Lopez Holdings

PCTA Chairman Ralph Casino, PCTA President Allan Dungao, Convention Chairman Philip Chien, ladies and gentlemen:

Good morning. I’ve been asked to give a brief discussion on the future of Cable TV. But let me start out by saying that the future of Cable TV is not going to be about just cable TV. Today I’d like to talk about the three key points that I think are going to determine how much growth our industry can continue to show. The first point is that broadband internet will be a key source of revenues for the industry. The second point is that encryption and addressability are mandatory investments to protect and grow our core business. And the third point is that we are going to compete in an arena where the telecom giants are beginning to become media companies—whether through mobile phones, IPTV or DTH.

Let me start with the first point: cable has not succeeded in capitalizing on the astounding growth in the broadband industry. Whereas 5 years ago, there were hardly any broadband customers, today there is an estimated 600,000 broadband subscribers nationwide and that number continues to grow exponentially each year. Demand will continue to grow as PC prices come down, as the growing number of OFW’s use the internet for communication and information, and as the cost of bandwidth declines.

It is the right time for us to make the investments needed to become a stronger player in the broadband market. Not only does the demand exist, technology has given us the means to create a compelling competitive advantage for our industry. On DOCSIS 2, we now have the capability to offer up to 32 mbps to the home. On DOCSIS 3, we will have the capability of offering up to 100 mbps to the home. These are not just promises made by overenthusiastic suppliers. Throughout Asia, these speeds have already been commercially deployed. In Singapore, Starhub, which offers a sixteen, a thirty-two and a one-hundred mbps service, now has a 50% share of the broadband market, competing successfully against telecom giant Singtel. TBC in Taiwan is offering speeds up to 16 mbps, with broadband revenues hitting almost 15% of total sales, and sub growth increasing by 20% p.a.

The market is here and the product we are capable of offering is very competitive vs. the telcos. It’s also much more attractive to us from a revenue standpoint. The ARPU from our broadband service is 2 to 4 times that of our cable subscription fees.

It’s a good bet to make the investment in broadband services while the window of opportunity is still open. We’ve missed the boat once, we shouldn’t miss it again.

The second point is that addressability is no longer an upgrade, but a necessary investment to remain competitive in this new age. Let’s consider the situation many of us find ourselves in:

1. subscriber growth over the past five years has been marginal,

2. costs including programming continue to rise while we find it increasingly difficult to raise prices—especially since the market has become much more price sensitive,

3. the continuous rise in costs coupled with successive years’ price increases have left us with a price point that may no longer be affordable to the larger but less affluent segments of the market, and

4. cable theft remains rampant in many parts of the country.

While it is not an overnight home run, in the medium term addressability will help us resolve all of these outstanding industry issues. Here in Metro Manila, we have made the decision to invest in digital encryption. It is still substantially more expensive than an analog solution, but we feel that this investment will not be rendered obsolete in at least the next ten years. As of today, nearly one-fourth of our subscriber base already has a digital set-top box in the home.

For the saturated postpaid market, we can now drive growth not just through subscriber numbers, but by offering these higher income households additional channel choices priced on top of basic. There are at least thirty new channels being offered in Southeast Asia this year. Without addressability, we would have had to include many of these channels on basic, then increase the monthly fees to accommodate the cost. But because of addressability, each new channel is now a revenue growth opportunity for us. We can choose to sell each new channel on its own or as part of a SkyCable Platinum bundle. Either way, we keep basic fees flat, while creating new revenue opportunities for current subscribers that are willing to watch and pay for the new channels. As the number of channels in Asia grows, our revenue opportunities should continue to grow as well.

In the next two years, our eventual goal is mass customization. We want to allow each and every subscriber to pick and choose the channels they are willing to pay for. Rather than force the same bundle of channels on basic to each and every customer, subscribers will now determine what exactly their individual channel line-up should look like. From a cost perspective, this means we no longer need to pay certain channels a fee for all our subscribers when in reality only 10% of them watch that channel. But similarly, subscribers can also pay less by paying only for the channels they watch. The end goal is better efficiency for everyone:

1. The channels can charge a premium per subscriber. But they also need to work harder to convince customers that they should purchase and watch the channel.

