Sarah Sullivan: How is the relationship of MultiChoice Egypt to CNE, and to ART and Showtime, structured?

Khalid Abu Nuwar: We specialize in different areas of the business. There's ART and Showtime as bouquet providers, CNE and NCN as pay-TV license holders for distribution in Egypt, and we work under their auspices in providing pay-TV services for the subscribers. We're a subscriber management services (SMS) company; we do activation and disconnection of subscribers, the monthly billing, credit control and cash collection, invoicing, installation of decoders, decoder sales, maintenance, warranty—all the on-the-ground work for the subscribers.

So the division of responsibilities is between the people on the programming side, the bouquet providers, and the people on the ground as the SMS operators and pay-TV license holders. They provide the programming itself and we do the marketing, sales and distribution.

A few years ago most of the focus was on the hardware part of the business, because that was a big barrier to entry. People had already invested in the terrestrial analog service, or invested in free-to-air tiers of the C-band analog and Ku-band digital. Then there was the introduction of pay television on the digital satellite platform through Arabsat and through Pas-4, and eventually through the hotbird of the pay-TV industry in the region, which is Nilesat. The inauguration of Nilesat 102 will add a huge array of channels and bouquets, and more free-to-air channels, which will help advance the pay television business in the area.

Sullivan: You've been able to succeed in selling this product in a very competitive market, and a market that didn't always understand the concept of pay-TV. What's your basic strategy?

Abu Nuwar: To go back to the beginning, early on everyone was concentrating on the hardware. The hardware was very expensive, as the Orbit experience indicates. Our hardware was much cheaper and more competitive, and has the advantage of receiving all the free-to-air channels coming from either Nilesat or Arabsat, or if you have a motorized dish, you can pick up other free-to-air channels coming from Europe. Most efforts were on promoting the service through eliminating the barriers to entry, which was very difficult because as much subsidy as you could pour into the hardware, it was still to expensive to have meaningful results in the end price of the hardware for customers. Especially because there were competing free-to-air and analog services. After 1998 the price of hardware began to drop from the manufacturers, because of economy of scale, because of large production volume. I could point to this as the turnaround in the business: we were able to subsidize the hardware and give a much better deal to potential subscribers, to people who hadn't subscribed to pay-TV before, or to those who had other services and realized the value of the new digital satellite television with its differentiated programming.

So we segmented that market, we revisited our marketing strategy based on the following: instead of spending huge amounts of money on above-the-line and below-the-line marketing for potential subscribers and to convert older subscribers from the different system to the new system, this money was put into the market in the form of pure media advertising: TV, magazines, radio ads, plus competitions, exhibitions, trade distribution channels, etc. We decided to take the marketing budget and subsidize the box in a package deal of hardware and software--which is the subscription and the decoders--and see how that would play in the market. Evidently that was the best combination, whereby you take the money earmarked for advertising, say here's how much we're going to spend on so many boxes subsidized within a campaign—and we used to do three or four campaigns a year—and put the rest into pure above-the-line and below-the-line advertising.

The deal was first, buy your decoder at LE1,700 and you get the dish free, and you pay the subscription. We moved the price lower and lower, until we were able to break what we call the "hot price point" of LE1000; we introduced the LE995 digital box including all the peripherals and dish, and you commit to a subscription of at least one year.

We started this in late 1998. The resulting figures were very good for the business; we experienced above-targeted numbers of subscribers. We continued with variations of the same idea, and it proved to be the most successful way to promote our product. People don't mind paying for programming they can't see anywhere else, provided they don't have to invest more and more into hardware each time they want to see something new. We cooperated with the bouquet providers, ART and Showtime; we subsidized boxes together, we launched campaigns together.

Another thing happened around the same time. The market in Egypt was just starting to introduce the concept of pure credit card terms with the banks. Before, you had to pay a deposit, then the bank would take your money and turn it into "credit"—which isn't credit. But then the banks started real credit deals with their customers. We plugged into that from the beginning. Just like the wave of hardware, we rode also the wave of credit card terms. We approached the banks and credit card companies, and incorporated this into our promotions; people can sign up for a year, and we automatically charge their card. These promotions have been going about a year and a half, and people are very happy with it. Our credit card collections three years ago weren't more than five percent. Now it's around 40 percent, and it goes up 3 to 5 percent every month.

Other byproducts of using credit cards have to do with what we call "churn," when people don't renew their subscriptions. Because of these new user-friendly secure means of payment, where we renew every month without any interruptions, the customer doesn't have to think about having to go and pay and doesn't get disconnected. This has reduced our churn to an absolute minimum—less than one percent a month.

