From Forbes Global, May 1st, 2000 (thanks goes to pampa02 off Yahoo GLCBY board for uncovering this one):
forbes.com
Moys‚s Pluciennik transformed Brazil's Globo Cabo from a pay-TV company into a serious broadband contender. Now he's setting his sights on the telecom market. Brazil's Big Picture
By Alexandra Kirkman
Brazil isn't the most hospitable place in which to build a company aiming to lead the broadband revolution by combining cable TV, Internet and telecommunications. More than three quarters of the country's 165 million people don't have a telephone. But precisely because the Brazilian market is "backward," it's possible to leapfrog to the front of the information revolution.
Moys‚s Pluciennik, the chief executive of Globo Cabo SA, is making the leap. He's turning Brazil's largest pay-TV company (1999 revenues: $360 million) into a communications giant, capable of offering Brazilians a level of Internet service as sophisticated as any in the world. Globo Cabo, a listed subsidiary of Organiza‡äes Globo, Brazil's largest (1999 revenues: $2.8billion) media group, has laid 25,000 kilometers of coaxial cable past almost 5 million homes. Its pipe runs through Brazil's 18 largest cities, including SÆo Paulo and Rio de Janeiro.
Television is only the first medium Pluciennik plans to pump down that cable. He's begun to offer broadband Internet access as well. What's more, he wants to turn those TVsets into interactive devices for e-commerce and other activities. And he wants to offer telecommunications services as well--a sort of AOL, Time Warner and AT & T rolled into one. "When we got into that business in 1992, we clearly understood that we were not just getting into the cable-TV business--we were building an infrastructure that would become the most important means of delivering video, data, telephony, you name it," says Pluciennik, 50, a relaxed, confident man with a ready smile.
His timing couldn't be better. The Brazilian economy is slowly recovering from a rocky devaluation in January 1999. And Internet usage is set to grow rapidly not only in Brazil, the region's largest economy, but in the whole of Latin America. Salomon Smith Barney forecasts that Internet penetration in Latin America will jump from 4% of households last year to 31% by 2009. Revenue generated by the Internet (e-commerce, usage fees and so on) is likely to increase from $600 million to $35 billion over the same period. "We are preparing Globo Cabo to become a national--perhaps international--provider of all kinds of data services," says Roberto Irineu Marinho, the billionaire cochairman of Organiza‡äes Globo.
Globo Cabo's goal is ambitious, but investors like its direction. Since FORBES GLOBAL first wrote about the company, (see story), Globo Cabo's Nasdaq-traded American Depositary Receipts have zoomed from less than $6 to over $24, before settling at $15.88 on Apr. 11. The company was listed in SÆo Paulo in November 1996 and will be added to Brazil's Bovespa index this month.
Pluciennik, a production engineer with an M.B.A. from the Massachusetts Institute of Technology's Sloan Business School, first came in contact with Organiza‡äes Globo in 1991. At the time, he was the partner in charge of Latin American media, telecom and information technology at the consultancy Booz, Allen & Hamilton. Globo was Pluciennik's biggest client and wanted his help to explore the potential for cable television in Brazil. He told Globo that the opportunities were enormous and suggested a means to exploit them. He envisaged a cable network that could be used for many things beyond cable TV. Globo liked Pluciennik's ideas so much that after five years of collaboration, it hired him to be the CEO in January 1996.
By the end of 1997, Globo Cabo was Brazil's largest cable network (following its acquisition of Multicanal Participa‡äes, the country's largest wireline cable operator), and its dominance has grown since then. It now passes 4.8 million of the 7.3 million total homes passed for cablein Brazil. Globo Cabo now has 1 million customers who have exclusive access to the Globo group's 11 pay channels, including the Brazilian version of the Playboy channel.
Pluciennik's next step was to harnessthe Internet. Microsoft had been collaborating with Globo Cabo on the development of a broadband platform in Brazil. In August the software company bought a 9.6% stake in Globo Cabo for $126 million. In December the company launched V¡rtua, a high-speed residential broadband service available only to Globo Cabo's pay-TV subscribers.
