By Greg Hoffman and Rakesh Tummala
At first blush, Pay TV seems an appealing business. Subscriber numbers have been growing. The average amount subscribers spend is going up. Margins are very healthy. And in this country we have two operators, Austar and Foxtel, in a cosy duopoly (arguably, the competitive situation is even more attractive – two monopolies).
Number of Pay TV Subscribers
These facts enticed us to spend a good part of this week researching potential opportunities in the sector. And after spending several dozen man hours doing so, we’ve concluded that there are still too many pieces of the puzzle missing in our minds.
In this blog post, we want to bring you up to date with some of the background and share some of the questions we’re grappling with. We’re hoping the Doddsville tribe will ride to the rescue.
Complex structure
The ownership structure of assets in the industry is a bit tricky. Austar is listed in its own right. Simple enough. But Foxtel is 50% owned by Telstra and 50% owned by Premier Media Group (PMG), which in turn is 50% owned by the listed Consolidated Media Holdings (giving it an effective 25% stake in Foxtel).
This complex structure is the reason why financial information on Foxtel and PMG is difficult to come by. Several trips to ASIC to obtain Foxtel’s and PMG’s financial statements have made the puzzle a little clearer, but there are still a few pieces missing.
Content or platform?
At the heart of the puzzle is understanding where the value lies – ‘content’ or ‘platform’? ‘Content’ relates to the movies, shows and sporting matches that are produced and then on-sold. ‘Platform’, on the other hand, involves the various mediums and technology through which the content is shown. Examples include cable and satellite networks. It’s an arm wrestle and we’re interested in who’s stronger.
Carving up the country: Austar and Foxtel's respective patches
PMG owns the popular Fox Sports channels which Foxtel and Austar both distribute. In addition, Foxtel and Austar own and operate several channels in a joint venture, XYZnetworks (seriously).
This content is critical in attracting subscribers, but does that mean that content providers, such as PMG and XYZ, can extract the lion’s share of the economic benefit at the expense of platform owners?
New technology
On the other side of the equation, platform owners have had virtual monopolies that are now being threatened. Foxtel’s cable and Austar’s satellites have previously provided the only means of distributing Pay TV content, but new technologies such as IPTV are gaining favour. Will the Foxtel and Austar platforms become redundant over the next 10 years? If so, is there any way they could counteract the threat?
Our next query relates to contracts. How often do these get renewed? Do platform owners have to buy content and then bundle it into channels, or do they negotiate for channels that have all the content? Also, are the costs involved fixed or variable in relation to number of subscribers?
These are questions we’re currently grappling with. So if you’re in the Pay TV industry, or have an understanding of any of the issues involved, we’d love to hear from you. Either comment below or, if you’d prefer anonymity, contact us via phone (1800 620 414) or email (info@intelligentinvestor.com.au).
And one final tip – if your’re ever venturing to ASIC to obtain financial statements of an unlisted business (like Foxtel or PMG), take cash. Australia’s most powerful regulator won’t accept anything else.