This article first appeared in The Edge Malaysia Weekly on November 15, 2021 - November 21, 2021

LIVE music from a string quartet greeted guests arriving at Astro Malaysia Holdings Bhd’s fete on Nov 9 to mark the addition of global streaming leader Netflix as the fifth over-the-top (OTT) service it is aggregating — but the first with its own “remote button” on Astro’s plug-and-play Ultra (set up) box.

If nothing else, that and the live dance choreographed by local artistes — with clips from Netflix’s dystopian South Korean series and “biggest TV show ever” Squid Game, as well as Astro’s own original drama Dukun Diva — at the Petaling Jaya Performing Arts Centre’s theatre (that could have seated up to 686 at full capacity) demonstrated support for the local arts scene and Malaysian artistes whose income sources had been hurt by necessary social distancing rules to battle Covid-19.

Save for sanitisers as well as masks being donned while not on stage, eating or drinking, the only other reminder of the pandemic was perhaps news of Netflix vice-president for business development (Asia-Pacific) Tony Zameczkowski being “stuck in Singapore” and making an appearance only via video recording to say that Netflix is “thrilled to bring an elevated multi-device entertainment experience to more Malaysians”.

For many, being stuck at home without a television and streaming videos the past 18 months or so would have been excruciating. As the world reopens, investors and analysts tracking the entertainment scene are now closely watching for changes in consumption patterns.

If indeed the world has hit peak streaming — everyone who would have signed up for Netflix, HBO, Disney+ Hotstar, Viu, iQiyi, WeTV, Amazon Prime or any other streaming video on demand (SVOD) service would have already done so during the pandemic-induced lockdown — streaming service providers will need to work extra hard to keep subscribers happy.

Last Wednesday (Nov 10), Disney+ said it only added 2.1 million customers, or one-fifth of the 10 million net adds Wall Street had expected — the slowest quarter since its launch. Helped by the phenomenal following of popular original programmes like Squid Game, which was watched by 142 million member households globally in the first four weeks of its launch, Netflix’s subscriber growth rebounded ahead of street forecast in 3Q2021 and a strong 4Q is expected, but that is after falling short in the first two quarters of this year.

As seen in movies, the term “no perpetual enemies” came true with Netflix — deemed to have “dug into the lunches” of traditional pay-TV providers such as Astro — becoming an Astro partner. Like in dramas, “no eternal allies” would probably play out if there are no more common interest.

Their common interest is the desire to keep subscribers locked in with the service — as demonstrated by the differential pricing of new Astro packages that incorporate Netflix as well as Astro’s earlier streaming partners Disney+ Hotstar, HBO Go, iQiyi and TVBAnywhere+. Subscribers will pay less if they sign up for 24 months compared with just 12 months or without any contract.

Unlike with Disney+ Hotstar, where existing Astro Movie Pack customers are automatically signed on with an additional token RM5 monthly fee, Astro customers will not be automatically signed on to a Netflix package.

Netflix, which had 30.05 million subscribers — or 14.1% of its 213.56 million subscribers — in Asia-Pacific as at end-September, does not say how many subscribers it has in Malaysia. Statista, however, puts Netflix’s subscriber base at 336,100 as at end-2020 and 221,750 at end-2019. That would be about 1.32% and 1.37% of Netflix’s subscribers in Asia-Pacific as at end-2020 (25.49 million) and end-2019 (16.23 million) respectively. If Malaysia still makes up 1.3% of its subscribers in Asia-Pacific, the number would be about 390,650, our back-of-the-envelope calculations show.

Astro does not say how many of its 5.67 million (premium pay and free) TV customers take up its Movies Pack. That Astro reaches 73% of Malaysia’s 7.74 million households — a base which likely includes premium customers with greater disposal income — is probably its greatest attraction to global players such as Netflix and Disney that are looking to expand their global base with the right partners.

The convenience of plug and play and having a TV box that can provide all relevant streaming services in one legitimate box should appeal to at least some cord-cutters and customers who never took on a pay-TV subscription.

Whether that is enough to convincingly reverse a slide in Astro’s pay-TV subscription revenue and premium paid subscriber base, however, remains to be seen.

What we know is that in the second quarter ended July 31, 2021 (2QFY1/2022), Astro’s TV subscription revenue did not slide quarter on quarter for the first time since 2QFY1/2019, after slipping for 12 straight quarters. The improvement was only a marginal RM2.6 million or 0.3% from the first quarter, but likely to be among the points of interest when third-quarter earnings are released on Dec 10.

Its total number of paid subscribers may have increased by about 3,000 q-o-q to 2.67 million in 2QFY1/2022 as well, our back-of-the-envelope calculations show, but still about 125,000 below The Edge’s estimate of 2.8 million in 2QFY1/2021. Astro does not provide a breakdown of its paid subscribers — which probably makes up half of its total subscriber base — but gives an overall subscriber figure, which includes its free-to-view NJOI service that allows pay-per-view top-ups.

Overall pay-TV residential ARPU (average revenue per user) was RM97.40 in 2QFY1/2022 compared with RM97.20 in 1QFY1/2022 but down from RM98 in 2QFY1/2021. The group’s overall revenue and earnings for 2QFY1/2022, however, was significantly lower q-o-q and year on year, partly due to higher content costs for sporting events, including Euro 2020 and the Olympics.

