Jul 10, 2012

We don’t love pay-TV like the rest. So what’s Foxtel really worth?

Foxtel once predicted pay-TV would be installed in three-quarters of homes. In fact, at 28% Australia has one of the lowest rates in the developed world. So what went wrong?

Matthew Knott

Former Crikey media reporter

In 1999, when the Australian pay-TV industry was less than four years old, Foxtel CEO Tom Mockridge made a prediction: a big, bold and -- as it turned out -- wildly incorrect prediction. Within 10 years, he said, pay-TV would be installed in three-quarters of Australian homes. Yet by 2009 only 29% of Australian homes had pay-TV. Today, according to stockbroking firm CCZ Statton Equities, it’s at 28% -- one of the lowest rates in the developed world. Mockbridge's over-optimism hasn’t stopped Richard Freudenstein, who replaced Kim Williams as CEO last year, from publicising his own lofty goals for the industry. In March, he announced an ambition to lift the take-up of pay-TV to 50% (though he didn't apply a deadline to the target). None of the media analysts contacted by Crikey for this story believe this will happen -- ever. They say despite News Limited's bid to lift its stake in Foxtel from 25 to 50%, the take-up of traditional pay-TV has already peaked -- and will soon start to decline. "There is no indication whatsoever that pay-TV in its current form will grow to 50%," said veteran telecommunications consultant Paul Budde. "No way." Even securing AFL broadcasting rights last year, at a cost of $530 million, hasn't boosted customer numbers significantly, Foxtel sources told The Australian Financial Review last month. There's also no sign the Olympics -- to air on Foxtel over eight channels later this month -- has led to a spike either. "They want to paint a picture of a beautiful blue sky: we’re thundering along, people are joining us, we're growing," said media analyst Steve Allen. "But that's marketing and spin. At the pricing model they have now they're not likely to get much growth." Cost, Allen says, is the major reason why the Australian pay-TV penetration rate dwindles behind the US (90%) or UK (60%). Signing up to pay-TV here costs far more than the US or most of Europe. Other factors have applied a handbrake on growth, according to Citi analyst Justin Diddams. Pay-TV, he says, has had the best take-up in countries where providers bundle it together with other telephony services such as broadband or mobile phone deals. In the UK, for example, BSkyB has given away free broadband to lift subscriber numbers. In Australia this hasn't been possible because Telstra -- which owns 50% of Foxtel -- won't allow the pay-TV provider to sell broadband connections. Our tough anti-siphoning laws also haven't helped either. Nor has the arrival of Freeview, which allows people to watch for free the type of content they used to have to pay for. None of this bad news, it's important to point out, has stopped Foxtel from making serious dough. Although relatively few Aussies are prepared to fork out for pay-TV, those who do are willing to pay a lot. Last year, the company increased full-year earnings by 15.5%, despite subscriber numbers only rising by around 18,000. This business model, however, is on its last legs thanks to the arrival of Internet Protocol Television (IPTV) -- a technology that streams TV and video services via the internet direct to computer, television set or game console. The industry is still in a nascent stage, but is expected to grow rapidly in the next decade with the proliferation of high-speed broadband. "The traditional model of pay-TV is on the way out," said Paul Budde. "People will always be interested in good content -- movies and sport -- but the format in which it’s currently delivered is a dying concept." Roger Colman, head of media at CCZ Statton Equities, agrees. According to his firm's projections, next year will be the last year of subscriber growth for traditional subscription television. By 2017, he expects around a fifth of households to have satellite or cable pay-TV while IPTV will be approaching 50% penetration. Chris Coughlan, research director at technology analyst firm Telsyte, says the growth of IPTV represents both an "opportunity and a threat" for Foxtel. The opportunity: many more customers. The threat: many more competitors -- including Fetch TV, Apple TV, Quickflix and, ironically, Telstra, which is taking on Foxtel with T-Box, which offers movies on demand and live sport. "It’ll be a fine balancing act to package up the IPTV channels so they don’t cannibalise the existing plantium users -- those who get all the services, not just bits and pieces," said Coughlan. "They’ll have to be very clever." Steve Allen reckons Foxtel will have much lower profit margins in five years time. It will also have to spend big on original programming to maintain viewers (an outcome that would be a boon for the Australian entertainment industry). Roger Colman is far more optimistic than his counterparts. Foxtel, he asserts confidently, will make more money in the IPTV era than it does now. "It's a simple equation," he said. "There are no real competitors of any import." Foxtel, Colman says, is expanding into IPTV far more aggressively than it's making out and is already stiching up deals with major Hollywood studios for Australian IPTV rights. Despite the widespread assumption that the internet leads to fragmentation, Colman says real-world experience shows that it also leads to monopolies. In the US, Amazon has around 80% of the online book market, Netflix owns 90% of the online DVD market, while iTunes has around 90% of digital music sales. He expects Foxtel will achieve the same market dominance in Australia for IPTV and is telling his clients to bank on it. Crikey approached Foxtel CEO Richard Freudenstein for comment but he was unavailable.

