Future of TV: fragmenting inside the box
An array of new choices — Google TV, Apple TV, and internet TV — is reshaping the market, write Julian Lee and Lucy Battersby.
TEN years ago the number of media choices the average person turned to each day could be counted on one hand. Nowadays you need a spreadsheet.
Each new invention brings a slew of challenges and challengers to traditional media outlets and smashes audiences into smaller and smaller fragments.
The competition for eyeballs as well as the consumer’s wallet will become more intense in the coming years, as Foxtel chief executive Richard Freudenstein acknowledged earlier this year when he told the industry’s annual talkfest: ‘‘ There is a lot of confusion out there, there is a lot of choice out there.’’
And whata choice; Google TV, Apple TV, internet-enabled TV sets, TV-enabled internet devices, pay per view services like Quickflix, TV services tied in with your phone bills and video on demand. And then there is traditional internet, with YouTube slowly but surely reinventing itself as a ‘‘ premium content’’ player. The government’s national broadband network will make internet-video streaming even faster.
While all these different options posea threat to the TV industry, it is perhaps Foxtel that is feeling the most heat, relying as it does on a model of aggregating different channels and charginga premium for it, regardless of whether you want it all. The question is —can Foxtel keep growing in this environment?
There are signs that Foxtel is buckling; new subscriptions have stalled, as has penetration of households, which remains stubbornly static at 29 per cent. Foxtel denies it is struggling.
‘‘ All media companies have been affected by ongoing subdued consumer sentiment, as Foxtel explained in its 2012 financial year result. Despite this, Foxtel achieved subscriber growth and strong gains in revenue and profit. We also achieved solid growth in advertising revenue at a time when other media companies were struggling and even going backwards. Our plans to revitalise subscriber growth are well advanced,’’ a spokeswoman said.
But any household that wantsa Foxtel subscription would have one by now. While Foxtel can generate demand by tying up exclusive content, like movies and sport, it could never do this to the same extent that cable companies in other countries can because successive Australian governments have issued an anti-siphoning list that puts the most popular events on free-to-air television.
And the outlook for growth is tough, despite Foxtel’s $625 million investment in the rights to screen four AFL games a week — live and with no ads— for the next four years. It is unclear if this has attracted enough new customers to the service. New subscribers in the year to the end of June amounted to just 30,000, bringing its subscriber base — excluding those from the Austar merger — up to 1.68 million.
And sports bodies are starting to sell content directly to fans. This week the National Basketball League launched a $59 pass for every game live over any internet connected device. The NBL expects to make more money out of this than selling broadcast rights deals toa second or third party and already has ‘‘ thousands’ ’ of pre-registrations , aspokesman said.
During the Olympics, Foxtel gave away eight channels to sports package subscribers rather than hit them up. The returns by way of new subscribers or falling churn figures have yet to be quantified, let alone made public.
Recent deals demonstrate just how far Foxtel is prepared to go in order to improve its anaemic growth rate. It has revealed plans to give a year’s free subscription and free installation to anyone who buys a Plush sofa worth $2000. Foxtel expects to gain just 300 customers and retain an equal number from this deal, according to the application lodged with the competition watchdog.
It also bends over backwards to keep subscribers. Operatives in the Foxtel call centre are used to offering free set-top box upgrades, additional set-top boxes and slashing monthly charges for customers who threaten to cancel their subscription, citing rising living costs. Customers in financial distress are offered a temporary $10-a-month subscription, the so-called ‘‘ poverty package’’ , according to a former call centre worker.
At $99 per customer, Foxtel’s average monthly revenue per user (ARPU) rate continues to be the envy of the world, where it is at least twice as expensive as comparable services offered in the United States or Britain.
According to people inside the industry, Foxtel always expected it would have to make high margins from a small subscriber base because of Australia’s low population, rather than small margins off a large subscriber base.
But with new technologies making it easier for new content to enter the market, Foxtel faces an uphill battle, says Digby Gilmour, media and telecommunications analyst at investment house CLSA.
‘‘ Foxtel is facing a conundrum. It can either bring down its prices to boost its household penetration, or unbundle its offering, allowing consumers to pick and choose what they want, which risks average revenue and potentially margin on each subscriber fall. At the moment they are preserving ARPU, possibly at the expense of penetration.’’
Another subscription TV executive, who preferred to remain anonymous, called it a ‘‘ marketers’ nightmare’’ . ‘‘ You can’t go out in the marketplace and offer too many of these kind of deals to sign up new customers or you end up pissing off your existing customers.’’
For the past year, the company has been offering cut-down services on platforms like the Xbox, console owners can pay $64.50 a month for AFL broadcasts via the Footy Play channel. Or Telstra customers can buy ‘‘ Foxtel on T-Box’’ , starting from $19.50 per month for 11 channels up to 47 channels for $94.95.
It is offers like these that Foxtel chief Freudenstein is hoping will drive subscriptions to half of all Australian households, his stated penetration target.
However, the company’s decision to not make available figures for Xbox or T-Box services has only fuelled speculation that both have been disappointing.
‘‘ At the top end we have got it right. We are [now] going to be very focused on marketing at different price points . . . I think we can get to 50 per cent,’’ he told BusinessDay earlier this year.
