Spain
Spain DTT Initiative Update
March 2, 2006
Executive Summary
SPTI has the opportunity to become a significant player in
terrestrial television in a major European market
• Opportunity to expand SET's footprint to Europe and operate a digital terrestrial
television channel (DTT) in Spain through a partnership with VEO TV, a TV
broadcaster owned by media group Recoletas (25%), Unedisa - owners of El Mundo
newspaper (21%), electricity giant Ivervola (20%) and 4 other smaller investors
• SET would be predominantly a digital free-to-air channel with revenue driven primarily
by advertising
– Spain is experiencing strong growth in TV ad sales (15%), the highest of all
western European markets in 2005
– DTT market poised for rapid expansion fueled by government incentives and
mass-market level hardware pricing
– Opportunity to build a $100MM revenue business in 6 years
• Strong strategic value to the Sony family – SPTI/MGM licensing, flat screen TV sales,
interactive and mobile opportunities, and showcase for other Sony entertainment
• Projected deep watermark of $33.7MM, NPV of $23.4MM and IRR of 29%; Including
estimated license fees for SPTI/MGM programming: deep watermark of $26.3MM,
NPV of $48.3MM and IRR of 42%
• Request approval to close deal with VEO TV and prepare for launch
2
Spanish TV Market Overview
Due to low Pay TV penetration, terrestrial broadcasters still capture
98% of TV advertising expenditures
• 5 major stations and additional public regional channels dominate current free-to-air
TV market landscape; a new Televisa-led consortium was recently granted new
terrestrial broadcasting license to launch La Sexta and vie for market share
• All broadcasters to convert from analog to digital (DTT) distribution by 2010, when
analog will be shut down
– 21 DTT licenses have been granted, with 12 additional to be distributed post
analog shutdown for a total of 33 channels
– DTT access will be available through DTT and pay TV set-top boxes as well as
flat screen TVs with integrated DTT decoders
Spain 2005
Population:
TV HH’s:
Pay TV HH’s:
DTT HH’s:
Analogue groups
43 MM
13 MM
2.5 MM
0.5 MM
New Televisa
Group
La Primera
Antena 3
Tele 5
Cuatro
La Sexta
La 2
3
DTT Market Development
Spanish DTT market is expected to grow rapidly through numerous
impetus
• Spanish government actively driving DTT roll-out through various promotional
vehicles and also moved up analog shutdown by 2 years to 2010
• Low price of digital set top boxes (retail price below €50) coupled with robust sales of
DTT-enabled flat screen TVs - - 2005 set top box sales already doubled initial
projections
• Pay TV platforms' set top boxes will also be DTT ready
Digital Multiplexes
New Televisa
Group
La Primera
Canal 24 H
Antena 3
Tele 5
CUATRO
La Sexta
Noticias
TBC
La 2
Parlamento
Megatrix
Deporte 5
40 Principales
TBC
TBC
TBC
Teledeporte
TBC
TBC
T5 Estrella
CNN+
TBC
TBC
TBC
Infantil
TBC
TBC
TBC
TBC
TBC
?
TBC
Ciudadano
General Entertainment (6)
Kids (2)
Public Service (2)
News (3)
Music (1)
Local Fiction (1)
Sport (2)
No info available (16)
Channel to be rented
4
Strategic Partner
VEO TV is offering SPTI a carriage opportunity to operate one of its
DTT channels
• VEO TV is owned by media group Recoletas (25%), Unedisa - owners of El Mundo
newspaper (21%), electricity giant Ivervola (20%) and 4 other smaller investors
• VEO is 1 of only 3 new players granted DTT licenses while all other licenses have
been distributed to the 4 major existing free TV broadcasters; future opportunities to
launch a national terrestrial TV channel in Spain, if any, would be very limited
• Key proposed partnership terms include:
– A firm 10-year commitment to operate the channel
– Annual operating costs to VEO of appr. $5MM per year plus inflation to cover
transmission costs, playout and marketing contribution
– VEO participation fee of $2.4MM per year plus inflation, but payments will be
deferred until DTT reaches 60% penetration of TV households
– Fees related to future government mandated DTT upgrade costs, which may be
appr. $1-$2.5MM per year, but won't start till 2008/2009
5
Programming Strategy
SET Spain's programming to focus on feature and TV series
• Opportunity to exploit SPTI/MGM library and generate additional licensing revenue for
SPE
• SET Spain can also be leveraged to improve buying power for AXN and diginets
programming acquisitions
THURSDAY
WEDNESDAY
TUESDAY
MONDAY
TIME
Documentary-Real TV- Water Rats ( R )
12.00
12.30
13.00
New Adventures of Flipper ( R )
13.30
14.00
Daniela ( R )
14.30
PROFILER
AMERICAN DREAMS
LAX/SUE THOMAS FBI
Three Sisters ( R )
15.00
(R)
(R)
(R)
15.30 8 Simple Rules ( R )
EPITAFIOS
Happy Family ( R ) FUGITIVE/ONCE AND AGAINAMERICAN DREAMS
16.00
(R)
(R)
(R)
16.30 Hidden Hills/Twins ( R )
