opinion/analysis by Renai LeMay
4 February 2014
Image: Game of Thrones promotional shot
The decline in power of Australia’s free to air television networks and the failure of IPTV players to enter or grow substantially in the local market have left pay TV giant Foxtel with an incredibly strong position in the nation’s content landscape. As some industry executives have feared for years, the company is now on the verge of becoming a content monopolist.
When then-Optus chief executive Paul O’Sullivan stood up on stage to give the keynote address at the 2011 CeBIT conference in Sydney, he had a stark message to pass on to Australia’s technology sector: Be worried about content. Be very, very worried.
At the time, O’Sullivan said he applauded the way that then-Communications Minister Stephen Conroy was reforming the telecommunications sector; especially the Labor Senator’s vision for the operational separation of Telstra and setting up the National Broadband Network Company as a wholesale-only concern.
However, O’Sullivan said, beyond telecommunications, it was time for “a far more rigorous debate in Australia about how we ensure there is a level playing field in competition for applications and content”. The Optus CEO said there was “a real threat” that Australia would allow “those with deep pockets” to tie up content and applications to create new walled gardens, fuelling new content monopolies which would restrict the flow of information and entertainment.
At the time, the allegation looked spurious. Despite the fact that the context was the looming, $1.9 billion merger of Foxtel and fellow pay TV operator Austar — which O’Sullivan wanted the Australian Competition and Consumer Commission to closely control — it seemed like content distribution in Australia had a bright future.
At that stage, competitive bidding for popular TV series imported from overseas still created a thriving local market for international shows to be made available locally. Then too, new pure-digital players such as FetchTV and Quickflix were just starting to achieve a degree of local traction with their IPTV streaming services, and it even looked as though global players like Netflix and Hulu would inevitably enter Australia.
Two and a half years later, O’Sullivan’s comments are looking astonishingly prescient.
Much hullabaloo has been made this week about Foxtel’s move to block the distribution of celebrated US television series Game of Thrones through any other Australian mechanism other than its own subscription TV service — and at a premium monthly price. However, the truth is that this example is just the tip of the iceberg.
The slow demise of Australia’s competitive marketplace for content imported from overseas can be traced back to several key factors.
The first of these is the decline of the traditional free to air television networks. In the past — a past which was only a handful of years ago — local TV giants Seven, Nine and Ten were always right alongside Foxtel, with plenty of cash in their pocket, at the appropriate point in the buying cycle where giant US and European production houses such as HBO, AMC and others discussed per-country distribution rights.
At that stage, Foxtel was mainly known by the content-addicted, first world, middle class Australian population as a home for exclusive sports rights, and as a place where a continuous stream of top-rated movies could be watched. Many of the big shows were available exclusively on Foxtel, it’s true; but the free to air TV networks had their own share.
But now things have changed. One need only spend five minutes browsing Foxtel’s upcoming show roster for 2014 (see here also) to become aware that the pay TV giant has snaffled virtually every new show of any note; and that Australia’s free to air TV networks have lost out almost completely.
Shows coming to Foxtel in 2014 include Game of Thrones, Mad Men, the Netflix production of House of Cards, Orange is the New Black, Boardwalk Empire, Sons of Anarchy, The Walking Dead, the Newsroom, True Detectives, the Crazy Ones, Pretty Little Liars, the Australian version of America’s Next Top Model and many more. And that’s just the new stuff and doesn’t include sport, movies or any of the dozens upon dozens of lower-profile shows and channels Foxtel offers.
In comparison, because they haven’t been able to pick up these mega-hits — or perhaps also because of the tie-in advertising opportunities — Australia’s free to air TV stations are tonight broadcasting reality TV shows such as My Kitchen Rules, the Block or (in the case of Ten), local cricket, backed up by perennial (and cheap) favourites such as Muriel’s Wedding, Home and Away, the Big Bang Theory, Everybody Loves Raymond, Neighbours and so on.
In terms of content, especially for the big-spending 20-40 year old category, it’s not even a competition. Everybody I know is watching Game of Thrones. Most people I know are watching Sons of Anarchy. Everyone loves Mad Men. I don’t know a lot of people who are dying for the next episode of Home and Away to come out, nor watching it in prime time. After all, why would you? Summer Bay’s been in operation continuously since 1987.
