outside of the television market, Telefónica has been challenged by the success of MásMóvil, which through a targeted acquisition strategy and a series of infrastructure agreements with Spain’s established operators, has become Spain’s fourth largest fully-converged operator. In 2016, the group added 188,000 mobile subscribers, in addition to 75,000 fixed broadband subscribers in the last two quarters of 2016. It is also rumoured to be launching an Android-based pay TV service later this summer, increasing the pressure on Spain’s established operators.

These competitive developments have led Telefónica to restructure its converged bundles, to make sure it attracts new subscribers by making TV services available to all of its fixed broadband customers.

IHS Markit estimates that Telefónica has a 65% share of Spain’s pay TV market. The operator’s offer centres on its Fusión converged bundles, for which uptake has so far skewed towards to the mid and high-value segments of the market. As of Q1 2017, 21% of Telefónica’s Fusión customer base were on a high-value package (Fusión+2 or above), while 51% were on a mid-tier package. The launch of new converged bundles provides Telefonica with the opportunity to capture more value from the remaining 29% of its current bundled subscriber base.

Given previous price wars in the Spanish telecoms market, Telefónica’s decision to implement a ‘More for More’ pricing strategy represents an attempt to differentiate its product in respect to quality. Advanced set-top box features, in addition to the inclusion of original content, will ensure Fusión #0 and Fusión Series differ from lower-priced alternatives. Targeting customers at the lower end will also reduce the risk of ARPU dilution, which will be increasingly important as Telefónica increases its investment in original content production.

Telefónica expects to spend €70 million in 2017 as it creates four original drama series, before producing a further 10 series in 2018. The first of these series is expected later this year. Investment in original content will reduce Telefonica’s reliance on expensive sports rights to attract pay TV subscribers, which if successful will drive pay TV penetration in Spain, which lags behind other major European countries.

Fusión #0 and Fusión Series both include Channel #0, which will be used to distribute Telefónica’s original content. Making this content available to a wider audience justifies Telefonica’s content investment, while potentially attracting new customers to its lower-tiered packages. Furthermore, the Fusión Series package includes on-demand access to full series of Telefónica originals ahead of linear broadcast, with whole seasons available for binging from the initial release of episode one. This adds further value to Telefónica’s higher tier package, acting as an upsell opportunity for lower-tier customers and a churn reducer for those paying more. It also provides Telefónica with its own service to compete with OTT services, and in particular Netflix, with which it currently does not have an agreement aside of some Netflix content in its premium tier. Providing a "Netflix type" service means Telefónica is able to cater for changing viewing habits and expectations. 

Telefónica’s move to restructure its Fusión bundles contrasts with the approach taken by Vodafone and Orange, which have opted to use sub-brands with a separate range of bundles to target the low-value segment of the market. In May 2017, Vodafone’s low-cost MVNO brand Lowi launched a new converged bundle, consisting of fibre and mobile, with prices ranging from €37 to €47. A month later, Orange followed Vodafone’s move and launched a similar bundle through its Amena.com brand priced at €40.95 to €45.95, depending on the selected mobile allowance. Both sub-brands thereby directly compete with MásMóvil’s fibre and mobile bundles, which start at €36.90.

Despite the shift in direction of strategy for its core business, IHS Markit believes Telefónica could still launch a converged bundle via its own sub-brand Tuenti. However, such an initiative would need to be carefully designed, in order to reduce the threat of the lower-priced Tuenti brand cannibalising Fusión revenues. A Tuenti converged bundle, therefore, is unlikely to include a pay TV element.   

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