Telstra has looked into the future of its pay TV offshoot Foxtel and doesn’t like what it sees.
So much so that it’s seriously examining the sale of its 50 per cent stake for as much as $4.5 billion, either to its partner in the venture, News Corp, or to the public via a float.
Foxtel is still making it money, but margins are under pressure because what was once a monopoly is now becoming a very crowded space with some very hip young things getting all the attention – Netflix and Stan among them.
Some indication of that came in the December half when Telstra’s dividend from Foxtel fell 26 per cent to $37 million compared to $50 million for the same half a year before.
Subscriber video-on-demand (SVOD) services Netflix and Stan have burst onto the scene and in little more than a year grabbed a big slice of the market. Figures from research house Roy Morgan show that Netflix, the biggest of the newcomers, has come from nowhere to 2.7 million subscribers by the end of 2015.
That trend is continuing. Shaun Ellis, Roy Morgan’s media writer, told The New Daily “the data for January and February shows that Netflix and the others are growing while Foxtel is down a little.”
Foxtel fought back
That change is critical because until now Foxtel has held its own against the SVODs by slashing its base rate in half to $25 a month and launching its own iteration, Presto, in conjunction with the Seven Network.
Those moves kept Foxtel in the game, with subscriber numbers growing to 2.8 million by the end of the year. But it was costly, with its base earnings falling 7.7 per cent in the December half as it paid for Presto and its fight with the other SVODs.
What appears to be driving Telstra’s wish to sell is a fear that a tough, competitive market will only get tougher and more competitive.
Steve Allen, of independent research house Fusion Strategy, says it’s not just the cut price SVOD’s hitting Foxtel. There are other factors at play.
“Program acquisition costs are rising as networks are launching new channels,” he said. The new players include SBS’ Food Network and Nine’s 9 Life, which use content that would have once been available to Foxtel.
Content is getting costly
Sports rights are also becoming more expensive. The Optus deal to buy English Premier League rights for $50 million and distribute via Fetch TV drew Foxtel’s ire. Many believe it to be a forerunner of other deals which will see the pay TV operator’s privileged access to sport eroded.
Movie rights are also becoming more expensive and difficult to get because of the explosion of new distribution options.
“When contracts with major content providers like HBO expire they could have problems renewing them,” Mr Allen said.
Another independent media analyst, Bob Peters of Global Media Analysis, says of Foxtel’s recent subscriber gains of about eight per cent in the December half, only three per cent went to Foxtel itself. About five per cent went to Presto which is a loss maker at the moment.
Mr Peters also believes that, despite its moves to slash prices, Foxtel has been bumping up against the ceiling of its penetration possibilities for a few years.
“It has hit 30 per cent and been bouncing around there ever since.”
In a world of increasingly curated TV where people are growing used to the freedom of SVOD’s and other download technologies, the Foxtel model is increasingly unattractive.