The reasons behind this stark dichotomy are pretty clear: It’s all about money.
According to its most recent set of financial results, Ten made a staggering loss of $274 million for the year ended 31 August 2013. In fact, its revenues only exceeded its television-related costs by about $55 million. The picture at Nine is complicated due to restructuring and its recent public listing, but if you look at the headline revenue and expense figures from FY2013, they’re little better, with the company’s expenses making up most of its revenue. Based on debt problems, Nine actually almost went bankrupt in late 2012, and was saved at the eleventh hour by a group of investment firms.
Perhaps the only one out of the lot which has appear to be making significant headway recently is Seven (part of Seven West Media), but even those results were not significantly helped by international content buys. The company’s programming was more based around sports such as the Australian Football League and the Australian Open tennis tournament, as well as the same reality tV shows — My Kitchen Rules and The X Factor.
If you look at the macro trends here, what is clear is that running a television station is no longer the guaranteed money spinner it was ten years ago. As time has gone on and advertising options have diversified (especially Internet advertising, which has grown exponentially over the past decade and is set to overtake television advertising this year), television stations have found it harder to find profits. In this context, they’ve turned to formulas which provide a much more attractive return than importing big budget US-style series. They’re pumping out reality TV shows by the dozen, which are cheap to make but tend to give very solid audience numbers, as well as featuring integrated advertising opportunities, as well as sticking with steadfast, reliable sports contracts, which keep viewers glued to the screen for hours.
In this context, a popular, high production value show like Game of Thrones, which would be very costly to licence but which only provides an hour of content a week (perhaps two or three with repeats), is just not going to be very attractive to Australia’s big TV stations.
I’m betting that while Seven, Nine and Ten are definitely always talking to networks like HBO about licensing shows like Game of Thrones in Australia. But I’m also betting that the financial model continually doesn’t make sense; and that they’re continually being outbid massively by Foxtel.
The pay TV giant, by the way, is raking money in left and right. For the year to mid-2013, the company made revenues of $3.1 billion — triple any of the other TV networks, with EBITDA of around $511 million. That’s plenty of pocket change to keep the major networks out of the game when it comes to the big US shows.
So that’s the TV networks. The other side of the picture is the supposedly burgeoning IPTV space.
In the US, online players such as Netflix and Hulu are currently becoming the platform de jour for those escaping the confines of the country’s ubiquitous cable TV networks. However, in Australia, such companies haven’t launched and the IPTV model has still failed to take off, despite passable attempts at platform-building by local players Quickflix and FetchTV. Unlike its US namesake, Quickflix is still almost entirely funded by its popular and well-established DVD rental business, which Netflix is progressively moving away from, and FetchTV has been unable to achieve significant scale, despite its strong partnerships with ISPs such as iiNet and Optus and its excellent re-launched hardware set-top box.
One other potentially significant IPTV player, Apple, has not yet truly emerged into the scene, due partially to its lack of a powerful set-top box that would integrate different forms of content. Most iTunes content is watched on laptops, with a small number on Apple’s micro-set-top box, the Apple TV. Apple does not yet have the scale in Australians’ loungerooms to have much of an impact on this issue.
Ironically, the only IPTV player which has actually succeeded so far in Australia is Telstra, which has sold hundreds of thousands of its flagship T-Box set-top box. The catch is that Telstra part-owns Foxtel. It’s not exactly an independent player.
Now, there is no doubt that players like Quickflix and FetchTV are involved in the same talks to licence hit US shows such as Game of Thrones. Quickflix announced in June last year that it would allow customers to buy such hit shows through its online platform. And FetchTV is also believed to be working on so-called “electronic sell-through” capability for its own set-top boxes.
However, there’s also no doubt that neither company has the financial backing to provide significant competition to Foxtel in purchasing such shows when they broadcast in the US. And, if this week’s announcement by Foxtel is any indication, they may increasingly be locked out of the bidding altogether, as Foxtel tightens its grip on such content and ensures it is exclusively available only through its platform.
