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5 Year Strategic Plan Board Meeting September 2 nd , 2009 Coral Gables

5 Year Strategic Plan Board Meeting September 2 nd , 2009 Coral Gables. Overview. 5 Year Strategic Plan (2010 – 2014). Strategic Direction HBO : Improve local relevance/connection in key markets Improve premium channel and content image Cinemax :

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5 Year Strategic Plan Board Meeting September 2 nd , 2009 Coral Gables

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  1. 5 Year Strategic Plan Board Meeting September 2nd, 2009 Coral Gables

  2. Overview

  3. 5 Year Strategic Plan (2010 – 2014) • Strategic Direction • HBO: • Improve local relevance/connection in key markets • Improve premium channel and content image • Cinemax: • Differentiate brand and content between premium and basic distribution • Original Productions: • Capitalize and build on prior year successes • Technology: • Invest for long term efficiencies and improve quality • Invest in new consumer technologies

  4. 5 Year Strategic Plan (2010 – 2014) • Strategic Direction - HBO • Be leader in HD distribution in every major market and meet consumer needs as new television media develop. • Diversify production capabilities into key countries • Increase On-Air post production capability • Mexico • Brazil

  5. 5 Year Strategic Plan (2010 – 2014) • Strategic Direction - Cinemax • Differentiate basic and premium channel and brands • New premium brand line extensions • Emphasize premium attributes and technology • Transition first run movies out of the basic distribution • Add HBO LAG Original Production library in basic • New long term ad sales revenue stream • Barker capabilities for premium channels

  6. 5 Year Strategic Plan (2010 – 2014) • Strategic Direction – Original Productions • Reinforce the Original Production franchise • Brazil tax incentives for two series per year • Better use of Original Production library to differentiate basic distribution • Aim for critical acclaim • Promotional and media value of coverage of original productions to support brand

  7. 5 Year Strategic Plan (2010 – 2014) • Strategic Direction – Technology • Invest to: • Replace obsolete decoders • Adopt new technologies that: • Allow efficient use of satellite capacity • Support new customer needs • HD • SVOD

  8. 5 Year Strategic Plan (2010 – 2014) • Summary • Revenues will continue to grow at 8% CAGR • $496M by 2014 • Net Profit after Tax increases every year

  9. 5 Year Strategic Plan (2010 – 2014) • Background to Plan: 2008 and 2009 • Maintain growth in Revenues & Profits in global recession • Affiliates • Telephone companies investing in marketing • Dish – aggressive entry in Mexico • Last year of Buy-Thru in Brazil • Roll out of HD & SVOD • Marketing • Focus on results: increase subscribers and improve brand perception • Programming • New Output deals, studios & HBO • Critically acclaimed HBO LAG Original Productions • Post production capabilities in Mexico & Brazil • Technology • Shadow stabilized

  10. 5 Year Strategic Plan (2010 – 2014) Historical Perspective • Highlights: • Improved quality and additional rights of product from studios. • Improved productivity in Staff & Technology.

  11. 5 Year Strategic Plan (2010 – 2014) Studios’ share of Revenues

  12. 5 Year Strategic Plan (2010 – 2014) • Assumptions for 5 years • No major economic crises • GDP, and Inflation assumed to be at historically stable levels • Exchange rates assumed • Brazil R$ 2.00 • Venezuela B$ 3.17 • Mexico M$ 13.92 • Argentina Arg$ 4.50 • New technologies used to support revenue growth.

  13. Financial Projections

  14. 5 Year Strategic Plan (2010 – 2014) HBO Latin America Group Financials

  15. 5 Year Strategic Plan (2010 – 2014) Expenses as percentage of Total Revenue

  16. 5 Year Strategic Plan (2010 – 2014) 2007 5YP vs 2009 5YP

  17. 5 Year Strategic Plan (2010 – 2014) Revenues • Affiliate Revenues • Key Affiliates in major markets continue rolling out Digital STBs • Maintain premium rates in the range of US$4 to US$6 • New technologies; HD, SVOD • Basic Movie Service Distribution • End of Buy-through in Brazil • Ad Sales • Growth from Basic Movie distribution in latter years of plan • Services Fees • No growth except for interim satellite capacity • Original production revenues • Remain at 2009 levels.