Sullivan: What was it before?

Abu Nuwar: It was variable, with the season, Ramadan, the market, school examinations, etc. The problem with this kind of market is that its trendless. You try to make predictions and can't. There are certain patterns—like Ramadan, summer vacation—but the buying patterns are trendless because the economy has been going up and down. In the last six months because of the liquidity problems, the market has been flat. But at other times it does very well—even after the Luxor incident, we had business. Plus this is a very cash-based society—people go to the bank, take out cash, and start spending; there's no planned household budget. At the end of the month, if there's money left, people will pay for pay-TV, and if not, if they spent it on something else, they'll wait for the next month. This is where credit card payments help us.

Sullivan: Do you think understanding your market has been key to CNE's success?

Abu Nuwar: That's the essential reason. You have to see how the market makes its buying decisions. The Egyptian market is different from the Saudi market, the Qatari market, etc. This market is price sensitive—that's why we worked on reducing the barrier to entry. The customer bought C-band, then Ku-band, now we ask him to buy digital. He's exhausted with that. But this is the final thing, and we want people to know that: you buy a digital decoder, it gets you hundreds of channels, and you take part of it as pay-TV.

So you have to find out what the consumer's mindset is, what his purchasing power is, how you can plug into that purchasing power and use things like credit cards that are coming up to your advantage.

We knew there was a cash problem. Forget about the elite; we're talking about the middle class, where the bulk of our business is. With a lease-to-own plan the customer can spread payment over twelve or twenty-four months. We have different schemes to meet different segments of the market, and people can choose what works best for them, from a viewership point of view, from a financial point of view, and from an ease of payment point of view.

When pay-TV was introduced on the digital side--which is the big business, analog is sort of flat--people were saying, why isn't the business growing. No one was trying to go deep down and see what the consumer situation was, what the consumer needs. In the Arab world television has been free; the government spent on the media. Now things are different, with new private channels like LBC, MBC, and in comes pay-TV. So you're competing against good channels subsidized heavily by petrodollars from the Gulf, you're competing with the already-existing free-to-air channels, and then you're introducing a new concept telling people they have to pay to watch something else. You have to show them why they need it.

Sullivan: So the bulk of your subscribers is not the upper classes who have extra cash to spend? My next question was going to be how much growth you foresee in your subscriber base. Will there come a point at which everyone who can afford pay-TV already have subscriptions?

Abu Nuwar: The wealthiest people, those who were the pioneers and bought pay-TV from the beginning, already have it. That's not going to grow. What we're trying to do is attract the middle- and upper-middle classes. In Egypt that's the growing class. We're looking beyond what we hope is a temporary financial problem in the country. The average middle class person makes three to six thousand pounds a month. He can afford an apartment, to get married, to get a car, and to have a pay-TV subscription.

Sullivan: Showtime is planning to offer Internet and TV via PC services, Shownet and Showcast, to subscribers. And Internet is big business now in Egypt, where ISPs and Internet cafes are cropping up everywhere. Will you be a competitive player?

Abu Nuwar: We're infringing on their business. Put all the ISPs together in Egypt, or the number of dialup subscriptions, and our number of pay-TV subscriptions is higher. If we introduce Internet for our subscriber base, we'll be the biggest ISP in Egypt as such, if we're successful.

Sullivan: There's talk of CNE moving to digital terrestrial?

Abu Nuwar: Yes, from the point of view of channel distribution that's an advantage, whereby you have one terrestrial station and you can put on it 12 to 14 channels. The operation cost is very advantageous. The problem is the price of the box. It's more expensive than the satellite digital box, because of economy of scale; the producers are concentrating on satellite. Not much analog terrestrial or digital terrestrial is being produced, so the box price is comparatively expensive. So if you tell customers, forget about satellite digital, go and buy your terrestrial digital, in my opinion it won't fly.

In the UK—a more affluent society—digital terrestrial exists and is successful, but it was introduced before digital satellite. Now there's a system whereby both are the same: what you get on digital terrestrial is the same programming you get on digital satellite.

Sullivan: So for the customer it doesn't make a difference.

Abu Nuwar: Right. But it's different here in Egypt. And the most important thing is the price of the boxes. Somebody has to import them, and they'd have to be heavily subsidized. Whereas on satellite, if you have a motorized dish you can watch 36 satellites, and the equipment is becoming fairly cheap.

