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The Australian Competition and Consumer Commission’s green light for the $2 billion Foxtel takeover of Austar is the worst competition decision since Kim Beazley bested Paul Keating in cabinet in 1990 and gave us a vertically-integrated Telstra. Here’s why …

1. The good, old-fashioned analogue reason: size, financial strength, profits and subscriber numbers. The merged company will again underline the reality of that financial cliché — the sum of the parts is larger than the whole. The merged company will be the largest broadcast media group in the country with more than 2.3 million subscribers, more than $1.8 billion in revenues and more than $800 million in earnings before interest, tax, depreciation and amortisation. It will dwarf the faltering profitability of the three FTA networks (Nine, Ten and Seven), plus Fairfax, APN and Southern Cross Austero. Its profit margin will be above 40%, and it will be all thanks to the ACCC, which has confirmed its long and undistinguished history of competition regulators in this country rolling over for the Murdochs and News Limited at crucial times.

Remember the 1986 approval from the old Trade Practices Commission that allowed News to buy control of the Herald and Weekly Times? That approval and the media law changes driven by the Hawke and Keating governments have ended up cementing News Ltd’s control of the newspaper and pay-TV industries in this country. So much for being either a prince of print or a queen of screen — News Ltd will be both.

Then there was the 2002 Foxtel takeover of Optus’ struggling pay-TV business, with attached undertakings that were meaningless as the newly-enlarged Foxtel expanded and digitised its network and introduced its IQ box and player, boosting subscriber numbers to just under 1.6 million. And now this decision.

2. It fails to address the role of Telstra. The ACCC should have made approval conditional on Telstra selling its 50% stake in Foxtel. Foxtel wants that, it wants to go heavily into satellite broadcasting (Austar is 100% satellite) and emulate BSkyB in London where Foxtel boss Richard Freudenstein cut his teeth and became chief operating officer. Foxtel wants to get rid of the $100 million it pays Telstra in carriage fees for the use of the telco’s HFC cables across Australia. Freudenstein knows Foxtel’s future isn’t in offering just pay-TV, but in offering internet-based and other services as well, as BSkyB has done very successfully in the UK (more than 6 million of its 10 million-plus subscribers take high-speed broadband and associated services by BSkyB now, against nil 10 years ago).

That is the future: Comcast, AT&T, Verizon, Cox, Time Warner and other US cable groups and telcos are busily expanding into each other’s turf via high-speed broadband, mobile phone and other services. The number of basic cable subscribers in the US is falling because of the recession, but the number of premium subscribers with cable, broadband, mobile and other services is rising. At the moment its a future that Foxtel, courtesy of Telstra’s ownership, will struggle to pursue. Separated, the two companies would be competitors in the new world of data, telephony and content services via the NBN.

The ACCC has also allowed Kerry Stokes to emerge as the dominant broadcaster in the country (and the media generally) with this decision. James Packer is stalking Eco (the holder of the Sydney Casino licence) and wants control. Selling his 55% stake in Consolidated Media (owner of 25% of Foxtel and 50% of Fox Sports) would raise well over $1.5 billion and finance that deal. Stokes is sitting there with 25% of Cons Media and is the buyer. Control would see him add a major stake in pay-TV to his Seven TV network and West Australian Newspapers. As pay-TV is not considered a “voice” under the current media legislation, Stokes is free to buy.

3. Foxtel’s undertakings are weak. They last for eight years and are supposed to promote competition in newer areas of IPTV and mobile TV. But they only prevent exclusivity and cover a bunch of moderately popular to almost ignored pay TV channels in this country. A more significant change would be to force Foxtel to offer access to Fox Sports, Fox Footy or even Fox 8, which are the heart of News Ltd’s dominance over pay-TV content in this country.

4. Bizarre timing. You also have to question why the ACCC approved this deal ahead of the outcomes of the convergence review and an indication of what the broadcasting landscape will look like beyond the analog switch-off. And the ACCC should have at least waited for the Optus fair dealing case, now under appeal, to be resolved. That is the most important legal case involving the Australian media for years. If Optus’ plans to use the fair dealing section of the Copyright Act are upheld all the way to the High Court, then the undertakings extracted from Foxtel have some value. But sports rights will be devalued and it could be the case that Foxtel has paid too much for Austar (not the ACCC’s problem; that’s Foxtel’s concern and that of its shareholders).

If the coalition of media groups and sports manage to kill off the Optus fair dealing case then the undertakings are next to useless. Leveraging mobile and IPTV rights into a viable service would become a lot more difficult.

The Optus case has the potential to unlock the media landscape in this country. The ACCC decision to give a green light to the Foxtel acquisition of Austar (and leave Telstra dominating Foxtel) will set the media landscape in this country in cement for years, with new potential competitors unable to compete on a level playing field if and when the NBN arrives. The ACCC missed a major moment in the history of regulation in this country and a chance to boost national productivity and the pace of technological change.But for Austar, the timing couldn’t be better. As the economy slowed last year and customers became nervous, Austar suffered a 5.1% slump in subscribers. Its business model has been to avoid competing with Foxtel (indeed, become a virtual slave broadcaster) and not bother investing in the sort of innovation that, for example, drove Kim Williams’s digitisation strategy at Foxtel. No wonder John Malone’s Liberty group ended up accepting Foxtel’s offer (remember Malone outsmarted Rupert Murdoch in 2008 by getting him to sell him the Direct TV satellite business and other media investments in exchange for the News Corp stake he had amassed while Murdoch was fleeing Australia for the US.).

Foxtel’s subscriber growth slowed in the second half of 2011 with no net new additions. That’s another reason the ACCC has helped News/Telstra and Packer/Stokes out of the difficult predicament with a Foxtel that had lost its growth spurt. Now it’s larger, can negotiate bigger ad contracts, higher prices for content from non-News suppliers, cut costs (which was under way before the merger was approved) and slowly get rid of all of Austar’s infrastructure and save upwards of $100 million a year.

No commentator this morning recognised the fact that News Corp has got its way in Australia while it is under rising pressures and being investigated for possible criminal activities in the US under anti-corruption laws, the NDS hacking claims and the phone hacking, computer hacking and bribery claims in London involving all arms of the group, The Times, The Sun, the News of the World and more lately, Sky News. Imagine the uproar in Britain and the US if competition regulators had cleared News Corp to make a significant acquisition.

Meanwhile, what happens if UK regulator Ofcom finds News Corp is not fit and proper to control a UK broadcast licence, like that held by BSkyB, while in Australia we have given the same company a tick to complete a major deal?

Peter Fray

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