  18. 5 Year Strategic Plan (2010 – 2014) Programming • Maintain quantity, quality and pricing of promotable movies from studios • New distribution technologies (mobile, VOD, internet) • Output Deal • Differentiate product from other movie services through exclusive series/content. • Renegotiate Disney output deal (2011) • Inventory to introduce basic channel. • Transition first runs from Cinemax basic • HBO NY – output deal • HBO LAG – original productions

  19. 5 Year Strategic Plan (2010 – 2014) • Potential actions to maintain, enhance and protect value of Premium PayTV Window • Protect Premium “exclusivity” and promotional windows ( i.e. structured windows) • Use and promote new technology (High Def, VOD, HD, IPTV, Dolby, Mobile, Ipods, etc.) • Have programming content that will drive premium business – “something worth paying for” • Exclusive HBO Latin America Productions • Improve and strengthen local content offering in key markets to (i.e. Brazil buy through). • Exclusive series and programming (HBO branded) • Localize On Air look and feel needs to be more provocative than basic channels • Regain leadership in “Programming Trends”- always HBO first • Be more interactive with subscribers Programming needs to adapt to meet Premium PayTV requirements

  20. 5 Year Strategic Plan (2010 – 2014) • Potential actions to maintain, enhance and protect value of Premium PayTV Window • Original Content tailored to major markets • Mexico: 26 episodes (2 series/year) • Brazil: 26 episodes (2 series/year) • Other: 13 ½ episodes per year (late night) • Maintain Sports Franchise • Boxing • Fair Play • Reinforce HBO Brand • HBO NY branded product • Strengthen HBO franchises (HBO Plus, HBO Family, Max HD) • Maximize use of government incentives • Brazil: Condecine & Article 3a

  21. 5 Year Strategic Plan (2010 – 2014) • Summary: • Revenue growth • HD improves perception of premium value • Improved distribution model for Cinemax • Ad Sales becomes new source of revenue. • Dependent on maintaining value of Premium window • Exclusive content and local production will help improved desirability of the service • Continued support of studio promotable product required • Cinemax is effective barker channel • Connect with customer • Localization of content • Control costs • Improve efficiency in use of satellite capacity. • (Potential for significant profitable growth)

  22. 5 Year Strategic Plan (2010 – 2014) Back Up

  23. 5 Year Strategic Plan (2010 – 2014) Revenues • Affiliate Revenues • Opportunities • Key Affiliates in major markets continue rolling out Digital STBs • Maintain premium rates in the range of US$4 to US$6 • New Players: Telcos (Telefonica, Telmex, America Movil and others) and DISH • Telcos DTH platforms targeting low SES by bundling PayTV, Telephony & Broadband • New technologies; HD, SVOD • Basic Movie Service Distribution • End of Buy-through in Brazil • Risks • Bundling with other services contributing to rate erosion • Further concentration of platform revenues by limited cable operators • Telmex, Televisa, Telefonica, Globo, Clarin, Liberty Media • Protectionist legislation: Country Risk • Currency devaluation • End of Buy-through in Brazil • DTH Piracy • Transition strategy from Basic to Premium (Chile, Peru, Central America)

  24. 5 Year Strategic Plan (2010 – 2014) Affiliate Revenues • Growth will come mainly from • CATV revenues from digitalization of services • New players forcing more competition • Expanding subscriber universe by acquiring subs that otherwise would not have our channels • Projection considers transition strategy from Basic to Premium by 2011 • Assumes no major Fx adjustments • Rate erosion based on the bundling packaging structure being introduced in the markets, oriented to increasing distrinbutors ARPU • Basic Movie Channel targeted to growth of future PayTV business (lower SES segments) • New Technologies (VOD, HD) • Regional feeds: contribution to the value perception of premium channels