Euan Smith, Astro’s group chief operating officer and CEO of pay-TV, says the “all-new Astro experience” is designed for customers who love streaming and the connected world to enjoy their favourite shows “all in one place with Astro” on the big screen as well as personal devices on-the-go. “Listening to our customers, we are reimagining the entire Astro experience to suit their needs, providing more choice, more outstanding content, more control and more value.

“Simplicity has become a core pillar for us in recent times, driving us to transform the Astro experience into a holistic easy-to-use, go-to platform, making our customers’ entertainment seamless,” says Smith, adding that more streaming partners will be announced in the months ahead.

In April, Astro group CEO Henry Tan said the group is looking to aggregate as many as 15 OTTs by early 2023, which means 10 more could be added in the coming year. HBO Max, for instance, is expected to also be available to Astro customers once it is available in Malaysia.

Yet Astro isn’t confining itself to just streaming video services. Smith told the media on Nov 9 that health could be a potential area of interest and that Astro will “copy with pride” global best practices from the likes of Comcast-controlled British satellite broadcaster Sky and make leading moves “where appropriate”.

In the UK, where Smith is from, pay-TV platform Sky Q’s box integrates fitness app Fiit to bring the fitness experience into one’s living room and home. Sky Q also offers Netflix, YouTube, YouTube Kids, children’s educational videos provider Highbrow, music subscription services such as Spotify and ROXi as well as games provider PlayWorks, according to the information on its website. In October, Apple TV+ launched on Sky Q and Sky Glass, and customers in the UK will be able to access Sky Go on Apple TV in the first half of 2022.

Without divulging the specifics of what else is in store in the coming year, Astro’s Tan says the group will continue to leverage its strengths and reach in content and entertainment to bring the best experience, value and rewards to its customers at home and on-the-go.

Delivering broadband with its new plug-and-play Ultra and Ulti box ties in with this goal but a sizeable group of its existing subscribers continue to be served via direct-to-home satellite TV service. Only 1.07 million customers have so-called “connected” set-up boxes that are linked to the internet — that was 18.8% of its total subscriber base of 5.67 million as at end-July.

As usual, Astro does not reveal how revenue is shared with the OTTs but Tan has maintained that cost savings on foreign content will be invested in strengthening its local content offering to continue satisfying the diverse Malaysian market and to remain as the perfect partner for global players. Astro spends about a third of its revenue on content every year. Tan previously guided that about 25% of its content costs go to producing original local content.

The current agreement does not involve Netflix taking any content from Astro but Smith says there is “no reason” there would not be such deals in future. Astro may also save some administrative cost as Smith says content from Netflix will not be censored by Astro.

Citing the “closed period”, as Astro is a month away from releasing its third-quarter results, numbers were not discussed at the Astro-Netflix do but Smith did say that the Malaysian government does not get taxes when people buy pirated TV boxes. “It’s wrong, it is theft and it’s not about Astro. It is about the content community,” Smith says, relating how content piracy essentially takes money away from the creators of content that helped kept billions of people entertained during the lockdown.

Astro, which usually earns more than RM100 million every quarter, will be impacted by the one-off Cukai Makmur, a prosperity tax that will hit every ringgit of chargeable income over RM100 million with a higher 33% rate as opposed to the usual 24% for the year of assessment 2022 (YA2022).

This may be among the reasons that Astro’s share price has slipped about 5% since Budget 2022 was tabled. Closing at 95 sen on Nov 11, however, Astro only needs to pay a dividend of 4.75 sen to deliver a yield of 5%. Astro declared a dividend of 1.5 sen in the first and second quarters of its current fiscal year. If it continues to do the same in the remaining two quarters, yield would be 6.3% and it only needs about RM313 million to pay a dividend of 6 sen per share.

RHB Research analyst Jeffrey Tan, for instance, estimates that a 10% impact from the prosperity tax on FY1/2023 core earnings would see a 5.3% y-o-y decline compared with his previous estimate of a 6% y-o-y gain, before staging a rebound of 13.3% y-o-y in FY1/2024.

Nonetheless, data appended in his Nov 10 report shows Astro will still make a net profit of more than RM500 million in FY1/2023 despite paying higher taxes for YA2022, though about RM30 million less than his estimate for the current fiscal year (FY1/2022). A 70% payout based on his earnings estimate would still yield RM350 million — enough to pay a dividend of 6.5 sen, our back-of-the-envelope calculations show.

RHB’s Tan sees Astro’s new subscription packages “resonating well with subscribers. The greater flexibility and control accorded should help reduce subscriber churn and draw in cord-nevers. The addition of Netflix bolsters its overall value proposition and supports Astro’s pivot into on-demand viewing”. RHB has a “buy” call on Astro with a target price of RM1.45, implying a 52.6% upside from last Thursday’s 95 sen close. His estimate of 7 sen dividend per share implies 7.4% yield.

UOB KayHian Research analyst Chloe Tan, who has a “buy” call and RM1.08 target price, wrote in a Nov 10 note that Astro’s management remains committed to a 75% dividend payout policy for FY1/2022, backed by sufficient cash-flow buffer. She reckons that Astro “may face initial margin compression when its SVOD services and broadband products start to roll out [while not contributing] incremental revenue in the first one or two years” but “likes [the Astro] management’s concerted effort to forge content partnerships and roll out new initiatives, which could allow them to defend the shrinking market share and ARPU over time”. For now, what is most alluring about Astro is its dividend yield, a factor that will continue to shine if its new strategy proves successful.

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