The service isn't cheap: It costs 68 reals ($35) a month to subscribe, plus a monthly fee of $10 to $20 for one of Globo Cabo's four Internet service provider (ISP) partners: ZAZ (the ISP arm of Telef¢nica's Terra Networks), UOL, Matrix, or Globo.com, Globo Cabo's sister company that was launched in March. Subscribers must also pay more than $300 for a cable modem and a one-time installation fee of about $125. In return, subscribers receive Internet access at speeds at least five times fasterthan over an ordinary phone line.
At that price few but Brazil's wealthiest residents can afford it. Lucky, then, that Globo Cabo's cable-TV customers are indeed some of Brazil's wealthiest households. According to internal company surveys, almost 70% of Globo Cabo's pay-TV subscribers have computers in their homes; half of those homes are already connected to the Internet.
Since potential V¡rtua subscribers are already paying Globo Cabo for their TV service, persuading them to sign up for broadband access should not be an expensive affair. "We have a very interesting advantage in terms of customer acquisition costs," says Pluciennik. "Anyone can get subscribers by giving free access, for example, but how much does that cost you in the end? And how much does it cost to maintain that subscriber? Over time, this will prove to be the critical aspect of an Internet business."
Anatel, the Brazilian regulatory authority, has granted all the country's cable companies the right to offer broadband access. Globo Cabo is the first of them to take advantage of this, and it has the edge in terms of size, being five times bigger than the next largest competitor, TVA.
Despite Globo Cabo's broadband lead, Pluciennik is taking great care with V¡rtua's rollout. "You only have one chance to introduce a new product--we don't want to screw it up," he laughs. The company is hoping to have 50,000 customers in SÆo Paulo signed up by year's end. No expensive marketing campaigns yet--for now the company is simply telephoning its pay-TV subscribers and inviting them to sign on, and the four ISPs are doing the same with their subscribers.
"I have five sales forces working for my product. The more, the better, because this is a volume business," says Pluciennik. This year Globo Cabo will invest $50 million in starting up and upgrading V¡rtua, compared with $100 million in its pay-TV business. (He expects the number of cable-TVsubscribers to grow by 7% to 10% this year.)
The prospects for Globo's Internet venture are all the stronger for the work that Pluciennik has put in to strengthen the company's finances. When he took over in 1996, the company's "churn"--its turnover rate among subscribers--was more than 40% a year, and the bad-debt rate was almost 15% of subscribers. "We needed to get our act together," says Pluciennik. By aiming his advertising at richer households, he managed to cut the turnover rate to 29% for 1998, and bad debt to 5.5%.
But then in January 1999 the real was devalued by almost 50%, and corporate financing dried up. "We had six months when you couldn't raise money even if you paid ten times the 30-year U.S. Treasury bond yield; there was no access to capital," says Pluciennik. Worse yet, two thirds of Globo Cabo's debt was dollar-denominated. The company basically treaded water by putting off investments and cutting costs until the crisis subsided.
By December 1999 Pluciennik had recapitalized the company: He privately offered 490 million ordinary and preferred shares for almost $300 million, and issued another $190 million worth of convertible bonds. After the recapitalization, the company's net debt (total debt minus cash) exceeded equity by 73%, compared with 164% at the end of 1998.Pluciennik also cut the amount of dollar-denominated debt to the same level as that denominated in reals and lengthened the maturity of both. Now well over half of the company's net debt has a maturity in excess of three years.
The devaluation and ensuing economic slowdown caused the company's 1999 EBITDA (earnings before interest, tax, depreciation and amortization) to fall from $121 million in 1998 to $89 million last year. Revenues fell from $540 million in 1998 to $360 million last year, but Globo Cabostill managed to increase operating margins from 22.5% to 24.9%. The company renegotiated programming contracts to split currency losses with foreign programming partners.
