Finance Finance News How Netflix could become the Foxtel killer
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How Netflix could become the Foxtel killer

netflix-foxtel-stan
Foxtel has its eyes on stealing the likes of Netflix and Stan subscribers.
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For almost a century, incumbency was the key to building successful media businesses in Australia.

If you didn’t already have skin in the game – or the backing of a powerful media empire – establishing a foothold in the local media industry was almost impossible.

But the internet has changed all that.

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Netflix leads the pack.
Netflix is the leader of the pack.

Newspaper publishers and print journalists have learned that technologies of the new millennium can destroy longstanding business models in a relatively short time.

The demise of the print news market is the starkest example of how the internet can wreak havoc on established media empires, but it’s not the only battlefield.

In the past six months, the economics of free-to-air television and Australia’s dominant cable TV provider, Foxtel, have come under serious threat from online entertainment provider, Netflix.

The profitability of the local television industry is set to take some big hits after more than half a million households signed on to Netflix’s video-on-demand service.

For only $8.99, Netflix offers Australian subscribers unlimited access to more than 200 TV shows and almost 1000 recently released movies.

Aussie TV is big trouble

Efforts by local television networks to compete against Netflix’s video-on-demand service appear to have backfired.

Research published by Roy Morgan Research shows that the battle for online eyes has virtually petered into a one-horse race, with Netflix emerging as a category-killer after only a few months operating in Australia.

Chart 1

The May subscription numbers for the Foxtel-backed Presto service and Fairfax/Nine Network-owned Stan were simply dwarfed by Netflix.

According to the latest Roy Morgan data, the gap widened dramatically last month, with Netflix reaching 1.42 million people in 559,000 homes by June 30.

The boom in online streaming services has spawned rapid growth in demand for internet service providers as customers have elected to take faster and bigger data plans.

Graph2

Foxtel under pressure

Netflix’s tremendous growth appears to be putting a brake on the profitability of Foxtel’s lucrative cable television business.

In November 2014*, Foxtel repriced its basic subscription offer to $25 from $49. Foxtel told The New Daily this was “a strategic decision”.

At the time, Foxtel CEO Richard Freudenstein said the new, lower price would trigger a reassessment by potential customers who were unwilling to pay $49 a month.

The extent of the early damage wrought on Foxtel by the Netflix phenomenon will be revealed next month when the cable television operator releases it profit result.

Foxtel, which is jointly owned by Telstra and News Corporation Australia, has a virtual monopoly in the cable market.

It raked in more than $550 million in profit in 2014, making it the main growth engine of News Corp’s local operations.

But the advent of Netflix has the potential to erode part of Foxtel’s subscriber base. We probably wont know what the material impact will be on Foxtel’s business model for a few years.

The rollout of the National Broadband Network could be a game-changer, which might force Foxtel to abandon cable altogether and compete directly with Netflix on the lower-cost internet platform.

One of the characteristics of online commerce that is not often appreciated by the general public is that it enables service providers to shift a big portion of their production costs to consumers.

Ultimately, consumers will have to pay for the high data volumes required to use online streaming services such as Netflix.

At some point in the future, Foxtel may find its capital-intensive cable network too expensive to carry.

Foxtel
Traditional media struggles as people move to digital platforms.

How far can Netflix go?

There is no doubt that Netflix is making waves among executives at Foxtel’s headquarters in North Ryde in Sydney, but its current offerings are not wide enough to trigger an immediate cleanout of the cable operator’s subscriber base.

Ivor Ries, a leading analyst at Morgans Financial, believes that the Netflix expansion in Australia is not likely to pose a critical threat to Foxtel until its adds live sports content to its catalogue.

“Competition in the subscription market has become intense because there is definitely a competitor that wasn’t there before,” he said.

“Foxtel and Netflix have very different offerings though, with Foxtel marketing a premium product.

“Overseas experience would suggest that there is a role for at least one multi-service provider such as Foxtel in our market.”

Foxtel’s ability to assemble an exclusive portfolio of live sports programs is its most valuable customer acquisition tool.

Because Netflix is not yet able to offer such content, Foxtel’s position as the leading subscription entertainment provider in Australia is not likely to be challenged.

However, its financial performance could be profoundly undermined because its most profitable margins are made on special subscription packages for movies and drama series.

Media analysts will be monitoring next month’s profit announcement for any indication of subscriber attrition in these parts of the Foxtel business.

Mr Ries said up to 75 per cent of Netflix’s customer base were people who had never had a Foxtel subscription.

He said Netflix’s long-term impact would hinge largely on improvements to internet download speeds because they would have an impact on the quality of its service offerings.

* CORRECTION: This article originally said the price change was made “in the last few months”. That was incorrect. 

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