In 1997 satellite channels available in Egypt, analog and digital, totaled 388. In 2000 there are 606 channels, 393 of which are free-to-air, 213 are encrypted. The Middle East is right in the middle of Europe, Africa, Asia, and whatever is coming in from the United States to Europe. But the numbers of free-to-air analog on satellite haven't changed. The analog technology isn't something people are pushing. Whereas in 1997 there were 107 free-to-air digital; it exploded into 246 digital by 2000.

By looking at this, you can see what we're up against. First there's the mindset of people that you don't have to pay for television. And we're introducing pay-TV at the same time that everyone else is introducing, on the same platform, more free-to-air channels of good quality.

Sullivan: While in the beginning people were paying for something they couldn't get for free, like CNN, before other all-news channels became available. How has your marketing strategy shifted, then, with competition from the free-to-air channels?

Abu Nuwar: We don't go head-to-head against the free-to-air channels, which we knew we couldn't compete with from the point of view of financing or distribution, because they generate revenue from advertising, they're highly subsidized by very rich governments, and they have a political agenda. They're here to stay. So we tried to turn that to our advantage. We told customers, here's a highly subsidized box, you can pay now or in installments, and on top of that this box—unlike Orbit's, for example, which they haven't been able to upgrade yet—gives you access to all those free-to-air channels. It worked well. People are taking our CNE decoder, subscribing to ART or Showtime or both, and enjoying all those free channels from Nilesat as well. And now Nilesat 102 can potentially double the number of channels they receive.

Sullivan: What does it mean for you that Orbit is now allowed into the market to sell their decoders?

Abu Nuwar: They'll be legal competition against us in the market, and we welcome that very much. Competition makes us even better operators. We become wiser, more aggressive. Also, both Orbit and us spending more in competition means better business for everybody, because it means more exposure of the pay-TV principle in the market. It means there's twice the amount of money being spent to introduce the public to pay-TV. And whoever has a better package will win. So even with Orbit here we have a better chance to succeed.

The strategy here is to ask bouquet providers to give us more programming at the same price. Add value, but at the same price to the customer. With more programming we build new promotional campaigns. And we're thinking into new territory, to packaging different cross-promotions between ART and Showtime, or making relational marketing with other fee-based operations like mobile phones. Mobile phones are a booming business in Egypt, and we're plugging into that with joint promotions. If, for example, you're a Mobinil subscriber you might get a discount on CNE, or vice-versa. Or if you're not either, subscribe to both and get a discount on both. We're already in talks to promote this kind of package.

Sullivan: Working as you do with both ART and Showtime, you get the strengths of both-Arabic programming, especially movies, on the one hand, and Western entertainment on the other. How do they work together as a package?

Abu Nuwar: They complement each other. Maybe you want a majority English programming, but also want to get Egyptian movies. You can buy the basic ART bouquet along with the full Showtime bouquet. Or vice-versa: you can subscribe to the full ART bouquet, then add a mini bouquet of Showtime. There are people who only want only one or the other, but also people who want a bit of both, so the packages have been designed to take care of all those needs.

Sullivan: Since you started there have been a lot of changes in the Egyptian economy, with a move toward privatization. But when you started, the current free-market climate didn't exist. Beyond that, ERTU is a shareholder in CNE. Did either of those factors mean that you had to overcome a bureaucratic business climate?

Abu Nuwar: It's something you have to keep in mind and to work with. Whenever you're working with a government body there's an element of bureaucracy and inflexibility. That may have been the case when we started but that changed very quickly, because the terms of the business, the demands of the people involved in the private sector, made it clear that the business can't afford to be bureaucratic, can't afford to be slow in making decisions, and has to move forward. There's goodwill between the parties, and everybody understands this.

Marketing, sales, and distribution is really the engine of the business; everything else is just systems: computer systems, transmission systems, satellite uplinking. The operators have always been very understanding of our need to move quickly on the marketing and distribution side, and have given us huge help. It surprised people, maybe, that they allowed us to move into the market the way we did, but they understood that we can't wait for committees to make decisions and sign papers. And you do have to move very quickly in the market, because of competition coming in and because of the way the market is reshaping itself.

The 1990s have been a new dawn in the Arab society in many ways. During the Gulf War everybody wanted to see CNN. They paid huge amounts of money for dishes that would become obsolete a few months later, just to be able to watch CNN. This is where pay-TV started, and where people began to understand that you have to move with the market, or ahead of it, as fast as you can in order to drive this business. Otherwise you stay where you are, and you lose money. These government bodies made money on these deals because they allowed the private sector partners to enter the market.