  25. 5 Year Strategic Plan (2010 – 2014) Premium Business • Premium content • Drivers • Regional feeds tailored to main markets • Expand HD channel offer • Must maintain Premium Window integrity to protect its strength • New output deal with extended windows • Movie Premieres continue to be relevant element in premium environment • Maintain Non-Movie differentiations • Series • Local original productions (Mexico, Brazil, Argentina) • Boxing/Concerts • Provocative Documentaries/Mini-Series • Sports Mags/Comedy • Barriers • Basic channels movie content has increased in quantity and quality (avg. of 14 channels with strong movie content basic tier) • New alternative technologies to access premium content (web, mobile) • Some competitors’ blockbuster movie premiere windows better than HBO’s • Other Movie Networks incorporating elements of Non-Movies within their programming strategy • Boxing • Series

  26. 5 Year Strategic Plan (2010 – 2014) Premium Business • Distribution • Drivers • Revision of premium packaging strategy, considering Regionalization, HD & SVOD • Increase of digital addressable homes/penetration opportunity • Consumer packaging offer introduced by new entrants (Telefonica, DISH) should increase Pay TV household • Effect of new players entering market • Conventional cableoperators must react and invest in new technologies • New technologies are an opportunity for revenue expansion and improved value perception of product • Increase marketing investment • Barriers • New mergers could create migration/churn/volume discounts • Affiliates’ capex for continuing Digital roll-out • Traditional structure and mind-set within existing distribution network require stronger involvement from HBO • Lack of interest in premium, more focused on triple-play strategies • Movie download services may become regular players • DTH piracy • Multiple platforms operating in the region hamper pan-regional promotions

  27. 5 Year Strategic Plan (2010 – 2014) Premium Business • Packaging • Drivers • Pay TV bundling with other services (internet, telephony, mobile) • HD improves value perception of premium channels • SVOD marketing/bundling opportunities • Traditional basic package segmenting into various tiers • Retail Pricing • Lower entry level pricing for Basic tier • Bundled telephony, basic Pay TV service, and internet • Barriers • Bundling of basic services with telephony competes for share of disposable dollars • Limited access to premium from all basic tiers • Basic • Extended Basic • Mini Basic • Retail Pricing • Premium price to value is not proportional to basic tier offers • Basic tier = Price & # of channels = Value • Less upgrade motivation • Distributors’ premium profit margin at a disadvantage vs other services • Basic, internet, telephony

  28. 5 Year Strategic Plan (2010 – 2014) • Premium Business - Competition • FOX Group • Distribution agreement concluded with LAPTV • Plans to convert Cinecanal to a fully distributed basic network by year end • Fox and Cinecanal have joined to produce local programming • New distribution platform represents 25 channels in the Latin American territory • Basic channels continue to compete for our Premium Business Growth • Premium Window threats • Potential access to our product through other media • Hulu, YouTube • Telecine theatrical titles have improved • Shorter windows (13 months vs. 18 months) • Other Premium and Basic players are engaging in local productions • DVD Piracy reducing demand for Premium Tier

  29. 5 Year Strategic Plan (2010 – 2014) • Pan-Regional Revenue Strategy (2001-2009) • 2001 to 2005 • Packaging Strategy: Introduce new channels & packages • HBO/MAX Digital, including HBO Family and Max Prime • 2006 to 2009 • Build and exploit existing revenue streams by targeting proven markets and affiliates (consumer/distribution) • Regional feeds: tailored to each main market • Key Affiliates (DTH,CATV,TELCOS) • Addressability/Digital expansion • Investment in areas with clear volume potential • New platforms: Mexico, Brazil, Venezuela, Colombia, Chile • Launch of HD and SVOD

  30. 5 Year Strategic Plan (2010 – 2014) • Pan-Regional Revenue Strategy (2010-2014) • 2010 to 2014 • Create new revenue streams by building aggressive partnerships with telecommunications companies entering the multi-channel video category • Leverage new competition within existing distribution network • Revision of premium packaging structure - considering HD • Transition in Basic markets to Premium by 2011 by launching Max HD. • Chile, Peru, Central America • Convert Cinemax into a truly basic services as part of our channel portfolio strategy. • Will promote and drive Premium Business • Major element in the transition in Basic markets to Premium • Participant in business share of new platforms targeting lower SES • Caveat/Assumption: Continued Programming Innovation • Content Franchises (Box, Sports, Series, Comedies, Concerts, Adult, Movies) • Special Features (HD, SVOD, multi-language audio/subtitles, Dolby, etc.)

