Asia Times: Foxtel and Optus cause pay TV stir


	March 7, 2002	atimes.com

Oceania

Foxtel and Optus cause pay TV stir

SYDNEY - Australia's biggest pay-TV operators Foxtel and Optus have agreed to resell content and share satellite space in a move aimed at helping earnings and cutting programming costs. The deal signals a shakeup in the pay TV sector, which has been under pressure given billions of dollars of investment but few signs of a return for participants.

From April 1, Foxtel will supply two quality sports programming channels to Optus, and from November 1 the rest of the Foxtel service will be delivered on Optus.

Foxtel, which is half-owned by Telstra Corp, with Rupert Murdoch's News Corp and Kerry Packer's Publishing and Broadcasting the other shareholders, will also supply some Optus content over the Foxtel platforms. In return, Optus will lease to Foxtel a substantial volume of capacity on the Optus C1 satellite, which is scheduled for launch in late 2002, a sign Foxtel is preparing for the launch of digital television.

As well, Foxtel will assume Optus's financial obligations under its movie and other content arrangements, thus negotiating for a wider Australian audience.

Optus, which has been in merger talks with pay-TV company Austar United, will purchase content on a wholesale basis. Optus chief executive Chris Anderson said that the agreement will help Optus' by adding about US$30 million (A$57.85 million) of earnings before interest, tax, depreciation and amortization to the company's pay TV operation bottom line.

Anderson said the satellite deal will add about US$40 million a year in revenue for Optus, fully owned by Singapore Telecommunications Ltd. Optus pay-TV margins will turn from negative to positive, and fixed costs will become variable. Minimum subscriber guarantees and costs will be absorbed by Foxtel, making Optus "a much stronger competitor in telephony", he added.

Optus reportedly pays US film studios for content for 500,000 subscribers but it only had about 270,000 pay-TV subscribers as of December 31. Anderson said talks with rival Austar will continue but the Foxtel deal is now the key. "We will continue to see if there's a way of going forward in the [Austar] area, but clearly this [Foxtel agreement] is our prime focus," he said.

Foxtel chief executive Kim Williams said he can't imagine that the Australian Competition and Consumer Commission (ACCC) will have a problem approving the merger. Williams said there will be no collusion to raise prices to consumers. He said it has to be recognized that pay TV is a business that has not yet managed to pay its way. "We are confident that our proposals stack up against all modern approaches in public policy to competition," he said. "I feel very confident in guaranteeing that the last outcome from this will be collusion between the two major competitive retailers."

Williams said he does not see why there should be any regulatory problems. "We have an environment that is not sustainable and at some stage people have to recognize that this is a business and it is a business that has not been sufficiently successful in attracting Australians to the services," he said. "Yet the services are of a very fine quality and as good as or better than comparable services elsewhere. Clearly something has to be done in order to bring competition at a retail level into focus, where all of the content is consolidated."

Williams said the government would probably take a different approach if it were to revisit the approval for pay TV made seven years ago. He said it is now widely acknowledged that the industry inherited an environment that needed repairs. "What we have done is to come together in a way that earnestly endeavors to increase competition at a retail level, to consolidate content and to get costs down in order that we can create a sustainable and profitable business," he said. "That is fundamental to pay television's future. It is fundamental that we increase the audience."

The Seven Network Ltd said it is committed to a significant presence in pay TV but is looking at the future of C7, its sports-based service, after the industry shakeup. Seven spokesman Simon Francis said deliberations on the future of C7 are continuing, as are discussions with Optus regarding the sports channel, with a decision to be made in the next month. C7 is currently carried on the Optus platform and by Austar as a tier or extra service paid for by subscribers. "We will only pursue an involvement for our sports channel on terms which make sound business sense," he said. "The decision on the future of C7 on the three subscription television platforms rests with us."

Last year, Federal Court rulings opened the way for Seven's pay-TV arm to be granted access to the Foxtel platform. Francis said Seven wants to move C7 and other potential Seven networks on to the Foxtel platform on terms that "are reflective of other commercial arrangements between Foxtel and its suppliers ... We've had access mandated and we're just in negotiation of the financial terms of the access," he said.

Foxtel's Williams said the operator had made an offer to carry C7 on the Foxtel service and offer it to Foxtel subscribers as a tier service. "C7 would be free to set the subscription price and would share the revenue from the channel with Foxtel," Williams said. "C7 would benefit from the full weight of the Foxtel brand and have access to all our subscribers - C7 has not yet indicated whether it will accept the offer."

Francis said that aside from C7, Seven has been looking at a portfolio of channels on formats outside sports. "We are in discussions with international program providers on a range of other channels that would be carried across all three [Australian pay TV] platforms," he said. Francis said that a review of C7 started in January 2001 when Seven Network decided not to match a A$500 million offer from Rupert Murdoch's News Ltd and consortium partners - Network Ten, Foxtel and Kerry Packer's Nine Network. It was also at the time National Rugby League subscription rights were awarded to Foxtel.

In a separate deal, Telstra Corp Ltd will be able to bundle Foxtel's pay TV with telephone and Internet services on a single Telstra bill. Telstra chief executive Ziggy Switkowski said that the agreement allows customers more choice, gives Telstra new competitive products to offer and Foxtel an opportunity to grow its subscribers. "The bundling of telephone, Internet and subscription TV services on a single customer-convenient bill will allow Telstra to discount prices and reward customer loyalty," Switkowski said.

Telstra media executive director Gerry Sutton said the deal for Foxtel to lease satellite capacity from Optus will set the group up for digital services, potentially from around the middle of 2003. "Foxtel will take from Optus a substantial amount of satellite capacity, being in the order of 14 transponders - enough for 120-150 channels," Sutton said. "That really does foreshadow a movement into digital."

It has been estimated that it could cost Foxtel up to US$500 million to upgrade its networks for digital television. Sutton said that the digital regime remains dependent on a suitable agreement with government to get a reasonable return on the investment.

These deals will be subject to the scrutiny of the Australian Competition and Consumer Commission. Chairman Allan Fels said the commission will closely investigate the implications of the proposed resale of Foxtel pay TV channels by Optus and Telstra Corp Ltd.

(Asia Pulse)