• Potential of existing infrastructure seems diminished by regulatory environment

• Advertising in Thailand may have grown too fast prematurely

We think India represents greatest medium- and long-term opportunity in the region

Although Thailand’s deteriorating financial health has been the object of much attention over the past year, the outlook over our horizon is still favourable, though not as attractive as some of its neighbours. Having received an early head start in providing multichannel services, Thailand’s pay-TV industry still looks relatively weak compared with its free-TV cousins, all of whom are operating in a weak economic environment. Pay TV, in particular, should still offer very compelling growth albeit not immediately.

Market potential is suppressed

We expect that the Thai television market will grow from an estimated commercial revenue level of Bt12.4 billion (US$0.5 billion) in 1995 to Bt64.6 billion (US$1.9 billion) in 2005. This translates into a 10-year nominal CAGR of 17.9% in local-currency terms, but a rate of 14.4% in US dollar terms after applying our long-term exchange-rate assumptions. The great pity about Thailand is that its nascent pay-TV industry, particularly its wireline networks, could be used more effectively with a more liberal regulatory environment and rational industrial organisation. As a result, these forecasts, more than in any other southeast Asian market, are quite sensitive to developments on the political and constitutional front.

(A$ Bils)

(A$ Bils)

(A$ Bils)

Real CAGR (%)

Real CAGR (%)

Real CAGR (%)

Television Industry Commercial Revenue

12.42

26.11

64.64

9.3

16.1

12.7

(%)

(%)

(%)

CAGR (%)

CAGR (%)

CAGR (%)

Telephone VOD

0

0

0

NM

NM

NM

India Commercial Revenue

100

100

100

16

20

18

(%)

(%)

(%)

CAGR (%)

CAGR (%)

CAGR (%)

Viewing Fees

0

1

1

150

44

89

India Commercial Revenue

100

100

100

16

20

18

Micro & Macro Outlook

We assume national income to grow at 10% CAGR during 1995-2005

We do not mean to downplay the effects of recent economic troubles in Thailand; however, many of the elements of the larger picture are still attractive. Provided the country is able to strengthen institutions and policies, we believe the Thai economy can achieve our assumed growth rates over our forecast horizon. We expect that Thailand will see its GDP rise in nominal terms from a 1995 level of Bt4.2 trillion (US$169 billion) to Bt10.9 trillion (US$321 billion) in 2005, or a nominal 10-year CAGR of 10.1% (6.6% in US dollar terms) and 4.7% in real terms. We also expect consumption to take up a marginally higher proportion of the country’s output, with the private consumption taking up 56% of GDP in 2005 compared with 53% in 1995.

TV advertising seems to have moved ahead of itself

Television in Thailand is not yet universal, with penetration standing roughly at 90%. This should rise with incomes, expanding the value of the viewership. In all, the Thai environment would seem supportive of an expansion in advertising revenue. However, we estimate that - relative to the region (ex-Japan, Australia and New Zealand) - Thailand’s television advertising revenue took up a portion of GDP greater than the proportions for all but Korea in 1996. This could be explained by Thai consumer profligacy; but we estimate that for the same year television advertising revenue in Thailand took a portion of private consumption greater than the proportions for all but Korea and Singapore. It also took a portion of gross TV household income greater than the proportions for all but Korea and Indonesia.

TV advertising may be most cost-inefficient in Southeast Asia

More worrisome, though harder to confirm, is our estimate that ad revenue took a portion of gross TV household income ratings (the average portion of gross TV household income that is "viewing" television) almost as high as in Australia, which is highest in the region, and well above the average for its southeast Asian neighbours. This suggests that TV advertising is most cost-inefficient in Thailand. While it may also be that substitute media are also cost-inefficient, it suggests that support for advertising-rate hikes over the forecast horizon may be weak until balance is achieved again.