‘‘ We continue to look at ways to grow Foxtel. Broadband is important and we are working on iQ3, which will bea true broadband home entertainment gateway with greatly enhanced functionality and performance. By our estimates, we are already the No.1 provider of internet protocol TV [IPTV] services,’’ a spokeswoman said yesterday.
Apart from being a Trojan Horse for new competitors, the new national broadband network offers Foxtel an opportunity which has been very successful for cable TV overseas— adding broadband and telephone services to its content packages. British pay TV provider BSkyB, which is 39 per cent owned by News Corporation, last month passed the barrier of 4 million customers of its broadband internet service.
‘‘ We’ve continued to add new households and existing customers are remaining loyal and taking more products from us,’’ its boss, Jeremy Darroch, told investors.
However, Foxtel can only do this with the agreement of its 50 per cent shareholder Telstra, which dominates the broadband market and offers its own triple play of broadband, pay TV and telephony. Other players such as FetchTV, which provides TV services for Optus and iiNet, believe that ‘‘ the telco that bundles wins’’ .
‘‘ The telco is king,’’ says Fetch TV boss Scott Lorson. ‘‘ They have the brands, the customer touchpoints, the operational capabilities and the benefits of a single bill.’’
While it remains a majority shareholder, Telstra can stop Foxtel from selling broadband altogether, or insist it buy broadband off Telstra at wholesale prices.
Telstra chief executive David Thodey recently said selling broadband was purely a financial decision for Foxtel, but added that ‘‘ we have always said that when you need to do it, you can do it’’ . He went on to say that if Foxtel decided to sell broadband, Telstra would be expected to put ina competitive tender for the contract alongside other wholesale broadband providers. The alternative would be for Foxtel to buy broadband directly off NBN Co at the same wholesale price as every other telco and in the process deny Telstra alarge wholesale customer while introducinga new competitor.
Whether or not Foxtel goes down this path depends on whether Telstra and its other shareholders, News and Consolidated Media, which between them own the other half, believe it is the ‘‘ right thing’ ’ for Foxtel to provide the best returns, Mr Thodey said.
Whether that tension will ease if, as seems likely, News Ltd succeeds in its $2 billion takeover bid for Consolidated’s stake in Foxtel remains to be seen. Clearly News believes Foxtel hasa bright future, especially if it can offer its editorial products, which are now sitting behind pay walls, to Foxtel customers or bundle up media deals for households.
As News Ltd chief and ex-Foxtel chief Kim Williams said in a video to staff at the announcement of the bid in June: ‘‘ Those are great assets. They naturally harmonise with our editorial and commercial operations and from which we can derive much better value — financially and operationally. It will extend our reach and enrich our content.’’
Not that everyone is as optimistic as Mr Williams. As more internet TV services come on stream, the fragmentation of audiences that has been bedevilling the TV industry is set to quicken. CLSA’s Mr Gilmour predicts that by 2021, companies offering internet TV will capture 40 per cent of the overall audience, compared to 31 per cent for the free-to-air TV and then traditional pay TV players with 29 per cent.
In the US, for the first time in history, cable TV audiences are in decline, by 1.9 per cent in the most recent quarter, with internet TV cited as one of the prevailing factors.
Pricewaterhouse Coopers analyst Megan Brownlow predicts in her annual media and entertainment outlook that over the next five years IPTV will reacha penetration level comparable with subscription TV’s position today. ‘‘ The big winners will be viewers . . . they will have an increased range of home entertainment options.’’
Despite the prevailing headwinds, Ms Brownlow is also bullish about Foxtel’s future. She cites Foxtel’s ability to get customers to purchase more products and services, like the HD iQ box or adding table applications, as examples of Foxtel’s superior user experience. Ms Brownlow says the newly merged Foxtel and Austar isa formidable force and will continue to dominate the pay TV sector. She forecasts that spending on subscription TV services will grow each year for the next five years at 6.9 per cent to be a $4.6 billion industry, ahead of the overall media and entertainment industry that PWC is forecasting will grow at 4.9 per cent a year.
In order to prevent viewers from cutting the cord, Foxtel needs content that the other players don’t have. And that is getting harder. The free-to-air digital multichannels have slowed the growth of pay TV audiences, offering as they do a wider variety of general entertainment; last year commercial free-to-air audiences grew by 2.5 per cent, while pay TV audiences declined by 0.9 per cent. Movies are no longer the attraction they were, with everyone from Apple through its iTunes, to Fetch and now Google able to offer the same movies fora comparable price.
The other ongoing threat to Foxtel and all content owners is online piracy, as highlighted by Mr Williams recently.
‘‘ On behalf of large media companies like mine, on behalf of musicians, actors, writers, photographers, and all the future entrepreneurs and creators in as yet unformed digital companies, I am asking for a new set of copyright laws that protect our work from theft. Theft: Robbery. Stealing. Pilfering. Larceny. Shoplifting. And plain pinching,’’ he wrote in an opinion piece.
Which leaves sport — rapidly becoming the most expensive media commodity.
One only has to look at the price tag the NRL was able to command for free-to-air and pay TV rights for the next five years to see just how important Foxtel and its provider of sports programming, Fox Sports, believes it is. Fox Sports will see its annual fee almost double to $100 million.
It is not called pay TV for nothing.
Source: September 1, 2012 | Julian Lee and Lucy Battersby | smh.com.au