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7 thoughts on “We don’t love pay-TV like the rest. So what’s Foxtel really worth?

  1. uniquerhys

    Yep, going down – I cut the cord yesterday. Call me when I can pay per-show, not per-channel or per-package. And download it over my existing broadband link. Download to play on the device of my choosing, not DRM-encumbered nonsense or streaming.

    One thing’s for certain – I’m unlikely to even look at an IPTV service from Foxtel. I looked into Foxtel Download and the range of available shows is a total joke. That and the forced bundling with regular Foxtel. There’s little point using Download when I’ve already DVR’ed it off the regular cable.

    Sadly, the other IPTV providers don’t look any better. FetchTV requires a specific box to be installed, and a specific ISP. WTF? Read the freaking IPv4/v6 specs and understand OSI layering model for God’s sake! Networks, applications, formats, and protocols are different things and should not be bundled together for correct Internet operation.

  2. Merve

    “Cost, Allen says, is the major reason why the Australian pay-TV penetration rate dwindles behind the US (90%) or UK (60%). Signing up to pay-TV here costs far more than the US or most of Europe.”

    Yes, once again we Aussies get treated like a doormat.

  3. Mobius Ecko

    Ads were what killed Pay TV for me. I subscribed from the very beginning when there were not many channels but you can mix and match anything. The only thing that interrupted the shows were promos, and even they were short and far between.

    Then the channel numbers increased and crappy limited selections of packages were introduced. I love docos and it was the main reason for me going Pay in the first place, but when you had to get the top package to get all the doco channels you wanted then I started getting peeved.

    So it’s not the cost but the cost because to get a decent mixture you more or less have to get the top package, which is way too expensive. Then you have to pay for individual first run movies or special one off sporting events on top of that.

    But by far the biggest killer was the gradual increase in ads and the extension of promos, from no ads and a few promos when I first joined, to so many ads and promos there were many times I could channel flick through everything and catch and ad or promo on every channel.

    Why should I pay to be annoyed every few minutes when I could get that for free on FTA. When I dropped out Foxtel contacted me like clockwork every couple of weeks offering me reduced price deals (time limited of course) to rejoin and asked why I left after being a subscriber for so many years. I said ads. Get rid of the ads and I’ll sign up again, and the response was always they had to pay for their service somehow.

    Drop the ads and give better more flexible packages, and the ability to drop out channels and their promos, I will never watch then I will subscribe again.

  4. Bill Hilliger

    At last it has become apparent why there is such opposition by the Murdoch media and other rent seekers to the NBN rollout.

  5. eric

    I also dropped Pay TV when the ads stared to be as frequent as on FTA TV just another bit of sucking up to Murdoch by Howard and his cronies so the old man could make millions out of Aussie suckers.

    If Im paying $100 a month for mostly shit shows and 1960s re runs I dont want ANY ads thank you!

    Im glad Telstra never gave into Murdochs pressure to sell to him.

  6. Steve777

    I’ve never been tempted by pay TV. As ad breaks became increasingly intrusive and schedules became increasingly infested with reality shows, cooking shows and talent quests on Free to Air, I just watched a lot less TV and that mostly the ABC. When I’ve watched pay TV at relatives’ homes, I’ve noted the significant increase in the number of ads – pay TV is now like free to air used to be. Ads on free to air are one thing – I realise that if you’re not paying for a product then you ARE the product. But I’m not paying $4,000 to $5,000 a year for the privilege of being delivered to advertisers.

  7. Owen Gary

    Lets face it, if none of us bought TV’s they would give them to us for free. It is vital for their social brainwashing of the masses.
    If we then have to pay for TV I’m pulling the plug & will turn on my radio. As already pointed out why should anyone have to fork out to watch Ad’s.

    Most people will pay just for the sports, but again why pay for Ad’s, most of the shows are so called reality (garbage) which cost nothing to produce. No stars no story no point.

    I’m with Steve on this I will never pay for TV except the ABC which is coming out of our taxes.

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