Current Services

State involvement in TV might explain low ratings

Thai viewers face a wide selection of terrestrial free TV channels. Of the five, four are ad supported - Channels 3, 5, 7 and 9. The relatively low overall ratings in Thailand may partly be attributable to the heavy state involvement in free TV. Channel 5 and Channel 11 are directly operated and programmed by the Royal Thai Army and the Government’s Public Relations Department, respectively. Channel 9 is operated by another regulator, the Mass Communications Organisation of Thailand (MCOT).

Lessors of airtime do not have incentive to build brands

Besides the difficulty of watching television while stuck in Bangkok traffic, another factor contributing to the relatively weak overall ratings in Thailand is its unique reselling system. All the commercial terrestrials, except for Channel 7, sell airtime to outside programmers who in turn sell advertising slots. This helps to ensure that the terrestrials get steadier income flow, but also hinders the development of their brand name. For some, such as the Royal Thai Army, brand development is not an issue. Airtime lessors, like property tenants, have little incentive to enhance the value of the property.

Pay-TV services using various technologies

Pay TV started early in Thailand, with the first cable licenses being issued in 1989. The industry has developed to the extent that all delivery technologies are competing, including MMDS, DTH and HFC. However, microwave has proved ill-suited to the Bangkok weather and pirates. In Bangkok, two operators remain and are reported to be in advanced discussions regarding a merger. International Broadcasting Corporation, which delivers via MMDS and DTH, appears to have hit a wall at 150,000 subscribers. UTV Cable Network, funding an extensive HFC network, had a subscribership of 175,000 in October 1997 that is growing.

Competition

Intensification of free-TV competition likely

Despite the heavy involvement of the state in the free-TV industry, the Thai television industry is arguably the most competitive in southeast Asia and competition is likely to intensify during the coming lean times. The country’s sixth broadcaster, Independent Television, started operations last year as a UHF channel with 12 hours of programming. Further reorganisation is possible at Channel 11, which won permission to take advertising in late 1995.

Pay TV id denied the advertising revenue stream

The government has been concerned that pay TV will gain a slice of the advertising pie and has not allowed pay-TV channels to air advertisements. Even advertisements appearing on international feeds must be zapped. It is doubtful that this policy is going to change without a stable coalition in power to foster policy initiatives. It is also doubtful whether pay-TV programming, only a small portion of which is originally produced in Thai, will claim a large chunk of viewing time as it has in Taiwan, even if pay TV does become as universal as it is in Taiwan.

Exclusive infrastructure franchises lower competition

Lowing the level of fair competition to the detriment of service providers, the government grants monopoly franchises to infrastructure providers in a unique way. Currently, Shinawatra Group has a monopoly on Thai satellite communications. At the same time, all Thai-registered companies marketing satellite pay-TV services must use Thai satellites, leaving them no choice.

Convergence

Government’s BTO approach reduces asset value

TelecomAsia (TA), parent of UTV and part-owner of the network which UTV rents for the delivery of cable, also has a monopoly franchise on the installation of a fixed-line local access network in the Bangkok area. However, these monopolies may not be as valuable as they appear. Because these networks are supported by government concessions on a Build-Transfer-Operate basis, network operators do not have independent control over how their networks are to be utilised. The state telco, Telephone Organisation of Thailand (TOT), at one point rejected the use of the fiber trunk network for the delivery of programming.

Contention between regulators is also a problem

Confusingly, TA’s cable TV network, Asia Multimedia Network (AMN), is operated under a concession from MCOT, which means that MCOT holds title. Meanwhile, to gain permission to build AMN along telephone poles, TA has proposed to give 6% of AMN to TOT. Finally, it is still unclear whether TOT will permit AMN’s network to be used to provide telephony.

Other networks are probably also under-utilised

Other players in the communication business own networks that are probably similarly under-utilised. United Communications Group, UCOM, is trying out ATM on its backbone network that supports cellular services. UCOM has a license for pay TV and hopes to offer Internet access.

Commercial DTT by 2003

The Royal Thai Army’s Channel 5 hopes to begin experimental transmission of DTT in 1999 and expects a 3-5 year transition. We expect commercial DTT to be available in Thailand in 2003.