It also boosted pay-per-view sales--such as soccer games--which currently make up from 7% to 10% of subscribers' average monthly charges of $33. By concentrating its marketing firepower on well-heeled subscribers, Globo Cabo increased the proportion of people buying the advanced package--its most expensive deal--from 50% in December 1998 to 75% a year later.
"There's no question that Pluciennik has completely turned Globo Cabo's balance sheet around," notes Christopher Recouso, a Latin America media analyst at Bear Stearns in New York. Thanks to the recapitalization plan and Microsoft's investment, Globo Cabo had $107 million of cash at the end of last year, compared with just $5 million in 1998.
In addition to Internet investments, Pluciennik is using some of the money to find ways to reach companies, not just individual customers. In February the company paid $70 million in Globo stock and assumed debt for Vicom, a private, satellite-based data transmission service provider in Brazil. The company, whose clients include Petrobr s and such financial services companies as Bradesco, Unibanco and Visa, has around 3,000 ground-based satellite transponders in Brazil. "We are very good in the business-to-consumer market, but we're not in the business-to-business domain. With Vicom we bought a stack of relationships that are already on the ground," says Pluciennik.
The acquisition gives Globo Cabo access to small cities in Brazil's interior and could help it provide corporate clients with a full range of telecom services. "By combining Vicom's satellite backbone with our cable network, I can provide Internet and intranet access for companies in Vicom's 3,000 points of presence and our 18 cities," says Pluciennik. "If we can do that successfully, we'll be a strong competitor in the corporate market."
Although Globo Cabo is the biggest cable company offering broadband access in Brazil, other broadband providers are racing to compete. Telef“nica Brasil (formerly Telesp), one of Brazil's leading telephone companies, recently launched an ADSL (asymmetrical digital subscriber line) broadband service which hooks up to the local phone network and costs roughly the same as V¡rtua.
In addition, IMPSAT, an Argentine corporate network solution provider, with backing from its partners Nortel Networks of Canada and Global Crossing of Bermuda, is hard at work on a high-speed broadband network that would span Latin America. Pluciennik admits that further in the future, satellite and wireless will also be competitors in the broadband universe.
But Globo Cabo has some strong backers of its own. Besides Microsoft, another minority shareholder is Bradesco, Latin America's largest retail bank, with a 9.7% stake in Globo Cabo. Bradesco also has a seat on Globo Cabo's board and consults with the company on strategic decisions. In addition, 51.6% of the stock is held by Organiza‡äes Globo, with interests in television, radio, magazines and newspapers.
With access to content like Globo's, (see table), Globo Cabo has no need to merge with a content provider in the way that AOL did with Time Warner in January. Besides the Playboy channel, Globo Cabo has exclusive rights to ten cable channels produced by Globo, including TeleCine, a movie channel joint venture between Globo and Paramount, Universal, MGM and Twentieth Century Fox. SporTV, along with other Globo-owned channels, shares the television rights to the Brazilian soccer championship.
In the competition to offer broadband Internet services, the first company out of the gate is likely to gain the upper hand. In Brazil, V¡rtua and Telef“nica Brasil's service were launched almost simultaneously. But V¡rtua might have the edge because it's linked to television in a TV-crazy country.
"Cable is a highly attractive means by which to offer consumers a broad array of broadband services," says Whitney Johnson, a Latin America media analyst who until very recently followed the company for Salomon Smith Barney. "When you combine Globo Cabo's cable holdings with the heft of their controlling shareholders, it should put Globo Cabo front and center in the Brazilian broadband revolution."
Bear Stearns' Recouso echoes this assessment: "There is absolutely no company that is better positioned than Globo Cabo to cash in on the broadband Internet market in Brazil."
Globo Cabo's partners agree that the company is ready to move quickly. "The real question is: How fast can you go?" says Mauro Muratorio Not, Microsoft's chief in Brazil. "GloboCabo is prepared to go very fast. They've already overcome the initial hurdles to providing broadband access."
