Pay TV triple play pits Foxtel in three-legged race with Telstra

Foxtel will compete directly with half owner Telstra when it begins offering telephone and broadband internet services in the next twelve months. Flickr/Bell

Monday’s announcement by Foxtel that it will launch broadband internet and fixed line telephony services bundled with its pay tv services comes as no surprise.

The deal, known as a Triple Play, will see Foxtel selling fixed line broadband and telephony services in competition with its 50% owner Telstra.

But while telephone services have been under discussion for more than a year now, the new offering will not see the light of day for another 12 months and the all important prices and conditions have not yet been announced.

The deal brings Foxtel into line with Optus and the iiNet offering called Fetch which have been offering all of the elements of the triple play plus mobile telephony services.

In announcing the new service, Richard Freudenstein, Foxtel CEO noted that an important motivation was to reduce the currently high rate of subscribers to drop out of the service.

For years, Foxtel has been pushing to break through the barrier of 30% penetration in Australian households. While the number of subscribers was up by 100,000 over the last year, customer churn numbers remains high. One industry source noted Foxtel lost 380,000 customers in the year from its total 2.5 million subscribers.

Bundling broadband and fixed line services to the subscription is intended to lock customers in and reduce the growing number of Australians who are signing up with the US subscription video on demand service Netflix.

Although not officially operating in Australia, Netflix has a rapidly growing local viewer list attracting up to 150,000 subscribers paying less than one third of Foxtel’s monthly charges for its subscription video on demand service called Presto.

The outstanding question posed by the triple play concept is the potential impact on competition within the merging broadband and entertainment markets and uncertainties caused by the new government’s redefinition of the National Broadband Network.

An owner and a rival

Foxtel is jointly owned by News Ltd and Telstra and according to the management agreement, Foxtel is required to obtain all of its internet services from Telstra. In a curious commercial arrangement, Telstra is currently an active marketer of Foxtel as well as being a retail competitor.

To date it has been in Telstra’s commercial interest to ensure Foxtel was not in a position to draw away Telstra’s own broadband and telephony customers. Industry consensus is the long delay in implementation of the triple play has been a sign of Telstra’s reluctance to support more direct competition.

The prospect of a more open-access NBN in which Foxtel or other new broadband and telephony providers can bring services to market has been a threat hanging over the heads of all current operators.

In the stand-alone broadband and telephony service markets, like with energy suppliers, the absence of long-term contracts and complex bundled arrangements have led to very high rates of consumer churn which savages the bottom lines of operators.

Typically new customer acquisition costs all but wipe out the very extensive investment in advertising and customer acquisition. Even a small increase in retention rates can quickly inflate the profit performance.

Overall impacts on competition are difficult to project in the absence of any indication of pricing strategies and details of the likely product bundles offered. However, with the near stranglehold on content, Foxtel and Sky Sports are likely to retain the ability to charge premium prices for customers and to improve retention rates as well.

Foxtel in the time of Netflix

Perhaps the greatest threat to Foxtel and a significant driver in its new triple play bundling strategy is the continued roll-out of high-speed broadband throughout Australia.

The threat comes in the form of streaming content providers such as the US giant Netflix which has come to rival the power of the US pay TV operators and even the Hollywood studios through aggressive marketing of almost unlimited content at rock bottom monthly subscription prices.

While there has been talk, there is no confirmation that Netflix will come to Australia. However it is clear from the company’s most recent annual report that international expansion is very much on the agenda.

In a recent US regulatory statement, Netflix noted that “domestically, cable and satellite pay TV subscribers numbers have stagnated, while DVR penetration has continued to climb”. Rapid growth in mobile platforms and heavy investment in technology has given Netflix a clear competitive head start.

As with the rationalisation of pay TV operators in Australia during the 1990s, the ability of governments to preserve vigorous market competition is severely limited. There are currently two decisions within the remit of governments which will influence the pay TV landscape.

The first is the relaxation of the anti-siphoning rules which prevent free-to-air programs transferring to pay only channels. Already the pressure is on the government to relax these rules.

The second government-related decision is the access price determined by the ACCC for the wholesale supply of NBN carriage services. If the access pricing is reduced from current Telstra wholesale levels, there is the real prospect of a short-term price war among content providers.