Foxtel CEO Peter Tonagh at an event to win support for federal government changes to media ownership laws at Parliament House in Canberra, Wednesday, May 31, 2017. (AAP Image/Mick Tsikas) NO ARCHIVING

More people are watching TV programs on more platforms than ever, but Australia’s only pay TV network is struggling to keep up. Foxtel’s merger with Fox Sports, given the green light by the ACCC earlier this month (but already on the rocks), will give News Corp a 65% stake of the company. But last week’s dismemberment of 21st Century Fox, offloading many of the Murdoch family’s international entertainment assets to Disney, will add to the financial dangers that Foxtel faces.

Shareholder instability

If the merger proceeds, Telstra’s share in the combined company will drop to 35%, with News holding 65% — a stake that will mean huge changes in the size and shape of News balance sheet, its revenues, cash flows and its earnings. Telstra says it’s happy with a 35% stake in the merged company, but in reality Telstra will not remain a long-term Foxtel shareholder. It could sell its stake back to News, or float its shares on the stock market (which would be the preferred option for all concerned).

An unbalanced balance sheet

With more than $3.1 billion in revenue and $4.1 billion in assets (between News and Telstra, US$1.20 billion each), plus the book value of Fox Sports (hard to work out), the eventual shape of the deal will reduce the importance of newspapers to the company even more — a change to the shape and size of the whole News Corp balance sheet. But taking control of a merged Foxtel and Fox Sports will mean News’ overweight Australian-based assets (including the 61%-owned REA Group, worth $6.2 billion) would be worth roughly $12 billion, or more than half of total assets, when the written-down value of the newspapers are added in. With a slowing property market and weak media market (and greedy Facebook and Google), News could end up with a lot of lead in the saddle.

A weaker local media market

This is a key danger across the board for all media companies. In the News Corp 2016-17 annual report directors worried about the health of the local pay TV market which drove their Foxtel impairment. 

“During the second quarter of fiscal 2017, the company recognised a $227 million non-cash write-down of the carrying value of its investment in Foxtel to fair value. As a result of Foxtel’s performance in the first half of fiscal 2017 and the competitive operating environment in the Australian pay TV market, the company revised its future outlook for the business, which resulted in a reduction in expected future cash flows. Based on the revised projections, the company determined that the fair value of its investment in Foxtel declined below its $1.4 billion carrying value.”

Telstra is now Foxtel’s biggest rival

On top of the weaker market, the competitive pressures in the Australian pay TV market haven’t eased in the past year. In fact, Telstra is now Foxtel’s biggest competitor and customer. Telstra is already the fastest-growing media/streaming video business in the country with about $1 billion of revenue a year from its Telstra TV offerings (which includes Foxtel and Fox Sports channels, as well as free-to-air TV). Telstra TV is actually the single largest customer for the Foxtel and Fox Sports channels. Telstra said in its June 30 annual report that its streaming service had 1.3 million subscribers (mostly for NRL and AFL games). It said its media revenue increased by 8.2% to $935 million “due to the strong performance of Foxtel from Telstra and Telstra TV”.

Weak subscriber growth

Foxtel has had two years of falling or no growth in subscriber numbers (now around 2.8 million). The pay TV operator lost millions, saw its ‘churn’ soar (that’s the turnover in subscriber numbers) and dropped around 100,000 subscribers when it closed its Presto streaming video joint venture with Seven West Media. Foxtel hopes its Foxtel Now streaming service, started in mid-June, can repair the damage to its subscriber numbers, cut churn and eventually reverse the fall in its Average Revenue Per User (ARPU) ($86 per subscriber in 2016-17, the lowest for several years). But now it’s up against other streaming outlets including Netflix and Stan, which haven’t suffered the same sort of embarrassing failures as Foxtel Now — such as the disastrous release of the latest season of Game of Thrones earlier this year.

The looming Murdoch empire split

The split in key Murdoch company 21st Century Fox is medium-term programming danger for Foxtel and News Corp. As Disney buys the cable channels and the film and TV production arms, there is likely to be a loss of programming similar to the way Fox cut off Ten’s access to programs such as The Simpsons and Modern Family recently when CBS bought Ten. Just where control of the programming/syndication rights from any Fox asset sale ends up is unclear. But Fox is the major non-sport program supplier for Foxtel (Fox Sports is the major supplier and access to US sports product will remain after any split). If Disney buys the program rights it will become a major rival to Foxtel/Fox and Netflix because of is own streaming ambitions. It is about to start streaming its ESPN sports channel and entertainment type programs. If it controls Fox’s TV and film rights, Disney over time will become formidable for rivals domestic and international.