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Fox in Box Wars

Absent any pending change to the media rules, Foxtel’s new low-priced strategy to entice more subscribers to its service is a step in the right direction.

In one sense, Foxtel has been a victim of its own success. After merging with Austar in 2012 to create a business with 2.6 million subscribers and over $900 million EBITDA (approximately 50% more than the three commercial TV operators combined) it has hit a wall with subscriber growth slowing to a crawl.

Part of its problem is the very high average revenue per user which at close to $100 per month is deemed unaffordable by many households.

Foxtel boss Richard Freudenstein has admitted as much and has launched a plan to offer a lower entry price point of $25 per month for a pretty good suite of general entertainment channels. The idea, of course, is to lure more price sensitive households into the fold and once there, to entice them to tack on a movie or sports package for an additional amount.

The potential short term loss of revenue for Foxtel as some subscribers churn down to the cheaper package could be offset by the longer term gain from attracting more subscribers overall.

Foxtel has also finally cracked a nut between its own shareholders (Telstra and News Corp) that has inexplicably prevented it from providing bundled pay TV, high-speed broadband and a home phone line. This weapon has remained sheathed keeping Foxtel from utilising its proven effectiveness as seen in other countries. Fortunately each party has finally seen the sense in offering a bundle as a means of attracting and keeping more subscribers.

The government has played possum over regulatory changes saying that unless there was a consensus then change was unlikely. So the outdated rules that keep regional TV broadcasters in business (the 75% audience reach rule) and pay TV businesses from bidding alongside commercial free-to-air networks for prime sports broadcasting contracts (the anti-siphoning rules) will continue to distort the market.

The launch of its subscription video-on-demand service Presto earlier this year has Foxtel in a better position than its local rivals. Nine Entertainment has parlayed a chunk of its ‘svod’ launch expense for StreamCo onto Fairfax Media but the service looks to be short of anything worthwhile subscribing to. Seven West Media seems prepared to sit on the sidelines and Ten Network is preoccupied with keeping its core business viable.

The big shadow around the corner is that of Netflix but the US company is busy launching across Europe and continuing its battle to grow at home. Netflix is also trying hard to produce more of its own content to avoid a total reliance on the TV networks and film studios that will inevitably look to charge higher prices in future.

It will take some time before Foxtel’s strategy is declared a success or not but it should provide the business with some forward momentum. Market penetration has remained constrained by a variety of factors and this initiative is a risky but necessary step to break through a long term barrier.

Foxtel is a highly cash-generative business already and its shareholders could be forgiven if it simply left it that way. But there is clearly growth available and these are sensible initiatives aimed at capturing that growth.

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