  31. 5 Year Strategic Plan (2010 – 2014) • Brazil • Buy-through will end this December 2009 • Restructuring of NET and SKY negotiations will result in rate erosion • Country average effective rates will decline as well: • 2009 overall effective rate = US$7.59 • 2014 overall effective rate = US$6.17 • This year the remaining operators will join NET and SKY in offering Telecine • Oi deal finalized, and contract signed, in August 2009 • Includes the launch of the Basic Movie Service by March 2010 • Project 1,000,000 subscribers by the year 2014 • Telefonica/TVA • Revenues increase from 21% to 23% of total • TVA will be affected by Telecine entry • Premium penetration will fall from 80% to 58% • Embratel will launch by 2010

  32. 5 Year Strategic Plan (2010 – 2014) • Mexico • CATV • Televisa leading the consolidation process through mergers and acquisitions • Approx. half of market share (Actual 3.0M subs) • HBO’s penetration in Cablevisión México grows from 16% to 21% by year 2014 • Telmex expected to launch IPTV in 2011 • Other MSO’s have followed suit in digitalization roll-out • Megacable • DTH • Total sub growth from 2.1 to 3.8 million by 2014, primarily driven by the entrance of DISH • Migration of MVS subscribers to be completed by the end of 2012 • Pricing and Packaging structure disadvantaged for Premium • Strong price disparity between Premium and Basic • Overabundance of movie channels on Basic (approx. 14) • Grey Market/Piracy (northern Mexico)

  33. 5 Year Strategic Plan (2010 – 2014) • Argentina • Grupo Clarin • MSO’s represent a consolidated platform with 62% market share (2.9 million subs) • Digitalization • CF/GBA completed in April 2007 • The main interior cities completed in April 2009 • Approx. 400k total digital subs • Small interior cities remain with analog service • Cost-efficiency evaluations underway to determine feasibility of digitalizing them • Subsequent penetration growth will be limited due to a strong basic tier offering • Soccer and movie services (i.e. CineCanal) have basic distribution • TyC lost the right to air soccer on the premium tier • Telco’s • Grupo Clarin has challenged all attempts by telco’s to obtain broadcasting licenses • Has been unsuccessful in its own attempts to get license for telephony • Regardless, Telefonica is forecast to launch in 2011

  34. 5 Year Strategic Plan (2010 – 2014) • Chile • VTR • Continue transition from Full Basic (with HBO/MAX) to “Basic Light” (without HBO/MAX) • Has cannibalized Basic subscribers – downgrade of 200k subs in 18 months • Full transition of HBO/MAX from Basic to Premium by 2011 • Liberty Media controls VTR and DTV (63% market share) • DTV for sale due to regulatory ownership laws • VTR represents over 55% of Pay TV market • Granted license to launch & operate new mobile service • 1st CATV operator with Quadruple Play, levels playing field with Telefonica and Telmex • Commercial SVOD launch in April 2009, potential for new growth • Telcos • Telefonica’s launching of HBO Premium in the DTH Platform initiated repackaging in Chile • Introduction of new concept of packaging – different target • Created reaction from competitors • Telmex purchase of ZAP TV has been very successful • ZAP TV had 40k subs, Telmex increased the distribution to over 250k subs

