Finance Finance News Why Foxtel is starting to cramp Telstra’s style

Why Foxtel is starting to cramp Telstra’s style

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When Telstra indicated its desire to sell its 50 per cent stake in pay TV group Foxtel, pundits claimed the sale could reap $4.5 billion in a public float.

But the markets have thrown cold water on this suggestion with investment bank Credit Suisse predicting the figure would be more like $2.45 billion.

That number is probably closer to the truth and reflects the fact the reality of Foxtel’s new environment where Netflix has gained 2.7 million viewers in a year and serious competitors like Stan are growing quickly.

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This new competition is changing the environment so much that “Foxtel is no longer a growth company”, says Bob Peters, independent media analyst with Global Media Analysis.

It’s not just the new competitors that are eating into Foxtel’s profit, forcing it to cut its basic subscriber charges and reducing its margins.

Telstra has AFL mobile rights. Photo: Getty

Its ownership of Foxtel is now cramping its style and restricting its ability to be part of a raft of emerging opportunities.

“It’s more economic now to deliver content over the top of the existing network but Foxtel likes people to deliver content in ways that involve Foxtel,” said Foad Fadaghi, managing director of telco research group Telsyte.

That over-the-top model is the one used by Netflix and other video streamers who just piggyback on the existing telco network rather than having to own and maintain a cable network which is Telstra’s responsibility under the Foxtel joint venture with News Corporation.

If Telstra sells its Foxtel stake, it could launch its own streaming operation using whatever network technologies are available and compete with Foxtel the way Netflix and Stan (a Nine-Fairfax tie-up) do today.

Telstra has already started on the path to becoming a video streamer through its ownership of rights to broadcast the AFL and NRL over its mobile networks, where it streams all games from both codes.

Technological change means “the distinction between mobile and computer rights are increasingly blurred”, said Mr Fadaghi.

So it is increasingly attractive for Telstra to be in a position to enter the market in its own right to give it the ability to offer a curated suite of services. Its competitor Optus is already showing the way.

Optus paid $50 million for rights to broadcast English Premier League soccer and largely distribute it through internet TV operator Fetch TV.

Telstra could launch its own video streamer. Photo:AAP
Telstra could launch its own video streamer. Photo: AAP

Indeed, Telstra is moving into the space itself, through Telstra TV, which streams Stan, Presto (owned by Seven and Foxtel), as well as catch-up and movie services and the replay and highlight capabilities for its AFL and NRL contracts.

As Foxtel’s environment becomes more competitive, Telstra’s relationship with joint venture partner News Corp, always difficult, is becoming more problematic.

News owns Fox Sports which provides a lot of Foxtel’s sports content. News is looking at rolling Fox Sports into Foxtel which would be done through an equity deal “which would see News increase its Foxtel stake to about 65 per cent”, said Mr Peters.

That would heighten Telstra’s status as a passive investor, Mr Peters said, and it is already paying a price.

When Fox Sports last reported its profits in 2013, it was “earning a 24 per cent margin”, Mr Peters said.

Telstra’s view on that is likely to be “why should they pay Fox Sports a 24 per cent margin”, he added. “It’s not the best deal for Telstra.”

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