2. The operators can afford to pay the channels the premium because it passes on the cost only to subscribers who are willing to pay for the channel--and not to the entire sub base, and

3. The subscriber can lower his monthly bill by paying only for the channels he wants.

We’ve got to do some pencil pushing on this but what we hope to see in the next few years is that as the cost of pay TV becomes more affordable, we also see a growth in penetration rates and a reduction in churn.

We’ve also taken our cue from the telcos and consumer companies. Addressability has allowed us to go after the mass market by sacheting our product and allowing consumers to “load” their set-top boxes in either 3-day, 15-day or 30-day increments by purchasing prepaid cable “loads”. Just like their cellphones, consumers can purchase these prepaid cards at most retail outlets, SMS the codes at the back of the card, and have their set-top boxes authorized to receive the cable TV signal for the appropriate duration.

We have seen our penetration rates as much as double in certain barangays where the prepaid cable service has been launched. In a market where over 90% of the 40+ million cellphone subscribers are on prepaid, it certainly does not make sense for our industry to overlook this.

Despite our encryption, the issue of cable theft has not disappeared. For as long as we operate in a market where the other providers continue to remain unencrypted, signal thieves cannot be converted to paying subscribers. And that’s why I propose that signal encryption needs to be an industry action.

Here I challenge the PCTA to play a magnified role in creating the new growth story for the industry. I think the association has the ability to consolidate the requirements of its member operators and create economies of scale for everyone. It can, for example, consolidate all encryption requirements and push suppliers for a single, national price for set-top boxes. It can negotiate with a Conditional Access provider for lower rates and higher penalties in the event it is compromised.

There are enough business reasons for the industry to push for encryption. It will drive growth and it is a non-regulatory solution to our age-old problem of illegal connections. But above all, it is what we need to stay competitive in a market where everyone is increasingly moving towards the distribution of digital content.

So far, our cable TV industry has felt competition only from a single DTH player, and one facing financial difficulties at that. But that is about to change very quickly. There will be at least one other DTH operator that will launch commercially within the next twelve months. More significantly, the telcos have already signified their intent to be media companies either through DTH or IPTV.

For cable to stay competitive, it must upgrade its network for digital distribution. We cannot be competitive as an analog provider in a world that is increasingly digital. Our most important asset is our distribution infrastructure. We have to be ready to make the investments that allow us to maintain our competitive advantage vs. copper and satellite. We need to be innovative and ensure that we lead in offering the consumers the applications that a digital lifestyle demands. HDTV and video-on-demand are going to be important consumer offerings and they can only be presented on a digital platform.

For most of us, the amount of capital needed to make these investments can be significant. In Metro Manila today, for example, less than half our franchise is digital ready. This is where the regulators need to create a level playing field vs. the telcos who have access to foreign capital. Regulators should ensure that the cable industry has access to the capital that it needs to keep in step with the digital evolution and to stay competitive against new and well-funded market entrants.

But capital in itself will not be enough. There needs to be a consolidation among the players in this industry so that the institutional funders are investing in projects with scale. There’s certainly much more investment appeal to look at a project with 100,000 subscribers vs. a project with only 10,000. I think the industry, maybe through the PCTA, should explore ways by which provincial operators can come together and create this kind of scale. The association should consider partnerships that create economies of scale which then allow the independents to upgrade their networks and participate in convergence. As I mentioned earlier, there is sense to do this from a procurement standpoint. There is also sense in doing this to create investment appeal.

Whichever way it is done, there is on inescapable truth: tough competition for pay TV is looming on the horizon and we need to ensure this industry is strong and prepared for it.

Once upon a time, our industry was at the forefront of technology. We were the only ones capable of offering over a hundred video channels. We were the ones technically capable of offering the fastest internet speeds to the home. We were the best positioned platform for the convergence of video, voice and data. Despite all this, convergence eluded us.

Today we have the opportunity to regain our lead in the convergence race. In today’s jargon, it’s now called the triple play. We need to be the pioneers in digital video distribution. We need to capitalize on the superior speeds of DOCSIS 2 and 3. And we need to capitalize on the opportunities brought about by VOIP. Whether we can capitalize on all these opportunities and be the new digital media leaders is really up to us.

Thank you and good day.

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