Foxtel adapted its business strategy to the changing media landscape. Photo / Getty Images
Foxtel adapted its business strategy to the changing media landscape. Photo / Getty Images
OPINION:
Two or three years ago, Australia's legacy pay TV network Foxtel looked as if it was on the path to obsolescence.
The traditional pay TV subscription model – locking subscribers into long-term contracts and delivering content via satellite or set top boxes – was becoming hopelessly out of dateas low cost, pay as you go internet steaming services like Netflix launched in Australia.
The subscription model still looks like a dinosaur, but Foxtel is in the midst of a remarkable turnaround as it prepares for a sharemarket listing next year.
The company has transformed itself from the one product – Foxtel pay TV – of three or four years ago to a streaming company with several different offerings for viewers: Binge for TV shows and movies; Foxtel Now for premium TV and movies; Kayo for sports; and Flash for live news.
Foxtel has also set itself ambitious targets for the next three years, including creating a subscriber base of five million and A$3 billion in annual revenue.
When we look at the current numbers, it becomes apparent that Foxtel has set itself a high bar. It currently has fewer than four million subscribers and earns A$2 billion in revenue.
An extra A$1 billion in revenue equates to a rise of 50 per cent; achieving this would be quite remarkable.
Importantly for Foxtel's owners, Rupert Murdoch's News Corp and Australian telco Telstra, growth of that magnitude would have investors rethinking their attitude to the company, perceiving it as a growth business rather than a legacy enterprise.
This is important because investors will pay more for a company – a higher multiple of its earnings – that they believe is growing than for one they believe is static.
Foxtel is busy talking up its prospects. At a strategy day for analysts and potential investors last week, the company tried to position itself as a "disruptor".
Foxtel owns sports streaming service Kayo. Photo / Getty Images
"Our strategy briefing highlights today's Foxtel Group is a very different company to the one-product Foxtel of three or four years ago," chief executive Patrick Delany said.
"The business has been repositioned as a technology-led streaming company with multiple sources of revenue growth from streaming, a strengthened Foxtel Retail offering and growth in digital advertising."
Delaney might like to position Foxtel as a technology-led streaming company, but the reality is it still has a sizeable rump of traditional Foxtel subscribers, connecting via set top boxes or satellites.
Nearly half – 1.9 million – of its subscribers are still on the traditional service, with streaming making up the rest.
The big question facing Foxtel – and potential buyers in any share market float – is the extent to which it can manage the decline of the older service model and the extent to which it can make up for this decline with new subscriptions to lower-priced streaming services.
Now that it is streaming sport, including the major drawcards of rugby league and Australian rules football, the attractiveness of Foxtel's traditional service has declined.
Certainly it's hard to see why consumers will remain locked into an expensive service when they can pick and choose from cheaper streaming services they can quit at any time. That's why New Corp and Telstra are holding off on the float, most likely until some time next year.
They know investors will want to see sufficient subscriber growth in its new services to demonstrate the growth is sustainable. That will likely take at least two quarters. Even with the risks, there is considerable upside potential.
Foxtel has been stuck on a market share of about 30 per cent of the population for the past two decades. This is partly due to cost and partly because of its technology. But delivery of content via the internet has hugely expanded its potential market, and it has a lot of catching up to do.
According to a recent study, Netflix has more than six million subscribers, Amazon Prime 2.9 million and Disney 2.6 million. Foxtel's products, by contrast, have far fewer: Kayo Sports, with 1.1 million subscribers, and Binge with 827,000 are its top performers.
A big advantage to the streaming services is that people don't limit themselves to just one. Starting at just A$6 per month for Amazon Prime, they cost a lot less than the A$59 per month Foxtel charges, even if consumers up take two or three.
And while viewers can cancel at any time, the reality is that most don't.
The other big advantage for Foxtel in streaming is there are no hardware costs. Its traditional pay TV offerings came with a heavy capital expense associated with satellite installations and set top boxes. Content streaming requires nothing more than an app or a website from the streamer and an internet connection for the viewer.
If it does hit its revenue targets, there is potential for much more of it to flow through to profit.
