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The end of the Foxtel wars

The announcement of the proposed merger of Foxtel with Fox Sport Australia, combined with Telstra’s agreement to dilute its shareholding in the pay TV operator, paves the way for the end of the Foxtel war between News Corp Australia (formerly News Limited) and Telstra.  The decline in revenue and subscriber numbers will most certainly have provided News Corp with the ammunition it needed to break the stranglehold that Telstra has held over Foxtel for more than 20 years.

When the service was launched in 1995 Telstra secured a 50% shareholding, aimed purely at defending its telecommunications business against Rupert Murdoch’s News Limited. Telstra was very much afraid that News Limited would use the pay TV operation to get a foothold in the telecoms market and as such become a fierce competitor to the incumbent telecoms company. The telco never had the intention of making Foxtel a success story.

Initially the other 50% was equally shared between News Limited and Kerry Packer’s Consolidated Media Holdings. But five years ago News Corp was able – with the permission of Telstra – to buy the Packers out.

Now, more than 20 years after its launch, Telstra is no longer afraid that the Foxtel service is going to be a threat to them. Very soon after the launch we indicated that, given the Foxtel retail pricing, we didn’t expect that Foxtel would reach more than 25% penetration in Australian household. At the time my statement was fiercely attacked by Kim Williams, then the CEO of Foxtel.

He claimed that the company would reach 75% penetration by the year 2000. My argument was that people would not see this as an affordable service and would simply stay away. My current argument relating to the retail price of the NBN follows the same lines. If for whatever reason the nbn company has a wholesale tariff that makes it impossible to deliver an affordable high-speed broadband retail price then people will simply not buy it; and this is what is happening as we speak.

Back to Foxtel …….

Now, 20 years later, the penetration is around 25%-30% – nowhere near the 75%. (Content deals worth A$25 billion with the Hollywood studios were based on those predictions and had to be renegotiated once it became clear that Foxtel would not reach those targets.)

During all that time Telstra stuck to its guns and would not allow Foxtel to move into markets that it saw as its own. Over the last five years the stranglehold was loosened a bit but not enough to see Foxtel growing towards its planned targets.

It looked like Foxtel had become resigned to the fact that it was not much more than a premium sport content provider, and that its market share around the 25% reflects that passionate sport segment of the market who were prepared to pay the high subscription charges (and many still do).

It kept its pay TV subscriptions high in order not to have to cannibalise its sport market but that allowed Netflix, Stan and Fetch to make a killing in the Australian digital entrainment market, which had moved from the pay TV model to a video-streaming model.

With sport being the Achilles’ heel of Foxtel it was interesting to see last year’s Optus’s attack on this market, poaching the English Premium League Football rights away from Foxtel. And a further coup was announced last week, according to which Optus will now also have access to the Tabcorp market, where previously Foxtel had a sheer monopoly on the Sky Racing screens in these premises for sporting events other than live racing.

So the battle is over. Telstra has been able to keep News Corp successfully out of its market. This purely defensive strategy has worked and, beyond its sport segment, Foxtel has been mortally wounded.

The world has moved on. Pay TV is on the way out and the future is for streaming. There is no doubt that Netflix and others will also move into these markets adding further pressure on the Foxtel service. Furthermore, fully in line with the announcement at the annual meeting, Telstra has indicated that its primary role in the merged Foxtel entity will now be the distribution of the content and not the content itself – a retreat to its core business.

The most interesting ‘what if’ scenario in case Telstra had treated digital media as a new business opportunity was a merger between its Electronic Yellow Pages, Foxtel and its broadband content. This could have resulted in a very strong national digital media company that would have been able to stand up against some of the international heavyweights in the market. However structural separation would have been needed to make this a success.

But no use crying over spilt milk.

Paul Budde