  35. 5 Year Strategic Plan (2010 – 2014) • DTV/SKY • DTV/SKY • Total DTH Revenue contribution to HBO changes from 31% to 25% • Growth from 5.4 million to 6.8 million subs by 2014 • Shift in socio-economic segments from AB towards C+, introducing a “pre-pago” concept • Very successful in Venezuela (18% of total subs) • Telefonica and Dish are limiting DTV/SKY growth • DVR and HD offer are part of defensive strategy in order to avoid churn • DTV Pan-Am forecast for end of 2010  250k • SKY Brazil forecast for end of 2010  350k • SKY Mx forecast for end of 2010  150k • Considerations by territory • Mexico: Packaging, pricing structure, and number of basic-tier movie channels • Brazil: end of Buy-through • Argentina: Rich premium product on basic (soccer, movies channels)

  36. 5 Year Strategic Plan (2010 – 2014) • Telcos (CATV & DTH Platforms) • Began as a defensive strategy • Leverage a huge telephony subscriber base for triple-play • Telefonica • Expected 2011 launch in Argentina • Others • Oi projected to have 1MM subs by 2014 • Telcos have a massive pan-regional presence • Total revenues will account for 37% of HBO’s revenue by 2014 • Currently at 34% • Their market share of our total subscribers is 30%

  37. 5 Year Strategic Plan (2010 – 2014) Revenues • Service Fees: • No significant changes in fees to basic channels • Assume WBTV leaves Sunrise in 2009 • A&E networks & E! serviced from Adrosa • Globecast per contract • Reduced administration support to the basic channels • Sales of Original Programming • Maintain at current levels • Ad Sales: Addition of Ad Sales revenue on Cinemax basic distribution in Latin America.

  38. 5 Year Strategic Plan (2010 – 2014) • Value of Premium PayTV Window • Impacted 2001 – 2009 • Growth and decline of DVD business and increased DVD piracy. • Shortening of Theatrical and DVD windows by certain major studios. Studios discussing merging DVD/Theatrical windows, downloading, etc. • Basic Cable Channels • Excessive number of movie channels in certain markets resulting in stronger prime time scheduling (Mexico, Argentina). • Access to better quality promotable movies (TNT, Fox, Hallmark, local movie channels, local broadcast channels). • Basic channels pushing social limits with increasingly edgy product. • Spread of distribution to pan regional channels (actual & library) and increased non-compliance with “Rules of Promotion” • New Output agreements with studios have provided better quality library to help value of HBO and Cinemax.

  39. 5 Year Strategic Plan (2010 – 2014) Sales Expenses • Growth in line with Revenues growth • Set top decoder replacement program. • Ad Sales commission 25% of Revenues

  40. 5 Year Strategic Plan (2010 – 2014) Marketing and Research • Growth in line with Revenues growth • Media spend to concentrate on following initiatives • HBO LAG Original Productions • HBO NY content • Brand Marketing

  41. 5 Year Strategic Plan (2010 – 2014) Network Operations • Maintain cost of Network Operations to market benchmarks • Replacement of decaying decoders 2010 – 2012. • Assume additional capacity to facilitate migration to new technology. • Two IS-11 transponders scheduled to expire December 31, 2012. • Initiate negotiation with Intelsat (2010).

  42. 5 Year Strategic Plan (2010 – 2014) General & Administrative • Increase facilities, infrastructure and communication in Mexico and Brazil. • Maintenance costs of new traffic system • Includes new Uplink equipment ($5.5M), Traffic System ($5.5M), telecommunications upgrade ($800K) to support post production capabilities in Mexico & Brazil and replacement of obsolete equipment

  43. 5 Year Strategic Plan (2010 – 2014) Staff & Expenses • Headcount increase in 2010 is related to the freelancer rationalization done in the second half of 2009 where freelancers who were hired to support the development and roll-out of on-going projects such as HD, VOD, SVOD, the Caribbean feed, etc., were converted to regular staff. • Growth in staff, 2011 and 2012, to support expansion of channel offerings and to support the development of Cinemax Network restructuring, offset by additional efficiencies in T&O. • Staff cost increases at a nominal 5% average per annum across the organization, offset by devaluation of Bolivar to $3.17. • No significant changes in benefits are contemplated.

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