The end result of both of these major trends is clear: Foxtel’s grip on television content importation into Australia is becoming increasingly strong. The company has vastly deeper financial pockets than its competitors; deep enough to start locking them out of deals altogether. Australia’s IPTV players cannot afford to compete with Foxtel when it comes to premium content, and the nation’s free to air broadcasters increasingly are focusing on more profitable areas such as reality TV.
This situation isn’t new; in fact, the Australian Competition and Consumer Commission has considered it before. During the Foxtel’s $1.9 billion merger with Austar, the regulator closely examined the potential for the deal to cause competition issues. It ended up placing a number of stipulations on the merger that lightly limited Foxtel’s ability to obtain exclusive rights to content, including TV content. The ACCC action ensured that IPTV players such as Quickflix and FetchTV were not totally shut out of the content market. As ACCC chairman Rod Sims said at the time:
“The proposed undertaking has been offered by FOXTEL to address the harm to competition which is likely to arise as a result of the proposed acquisition. However it is not intended to resolve competition or structural issues that may already exist in the relevant markets and are unrelated to the proposed acquisition.”
Sims added that the ACCC would remain conscious in regard to competition concerns and misuse of market power, and whether there is a need to advocate for regulatory intervention in existing and emerging media markets. However, not everybody believed the Foxtel/Austar merger was a good thing. Crikey’s Glenn Dyer and Bernard Keane wrote at the time:
“The merged company will again underline the reality of that financial cliché — the sum of the parts is larger than the whole. The merged company will be the largest broadcast media group in the country with more than 2.3 million subscribers, more than $1.8 billion in revenues and more than $800 million in earnings before interest, tax, depreciation and amortisation. It will dwarf the faltering profitability of the three FTA networks (Nine, Ten and Seven), plus Fairfax, APN and Southern Cross Austero. Its profit margin will be above 40%, and it will be all thanks to the ACCC …
Foxtel’s undertakings are weak. They last for eight years and are supposed to promote competition in newer areas of IPTV and mobile TV. But they only prevent exclusivity and cover a bunch of moderately popular to almost ignored pay TV channels in this country. A more significant change would be to force Foxtel to offer access to Fox Sports, Fox Footy or even Fox 8, which are the heart of News Ltd’s dominance over pay-TV content in this country.”
If you examine Foxtel’s current content roster — and the dramatic way that it is continually locking up premium content, as we saw this week with the Game of Thrones issue — it seems clear that it was Crikey’s view of the future of paid televisual content — and not the ACCC’s — which is coming to fruition.
And Paul O’Sullivan’s comments back in May 2011 appear to be right on the money.
“We are particularly concerned that the proposed merger of Foxtel and Austar will create a competitive barrier to block open access to content,” O’Sullivan said at the time, stating that the Australian Competition and Consumer Commission must mandate “content-sharing provisions” which would cover news and entertainment content, as well as other forms such as sport and applications. As it stands, the regulator did enact content-sharing provisions of the type that Optus wanted — but it doesn’t appear as though they went anywhere near far enough.
So where does this leave the Australian consumer, who wants timely access to the world’s best content? It leaves them forced to sign up for a pricey Foxtel subscription — via HFC cable, broadband or satellite, probably bundled with Telstra telecommunications services in an expensive total package including mobile and a compulsory fixed telephone line (even if you don’t use it), which will make the individual cost of each component just affordable. How does $200 to $300 per month sound, for all your TV and telecommunications needs? Yeap.
Or, they could do what they are increasingly doing, and what BitTorrent site EZTV this morning encouraged them to do, and abandon Foxtel altogether for the shady world of unauthorised downloads and alleged copyright infringement. It’s looking more and more like channel BitTorrent is going to be shaping the future of Australian content distribution. It’s a bit tragic: Because most Australians would rather pay for a better (and more legal) service. Just not as much as Foxtel wants us to. But then, monopolists typically get to charge whatever they want.
It’s hard to see what the long-term future of this situation will be. For a long time, Australians have been assuming that this style of content problem would eventually be fixed. But right now, all of the players appear to be getting further entrenched in their positions. Foxtel is gaining more power and achieving a monopoly over some forms of content. The IPTV entrants continue to be marginalised, and the free to air players are continually moving further into other forms of content. Piracy is growing. One suspects it will take the radical intervention of new players or technologies to break up this very fixed paradigm.