BIG PICTURE: Why Netflix may not be a war machine

Paul McIntyre
By Paul McIntyre | 19 September 2014

We’re certainly all a bit obsessed by the carnage that US subscription video on demand [SVOD] dynamo Netflix might wreak on the Australian TV market, whenever it arrives. But an IPTV panel debate at the recent ASTRA Pay TV conference revealed a few sobering thoughts about the new barbarians at our gate.
For one, Netflix might just struggle massively getting Australian rights to many Hollywood studio movie and TV output because local players already have much of it stitched up. That’s potentially a real problem as the director of Foxtel’s Presto SVOD service, Shaun James, pointed out.
“When Netflix comes, which all indications are that they will, it has a phenomenal brand awareness already in this market,” he said. “I’m not trying to undersell the task we have got in terms of raising Presto’s brand awareness but [Netflix] will be an inferior local service because of the rights that currently sit with Seven, Nine, Ten, ABC and Foxtel. They have looked at this market and seen that. I think for the end of quarter two their filing was that they’d lost $50 million in Europe. They have grown the subscriber base but they are spending a lot of money on local content and on marketing in the UK and Ireland and it was still a US$50 million loss.”
Indeed, the “red ink” scenario was a key reason why Hoyts CEO Damian Keogh said he pulled the pin on its planned SVOD service.
Keogh thinks the market will be hard pressed to support two players, believing there will be one dominant player as it has been in pay TV for 20 years. “In terms of building an SVOD business, the content is expensive. We were looking at a price point less than Presto and the kind of money the studios wanted was significant. It was hard to get the business going and then your marketing cost to get subscribers was quite high. So really there was a lot of red ink involved with the whole process. At this stage we’re on hold but we are talking to a lot of other partners in the space.”
On the investment in marketing, Keogh did throw a barb at Shaun James: “I haven’t seen any Presto ads on Foxtel,” he quipped, inferring that it might be too effective in cannibalising Foxtel’s higher paying customers with a $9.95 monthly “all you can eat” Presto subscription.
“No, and you won’t for the foreseeable future,” James shot back. “And that’s a real advantage for Fairfax and Nine [joint venture partners in the coming StreamCo SVOD service]. I would concur there’s about 200,000 people using Netflix via VPNs out of this market already so there’s an appetite for [SVOD]. You look at the numbers in Canada. I think Netflix pulled 1 million subscribers out of a market with 30 million population in 30 months. I’m seeing US forecasts for 2017 that there will be 73 million SVOD subscribers in North America. To me that leads to rather rapid uptake in this market. You’d expect me to say this but I’m bullish.”
Let’s be clear though – James is bullish for SVOD but not necessarily Netflix.
Telstra’s boss for IPTV and Pay TV, Eric Kearley, threw a different take on the issue, however, predicting the cost of content would become less of an issue as players like Telstra, Foxtel and others bundled it up with other services such as telephony and broadband access. “The most famous example so far I guess is BT buying the [UK] Premiership League,” he said. “It went for close to £1 billion and everyone said it was completely idiotic. And it is if you look at it from a content perspective and from a media point of view. But from what they told us in terms of [customer] retention and acquisition that it resulted in, they made that billion back in a few months in terms of share of the broadband market.”
And that rather surprising disclosure about BT’s sports rights deal underpinned much of Kearley’s view on where media and content was headed. “The future isn’t entirely about paying for content in isolation,” he said. “Increasingly we will stop divvying up these parts and charging as we [Telstra] do a lot already in bundles. So it’s a bundle of connectivity and content. The future will be more about debating the cost of connectivity and content versus just content on its own.”

They said

“In a lot of respects what everyone is trying to do is keep it simple. In the case of triple play, that’s delivering what people now would call some of life’s basic necessities – cable TV, broadband and telephony, all from the one provider, all on one bill. We are moving into a reseller model with triple play but it is a new area of expertise and business that Telstra has been market leaders and experts in. So we have to gear up and understand that before we venture into it, exactly the same as Telstra has done as a reseller of Foxtel.”
Shaun James,
Director, Foxtel Presto

“If you go back to the history of pay TV in Australia, the first time Foxtel made a profit was 2006 and they launched in 1995. Shareholders, including Telstra, sunk $1 billion. There was a lot of red ink involved in this whole process. I’ve got no doubt SVOD [subscription video on demand] is coming but at this stage we’re on hold.”
Damian Keogh,
CEO, Hoyts

“Foxtel is at that tipping point where they could start to hover in that 40% penetration over time and that makes them a reshaper of the marketplace,”
Henry Tajer, Chairman, Mediabrands

“It’s an impressive response to get match fit for the arrival of IPTV. It’s a land grab to become the entertainment hub for Foxtel homes and scale the number of homes where that isn’t the case. Their strategy has flipped and the catalyst for that is impending competition. It doesn’t future proof them but it certainly protects the business model for more years than it would have otherwise”
Peter Horgan,

“We’ve sold a Foxtel package for a long time at $20 through the T-Box and that has driven, without getting into confidential statistics, substantial growth of the Pay-TV market in Australia. The future isn’t entirely about [people] paying for content in isolation. Increasingly we will stop divvying up these parts and charging as we [Telstra] does a lot already in bundles. So it’s a bundle of connectivity and content. The future will be more about debating the cost of connectivity and content versus just content on its own.”
Eric Kearley,
Director IPTV and Pay TV, Telstra


Millennials are “a problem” for Pay TV

Pay TV has a major challenge the world over in attracting millennials to the platform but those troublemakers aside, Turner International’s president, Gerhard Zeiler, says Foxtel in Australia will finally crack its stagnant home penetration rate, which has been touted as the lowest in any developed market.
But Zeiler quickly put that perception to the sword.
“We all know that Pay TV penetration went sideways for quite a long time,” Zeiler said in his keynote address to the ASTRA conference this month. “There has been a huge amount of debate about the reasons for it and many, many proposals on how to change that. I want to come from a different angle.
“The worst pay TV penetration in a mature market happens to be not in Australia. It happens to be Germany, a market I know very well. If you had asked me 10 years ago whether I see a chance that pay TV can be a success in Germany, and actually I remember James Murdoch asking me exactly that question when he took over the helm at BSkyB, I would have said no chance, don’t invest. Germany is a country where free-to-air [TV] is so strong, especially when it comes to sports rights, that pay TV doesn’t have a chance.
“I was completely wrong. Germany is the only market in Europe, Western Europe, where subscriber numbers have gone up by double digits for several years now in a row. And I don’t see any indication that this trend will stop in the near future.”
Zeiler put the turnaround in fortunes to four themes:
1. Penetration started to move upwards when “first class management” arrived.
2. There was a clear focus on innovation - from broadband to triple play offers and investment in HD and HD channels.
3. A new willingness for cooperation between the platforms and the content providers to encourage them to invest in higher quality content. He said Turner’s TNT channel in Germany produced its first local drama series exclusively for pay TV when penetration was still around 10%.
4. Platform operators were willing to risk, in the very early stages, their own fragmentation.
Indeed, Zeiler said “sometimes we have to fragment ourselves before others fragment us”, alluding to the announcement 30 minutes later from Foxtel’s CEO, Richard Freudenstein in which the Pay TV operator slashed its entry subscription prices to $25 and unveiled a host of new subscriber benefits.
“All of these ingredients you also have here in Australia, and that is the reason I am very, very optimistic, with all that the management of Foxtel is planning, will lead to a significant increase in subscribers,” he said.

This story first appeared in the AdNews print edition on the 19 September 2014.
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