Foxtel-Austar merger makes sense

Foxtel’s proposed merger with Austar took another step in the right direction last week when the Australian Competition and Consumer Commissions (ACCC) commenced market consultations over Foxtel’s draft undertakings. Foxtel has provided the ACCC with undertakings in order to allay ACCC concerns that a merged company would hamper competition in the IPTV market. Foxtel and Austar, along with Telstra (50% owner of Foxtel) all currently have some form of an IPTV offering in the market.

As it stands Austar and Foxtel only compete in one market, the Gold Coast. The glamour strip sees Foxtel signing cable customers only, whilst Austar has the monopoly on satellite installations. Even without any merger the two companies are extremely close through XYZ Networks (50:50 joint owned by Austar & Foxtel) , joint bidding for sporting rights such as the AFL and for the most part offering the same channels.

The merger in my view makes business sense. Foxtel and Austar face increasing competition from digital FTA channels and IPTV providers. With penetration rates at only around one-third of metropolitan households both Foxtel and Austar already have enough trouble trying to grow subscriber numbers.

The barriers to entry for other cable/satellite providers to enter the market is now too high, given the increasingly fragmented media landscape. Internationally pay-TV penetration is much higher, e.g. in New Zealand or the United States. It will be a long road ahead for operators to reach similar levels in Australia and it would seem without the advantages that a merged Foxtel-Austar would create, the level of subscribing households in Australia will not greatly increase. Infrastructure, content and marketing costs are prohibitive for new entrants to compete in non-IPTV subscription-TV markets.

A couple of examples spring to mind illustrating the difficulty of establishing and continuing to grow subscription-TV businesses in Australia.

Optus previously directly competed against Foxtel with its own suite of channels including C7 Sport. This model was not sustainable in a small market and hence Optus is now a Foxtel reseller. More recently Bruce Gordon’s ill-fated pay-TV venture Select TV attempted to sell low cost specialist subscription channels. The venture failed and was sold off.

A merged Foxtel-Austar entity will streamline the businesses that are already so closely intertwined. This will allow them to compete more economically in the market and most likely increase subscription-TV penetration in Aussie households. The result is greater revenues from an entity with over 2 million subscribing households due to the synergies found between the two companies. The by-product will be greater investment in Aussie content, which is great news for content creation industries in Australia.

The ACCC’s fear that a merged pay-TV giant is bad news for IPTV entrants is not without merit. I wrote at the time of last year’s announcement of the new AFL media rights deal that Foxtel’s share of the rights would perfectly position it for IPTV dominance given its content and subscribers already with internet enabled set-top boxes. However a merger of Foxtel-Austar, whilst creating a large media company will not destroy the burgeoning IPTV market. This is because of the lower costs to entry that exist for IPTV operators. Furthermore the ability to deliver niche/specifically targeted content through multiple delivery methods adds to the competitive IPTV environment.  For example an IPTV service like Fetch TV, as opposed to a service such as Hulu, illustrates how IPTV encourages a range of providers with different business models.

Fetch TV’s strategy to date has been to establish partnerships with ISPs such as iiNet and Optus, where subscribers to those services can add-on a Fetch subscription for delivery of content via a set-top box. Content takes the form of channels such as Fox Sports News or on-demand content such as movies. Comparatively Hulu, which is yet to launch in Australia, delivers solely on-demand content to PC, iOS, Playstation and other devices for a monthly subscription charge (in Japan – the service delivers TV shows and movies commercial free).

Foxtel last week provided draft undertakings to the ACCC in an attempt to allay the regulator’s fears over the market power of a merged entity. Announcing the market consultation ACCC Chairman Rod Sims said,

“The proposed undertaking has been offered by FOXTEL to address the harm to competition which is likely to arise as a result of the proposed acquisition…However it is not intended to resolve competition or structural issues that may already exist in the relevant markets and are unrelated to the proposed acquisition.”

The ACCC’s major concern is that Telstra as the majority owner in any new entity would be able to bundle phone, Internet and pay-TV services to the detriment of competitors. The effect being Telstra would have greater market power, on top of what already exists.

Foxtel has given a number undertakings relating to its rights to enter into exclusive content deals for IPTV rights. This includes access to exclusive on-demand movies and also the delivery of certain linear channels, by providing competitors access to these channels such as the Disney suite of channels and Sky News. Importantly Foxtel’s proposed undertakings do not cover access to domestic sport (except ESPN), which remains one of Foxtel’s largest driver of new subscribers. For example this weekend Fox Sports is covering a record 21 football (AFL, Rugby League, Super Rugby & A-League) games of LIVE sport in HD across its channel portfolio.

The ACCC last week said,

“by reducing content exclusivity, the proposed undertaking aims to lower barriers to entry and promote new and effective competition in telecommunications and subscription television markets….The ACCC is conscious that any remedy must balance the need to reduce barriers to entry without dampening incentives for content suppliers or subscription television operators to be innovative and competitive.”

The ACCC’s market consultation period will be open until the end of the month, following which the ACCC will decide whether to accept or reject the proposed undertakings. The proposed undertakings are available on the ACCC website.

The Foxtel-Austar merger seems one of the most sensible in Australian corporate history. The draft undertakings are reasonable as they allow Foxtel to retain a competitive advantage whilst also providing new players access to engaging content to help them be competitive.

A new merged Foxtel-Austar is an important step to ensure the pay-TV industry in Australia continues to grow, and more importantly remains a source of innovation and creativity in the Australian media landscape.




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