DIRECTV pre-paid: how to wake up a sleeping giant
Much is said about rising new technology companies, but how much more challenging is it to reinvent a mature business model that has been around for decades?
The pay-TV industry is considered a mature market in the US. With penetration levels above 80%1 and a challenging competitive environment, pay-TV providers face increasing challenges to sustain growth rates and defend margins. Moreover, new disruptive entrants, such as Netflix, are capturing market share as they offer subscribers higher flexibility and lower monthly charges.
In this context, DIRECTV was able to revamp a stagnant industry by focusing its growth efforts in the Latin American region. However, in order to achieve this turnaround, DIRECTV had to re-design its business model, and tailor it to Latin America’s market and demographic profile. DIRECTV’s business model in Latin America is to increase pay-TV penetration (as levels are around half of those in the US2). In particular, in order to serve large lower-income segments, in 2007 DIRECTV developed a pre-paid solution for customers without a stable source of income nor access to the financial system3. In a nutshell, the service works similarly to pre-paid mobile phones, in the sense that customers can recharge the service at their discretion.
Since then, DIRECTV Latin America has been growing at an annual rate of over 20%, and pre-paid currently represents approximately 50% of the company’s subscriber base in the region4.
For this new service, DIRECTV implemented a series of changes to its operating model:
![DIRECTV pre-paid kit [5]](https://i4tsk12in2b2y7uts14c528g-wpengine.netdna-ssl.com/wp-content/uploads/sites/4/2015/12/kit-adentro.jpg)
Pricing: No contract, pay as you go. The service automatically disconnects once the balance of the customer’s pre-payment expires. It also allows the customer to select among different content packages, as well as purchase pay per view movies.
Distribution and recharge network: DIRECTV pre-paid kit can be purchased in retail stores such as supermarkets and electronic stores. In addition, rechargeable cards are available in a wide range of locations, including convenience stores, drugstores, lottery agencies, pharmacies and mobile phone vendors. Customers can also recharge the service by calling DIRECTV’s call center.
Marketing: DIRECTV launched a wide marketing effort throughout the region, customizing ads to each country’s profile. Marketing channels include print, TV, magazines, radio, billboards and web.
Customer support: DIRECTV created a series of Youtube tutorials explaining step-by-step the installation process. Additionally, a customer service line attends inquiries related to the service and setup.
In conclusion, the introduction of an innovative pre-paid service allowed DIRECTV to capture an under-served and fast-growing segment, driving higher pay-TV penetration in the region and outpacing its competitors in terms of growth. Lastly, lower internet penetration and higher focus on news and live sports protect this segment from disruptive new entrants’ threats.
Footnotes:
- US pay-TV penetration data (September 2015): http://www.cedmagazine.com/news/2015/09/study-us-pay-tv-penetration-drops-83
- DIRECTV Investor Day presentation (December 2013): http://s1.q4cdn.com/453653659/files/doc_presentations/investor_day/DIRECTV_InvestorDay_Dec_12_2013_Print.pdf
- DIRECTV Annual Report (2007): http://s1.q4cdn.com/453653659/files/doc_financials/annual/Directv_Group_2007_AR.pdf
- DIRECTV Annual Reports and company interviews
Additional sources:
- Company’s website: http://www.directv.com/
- Local news on pre-paid service launch: http://www.elobservador.com.uy/directv-ahora-puede-ser-prepago-n254148; https://www.fayerwayer.com/2008/05/directv-chile-lanza-directv-prepago/
- Tutorials videos available on youtube.com
- DIRECTV Investor Day presentation (March 2012): http://s1.q4cdn.com/453653659/files/doc_presentations/Investor_Day_2012_Final_Print_Standard_Quality.pdf
Hi Dino! I enjoyed reading your article about a traditional company being successful as many of our peers wrote about fairly new companies. I am familiar with the popularity of prepaid cellular services in Latin America and think this is a good model for Direct TV. It can be used even in developed economies like the USA to reach lower income consumers. Furthermore, the potential in emerging economies is big, if Direct TV is not using this service in countries like China and India already.
However, I do not think this strategy change is innovative but just a small shift. It will not keep the sleeping giant alive for long. Direct TV needs a drastic change if it ever wants to complete with non traditional companies like Netflixs/Hulu. These companies also have low monthly subscription fees and no upfront costs for unlimited access to library content. Apps can can be accessed on any mobile device. In Latin America and other developed and developing nations, cell phone accessibility is high even among the low income population. So I think pre-paid TV will be attractive for awhile but not for long as internet accessibility and mobile device penetration increases even more.
Hi Dino,
Thanks for sharing great example where I can see DIRECTV modified its operation to support new business strategy. I see the pre-paid solution has been successful as it made the trial easier for people with low and unstable income. And also it is interesting that DIRECTV provides a kit and expects a customer to set up with it. I can imagine this decreases the labor costs for the installation and so decrease the price. When I read this part, I was afraid if lots of customers need a support beyond an installation manual but my worry was cleared by “Customer support” part. Tutorial on youtube is inexpensive and easy-to-understand way!
My concern on this business is that as technology/infrastructure get more developed in Latin America, as you discussed we can assume that the providers on internet and/or on mobile such as Netflix will come into the markets. But I think it will take some time so DIRECTV will be able to be making a success for a while at least. And this business/operational model can be applied to other emerging markets as well so there are still lots of opportunity for DIRECTV if we look for globally. If they want to be successful in the long-run in Latin America, one way is probably that they should gather the rights for the locally popular TV programs and licensed them to other internet providers when they come.
Kohei
Are there any issues with customers not recharging the service but keeps the hardware? Direct TV is subsidizing the devices and it would be a big loss if they get the hardware but is not being utilized. whats is the utilization %?