When CEO Richard Freudenstein finally unveiled Foxtel’s brave new world at the Astra conference last week – an attempt to rejuvenate subscriber growth with lower entry prices and more defined channel packs – he also sounded the starter pistol for a more entrenched battle for the Australian pay-TV group with free-to-air broadcasters, telcos and over-the-top media. 

Longer-term, the stage is now set for new turf wars across Australia’s emerging national broadband network (NBN). 

Through its 50% parent Telstra, Foxtel (also 50% owned by News Corp) will be at the forefront, delivering triple-play bundles of high-speed internet, pay-TV and telephony. It’s reminiscent of the strategy Freudenstein was instrumental in developing eight years ago in the UK, while at BSkyB.

Consumers should benefit with more favorable pricing and choice for premium content, including sports and movies, as well as better packaging and a wide array of options across traditional and non-linear platforms. 

For Foxtel however, locking in new subscribers before NBN launches in Q1 next year is vital. The company is aggressively looking to reignite growth across its sluggish cable and satellite business, often viewed as too expensive by new and untapped customer segments. 

At the end of June, the company had ~2.6 million customers, still less than 30% of Australian TV homes, with monthly Arpu standing at a sizable A$96 (US$88). 

MARGIN PRESSURE

Foxtel did deliver 5.6% annualized subscriber growth for its FYE June 2014, but that was almost entirely derived from lower-Arpu, IPTV-based platforms carrying Foxtel content and channels (eg Foxtel’s existing OTT service Foxtel Play, and Telstra’s own IPTV offering, T-Box). 

With new plans taking effect November 3, Freudenstein says the “vast majority of [Foxtel’s] existing customers will see prices drop, while new customers will have improved choice and flexibility.”

This could mean that monthly Arpu slides down towards A$80/month or lower over the next few years, while Foxtel’s profitability, measured at the Ebitda level (running at ~A$975 million in FY 2014), comes under pressure over the medium term.

Margins, currently at the 31% mark, are likely to contract. 

It’s a long-term plan that Freudenstein’s team will have prepared the company’s strategic shareholders for, as Foxtel invests significant sums in subscriber acquisition, marketing, content and infrastructure, including capital expenditure for a new, next-generation set-top box. 

The aim is to emerge as a future-proof media and telecoms business, serving the majority of Australian homes.

A More Flexible Foxtel (slideshow)

Freudenstein has broadly spoken about boosting Foxtel’s penetration to 50% of Australia’s TV homes within five years. This would imply about 4.5 million customers (versus 2.6 million today) and assumes a major reacceleration of growth on cable and satellite, in addition to more momentum on IPTV. 

Perhaps, 50% is an aspiration. Securing 3.6 million customers by 2018, with Arpu around A$80-85/month, could still help margins slowly return to the 30% mark, all things being equal. 

Within this plan, a broadband bundle and a sales team that delivers behind the triple-play are vital.

To succeed, Foxtel will have to upsell new customers to premium services, while limiting exposure to price escalation on third-party channel renewals. Partners such as Discovery, Disney, Fox, Turner, Universal and Viacom may need to absorb some short-term pain in return for long-term gain.  

The new plan sees the price of Foxtel’s entry-level pack (more than 40 channels, plus a DVR) falling from A$49 to A$25 a month. At the same time, subscribers will get more upgrade options, via new packs dedicated to genres such as drama, documentary and kids (see slideshow).

The move also brings the price of Foxtel’s popular sports tier (i.e. basic tier plus sports) down from A$74 to A$50 a month. 80% of Foxtel subs opt for sports. 

The new drama pack, which includes dedicated offerings from HBO (Showcase) and the BBC (BBC First) also contains BoxSets, a new channel and on-demand service anchored to Foxtel’s conscious move to attract binge-like viewing. 

BoxSets, geared around major seasons of popular dramas such as Game of Thrones and The Sopranos, is available to non-drama pack customers for A$10/month.

Foxtel is also adding nine new HD channels (sports, movies), taking its total HD count to 36. A new set-top box meanwhile, called iQ3, will give customers more DVR processing power as well as better search and recommendation functionality. 

SVOD RIVALRY

While Foxtel’s new calibration should ensure a competitive edge over existing digital free-to-air services, the company is also keen to co-opt Australia’s fast-growing subscription video-on-demand (SVOD) market. 

Foxtel launched its own SVOD offering, Presto, in Q1 2014, joining an increasingly crowded market that also includes Quickflix, Fetch and Hoyts Stream. 

US-based SVOD major Netflix also has an estimated ~200,000 SVOD customers in Australia, using virtual private networks (VPNs) to bypass territorial blocks on the service. The company has been in off-and-on discussions to conclude studio deals to legitimately launch in Australia sometime in the first half of next year. 

Meanwhile, Australian free-to-air majors Nine and Seven are also looking to roll out their own SVOD offerings in the future. Nine recently announced a A$100 million JV with Fairfax, and Seven may look to work with Foxtel in the future.

The market remains wide open.

Most SVOD content has not been tied up exclusively, although some studio content will be unavailable within specific windows such as pay-TV or transaction-based VOD, where Foxtel prevails.

At the same time, SVOD rights tend to fall outside existing output deals between studios and free-to-air networks.

It’s all there to play for.