17.00
Daniela
17.30
18.00
New Adventures of Flipper
18.30
Documentary-Real TV- Water Rats
19.00
19.30
sitcom:Malcom & Eddie
20.00
sitcom: Suddenly Sussan
20.30
sitcom:Home Improvement
21.00
sitcom: Everybody Loves Raymond
21.30
REUNION
PROFILER
AMERICAN DREAMS
LAX/SUE THOMAS FBI
22.00
22.30
BABYLON 5
EPITAFIOS
23.00 FUGITIVE/ONCE AND AGAIN AMERICAN DREAMS
23.30
sitcom:Home Improvement ( R )
0.00
sitcom: Everybody Loves Raymond ( R )
0.30
sitcom: Suddenly Sussan ( R )
1.00
sitcom:Malcom & Eddie ( R )
1.30
FRIDAY
SUNDAY
SATURDAY
Documentary-Real TV- Water Rats ( R )
sitcom:Malcom & Eddie ( R )
REUNION
(R)
New Adventures of Flipper
sitcom: Everybody Loves Raymond ( R )
sitcom:Home Improvement ( R )
FUGITIVE/ONCE AND AGAIN
BABYLON 5
(R)
(R)
PROFILER
Columbia Classics
Films ( R )
sitcom: Suddenly Sussan
Happy family ( R )
Three Sisters ( R )
(R)
Daniela
sitcom:Malcom & Eddie
Documentary-Real TV- Water Rats
sitcom:Home Improvement
sitcom: Everybody Loves Raymond
Three Sisters
8 Simple Rules
Happy Family
Hidden Hills/Twins
AMERICAN DREAMS
Columbia Classics
(R)
Films
Hidden Hills/Twins ( R )
8 Simple Rules ( R )
LAX/SUE THOMAS FBI
AMERICAN DREAMS
(R)
(R)
EPITAFIOS
BABYLON 5
(R)
(R)
6
Summary Update
Significant developments since November:
• Regulatory risks clarified and should be manageable
• DTT penetration progressing more quickly than anticipated; however intensifying
competition driving up product license fees
• Agreement almost fully negotiated – launch scheduled for May 2006
Opportunity presents attractive returns;
Recommend proceeding to finalize transaction
7
Legal Structure Update
Regulatory risks exist but should be manageable
• DTT license issued to VEO requires that the license holder "directly operates" the
channel which essentially restricts material outsourcing (including the activities
contemplated to be performed by SPTI)
• The proposed carriage agreement with VEO may therefore be challenged by the
local licensing authorities. If challenged, our position is not strong and we could be
compelled to stop distributing the channel
• In recent months, other forms of outsourcing arrangements have been launched on
DTT without being challenged
• Also, the current Spanish administration is very actively promoting DTT expansion,
and therefore challenging quality, well-funded operators such as SPTI would be
contrary to their liberal agenda
• A Draft Audio Visual Act now in circulation aims to permit outsourcing of editorial
control, but if approved may still take 12-24 months to enact
• Regulatory risks therefore exist; we have negotiated methods to mitigate potential
issues
8
Deal Economics Update
DTT penetration progressing more quickly than anticipated;
however intensifying competition driving up product license fees
Pre-Launch
(US$ 000s)
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Year 7
Year 8
Year 9
Year 10
TOTAL
DTT Penetration - Previous
DTT Penetration - Updated
5.3%
8.5%
13.4%
15.0%
30.5%
30.5%
52.0%
52.0%
72.2%
72.2%
86.3%
86.3%
92.2%
92.2%
95.5%
95.5%
97.5%
97.5%
98.0%
98.0%
SET Audience Share - DTT Ad Market
SET Audience Share - Total Ad Market
1.4%
0.1%
1.5%
0.2%
2.1%
0.6%
2.2%
1.2%
2.3%
1.7%
2.4%
2.1%
2.8%
2.6%
2.9%
2.8%
3.1%
3.0%
3.3%
3.2%
3,594
249%
3,811
155%
6,310
125%
7,217
104%
9,369
45%
11,427
48%
15,959
36%
23,914
47%
29,210
41%
35,309
46%
44,870
48%
45,798
45%
64,589
50%
63,437
48%
80,156
55%
76,952
51%
89,514
56%
87,037
50%
100,397
55%
98,396
51%
443,968
Programming - Previous
Programming as % of Net Revenue
Programming - Updated
Programming as % of Net Revenue
453,299
Updated Financial Summary (Excl SPTI/MGM License Fees):
Net Ad Sales Revenue
2,465
6,915
23,920
51,281
77,488
101,806
133,480
150,374
172,379
193,617
913,725
(164)
(13,355)
(13,212)
(3,979)
7,244
19,300
30,163
40,115
39,240
47,721
53,815
206,888
Cash Flow
(1,693)
(13,320)
(11,853)
(5,447)
(1,353)
8,410
18,119
23,051
33,935
39,059
47,017
135,925
Cumulative Cash Flow
(1,693)
(15,013)
(26,866)
(32,312)
(33,666)
(25,256)
(7,136)
15,915
49,849
88,908
135,925
EBIT
(US$000s)
Excluding
SPTI / MGM
License
Fees:
Including
SPTI / MGM
License
Fees:
0
November Review
Latest Update
Pre-Tax IRR =
41%
Pre-Tax IRR =
29%
Pre-Tax NPV =
47,458
Pre-Tax NPV =
23,432
Deepwater Mark =
(29,010)
Deepwater Mark =
(33,666)
CF Breakeven Year =
Year 4
CF Breakeven Year =
Year 5
Cume CF
Breakeven Year =
Year 6
Cume CF
Breakeven Year =
Year 7
Pre-Tax IRR =
54%
Pre-Tax IRR =
42%
Pre-Tax NPV =
75,501
Pre-Tax NPV =
48,256
Deepwater Mark =
(22,886)
Deepwater Mark =
(26,337)
CF Breakeven Year =
Cume CF
Breakeven Year =
Year 4
CF Breakeven Year =
Year 4
Year 5
Cume CF
Breakeven Year =
Year 6
9
Next Steps
• Sony Corp. senior management approval
• Final documentation
• Prepare for launch
10