When you combine Globo Cabo's coverage with its strong brand name and impressive partners, it seems a prime target for a global telephone company looking to stake a claim in the cable broadband universe. Pluciennik confirms that he has talked to a number of big phone companies about forming some kind of alliance but won't say which ones.
Christopher Taylor, who heads emerging-market media and telecom research at ING Barings in New York, thinks that Telecom Italia is a strong contender--it's already the Globo group's partner in Maxitel, a cellular phone venture in Brazil. "It's reasonable to assume that Telecom Italia will become Globo Cabo's telco partner, given the success of the Maxitel venture," says Taylor. Other possible partners include MCI WorldCom, AT&T and BellSouth, which, according to Taylor, have aspirations in the data market in South America.
Once the knot has been tied, Pluciennik would be able to offer such services as videoconferencing and voice/data telephony over the company's cable system. (Subscribers would most likely pay one subscription fee for all the services.) His goal? "To be a full-fledged digital service provider to the homes and businesses of Brazil."
He readily admits that the company needs to invest hundreds of millions of dollars more in its network if it is to compete with such Brazilian incumbents as Telef“nica Brasil and Embratel. "Telecom services are much more complex from a network point of view than pay-TV," he says. "We need a partner that understands the value of our networks and who's able to contribute the size, the money and the expertise we need to get into that business."
Potential partners would have to pay a steep price to acquire a sizable stake in Globo Cabo. In the past twelve months, its Nasdaq-traded ADRs have increased by 1,500%. Its recent $15.88 values the company at $3.8 billion. The stock recently traded at $4,700 per estimated 2000 subscriber and 48 times estimated EBITDA for 2000.
Johnson, the analyst, points out that this is expensive compared with such established U.S. cable companies as Cox, Comcast and MediaOne, which currently trade at $3,600 per estimated subscriber and 14 times estimated EBITDA for the same year. But it's less pricey when contrasted with European cable firms. Telewest, a British cabler, trades at well over $14,000 per estimated subscriber.
With Brazil eventually under its belt, Globo Cabo is likely to venture abroad. In a recent report, Johnson speculated on the possible creation of a Southern Cone regional network comprising Globo Cabo and the Brazilian cable operator TV Cidade (owned by the private equity firm Hicks, Muse, Tate & Furst), and the Argentine operators Grupo Clarin and Cablevisi¢n (also owned by Hicks Muse).
Pluciennik is more cautious talking about such possibilities than about what he intends to do on home ground. "If there's a sizable opportunity whereby we could extend our footprint, we would entertain that," he says. Within Brazil, Globo Cabo already has pay-TV franchising agreements with TV Cidade, which has cable assets in Brazil's northeast, as well as the southern Brazilian cabler Net Sul. Eventually Globo Cabo might franchise its V¡rtua service as well--or acquire smaller competitors.
For the time being, Pluciennik has his hands full introducing a cheaper pay-TV package in Brazil and developing broadband offerings that will involve the convergence of interactive TV and digital TV. "More and more, people will want increased interaction while they watch TV, but not heavy computer interaction. We believe in interactive TV as an extension of good, old-fashioned television."
Subscribers watching a soccer game, for example, will be able to buy the team's T shirt, change the camera shot, or look up some team statistics. Throw in services like e-mail and web access and you have a product with enormous potential. "In Brazil, more people have televisions than refrigerators," laughs Microsoft's Muratorio Not. Globo Cabo hopes to launch the digital high-definition service in 12 to 18 months.
The most serious threat to Globo Cabo's long-term plans may not be competitors such as Telef“nica Brasil but rather Brazil's volatile business climate. "The Brazilian economy has hurt us in the past," says Pluciennik. "Our business is very sensitive--with any sign of economic instability, people start calling to disconnect. It's something we're very conscious about."
For now, Brazil's macroeconomic outlook is good: GDP is expected to grow 3.5% this year, compared with 0.8% in 1999. But there's no telling if another financial crisis like last year's devaluation is around the corner. Pluciennik doesn't seem worried, though. "If we can have Brazil growing 2.5% to 3% a year--nothing fantastic--we are going to explode." |
