Is Foxtel ready to ditch the dish?
Foxtel is looking to a future where profits come from streaming, not broadcast. It still has a long way to go and a big pile of debt to tackle
Welcome to Unmade, written on Thursday afternoon at windy Sisters Beach, Tasmania.
Happy International Racoon Appreciation Day.
Today’s writing soundtrack: The seduction of Claude Debussy, from Art of Noise. That’s two outstanding soundtrack tips (both of them Trevor Horn related), I’ve had from Mark now - thank you. Soundtrack suggestions are always welcome to firstname.lastname@example.org.
It was a big day yesterday. As you hopefully saw in yesterday’s email, I switched on a paid subscription tier for Unmade. If you missed it, you can read what I had to say here:
It was an exciting response. It seemed that each time I opened my email, somebody else had signed up. As for numbers, I’ll be sharing that in my first paid post. You’ll need to sign up to read that part of the story. Until November 1, there’s a big discount for those who sign on for the annual subscription. You can find it via this button:
One piece of early feedback I’e received. A number of people in agencies and media companies are interested in a competitive group rate for their organisation. I’ll look into that over the weekend. I think I’ve got an idea how to make that work.
Time to get back to get on with it though. After all, that’s what (some of) you are paying me for.
Yesterday saw Foxtel Group run its first investor day.
With an investor, rather than advertiser, audience in mind, it wasn’t quite an upfront presentation. But it wasn’t unlike one either. As seems to have become the norm for such streamed events, most of it was a prerecorded package, followed by a live Q&A at the end.
As it happens, straight after the presentation, I spend a couple of hours recording a chapter of the audio version of my book Media Unmade. By coincidence, it was the chapter World Is Fukt, which tells the story of how Greg Hywood and Chris Janz saved Fairfax Media’s metro newspapers by reinventing their business model in the nick of time. The chapter ran as an extract on Mumbrella back in July.
Re-reading quotes from both Hywood and Janz about how they needed to rebuild an aircraft while it was still flying, made me think of what Foxtel is going through.
Foxtel CEO Patrick Delany and his team are trying to transform Foxtel from a satellite and cable broadcaster with high fixed costs into a nimble streaming player.
To the casual viewer, you’d have come away with the impression that they’re already most of the way there. In truth, although the organisation has made impressive progress over the last couple of years, it still has a long way to go.
The main motivation for the decision to hold an investor day is to start selling the message that Foxtel is worth floating on the ASX.
An IPO may be the last remaining route for its majority owner News Corp (65 per cent) and minority owner Telstra (35 per cent) to see one more payday from Foxtel.
Not that they talked about it yesterday but, just like the Fairfax situation, the banks are hovering. Foxtel has $854m of external debt, plus loans from its two shareholders.
And during the 2020 financial year News Corp wrote down valuation of goodwill in Foxtel by $1.106bn to $786m.
If Foxtel was already listed, and in that financial situation, we’d be talking abut how long it was until the administrators were called in.
The signal yesterday was very much that the company has finally embraced its streaming future.
Foxtel has been through a number of life phases. After it launched in 1995, it was loss making for a number of years. In the early days it was just a cable company, distributed on Telstra’s coaxial network. Reach grew after the Galaxy satellite TV service went bust and Foxtel went to satellite too.
But Foxtel only became profitable after Kim Williams suddenly replaced Jim Bloomfield as CEO in 2001. When Williams arrived, the company was losing $3m per week. He negotiated supply agreements to Optus cable customers, took the company from analogue to digital in 2004 and reworked its sport deals. After a decade of losses, the company finally became profitable in 2006.
For a golden decade, Foxtel was a huge profit centre, particular after taking over Austar and adding regional customers too.
But, as is so often the case with incumbents, Foxtel struggled to react to the coming disruption of streaming. It didn’t help that it went through a period of leadership churn, with each CEO staying for less time than their predecessor.
After Williams’ decade in charge, Richard Freudenstein did five years and Peter Tonagh just two. Fox Sports CEO Patrick Delany stepped into the role in 2018, and has already lasted longer that PT
Yesterday’s presentation was a subtle signal that the current leadership team has learned from the fumbles that came before them. The question is whether they still have time to turn things around.
In an alternative universe, Foxtel could have been a local market leader in streaming too. Under Freudenstein, it launched Foxtel Play as a way of subscribing without needing the (expensive to manufacture) IQ box. But the marketing was confusing, and one got the sense this was half-hearted, as the company understandably wanted to hang on to its lucrative broadcast customers.
Foxtel had a second chance to be first to market in 2014, with the launch of film streaming service Presto. Again, fear of cannibalising the existing subscribers mean that Presto could only be viewed on computers. There was no tablet app at launch and Presto couldn’t be streamed to TVs.
The third streaming blunder came when the company rebooted Presto to add TV shows, in a joint venture with Seven West Media. Again, fear of cannibalising Foxtel meant that the offering did not include the best of the company’s HBO deal, with the likes of Game of Thrones reserved for broadcast subscribers. And subscribers would still be unable to stream Presto to their televisions.
To compound matters, the marketing of Presto was poor and the technology base was a disaster.
Meanwhile, in 2015, Nine and Fairfax Media’s joint venture Stan took off like a rocket and Netflix launched smoothly into the market
By the end of 2016, Foxtel needed to buy Seven out of the Presto venture and close the service.
The company finally learned the lessons under Delany. Sports service Kayo launched smoothly (with the exception of the months when Covid killed live sport). Entertainment offering Binge likewise. Now it plans to offer news aggregator Flash. They talked about it yesterday, although I still can’t quite picture what the product is yet
Instead, the emphasis was on now having the right tech stack and the marketing.
Front and centre was chief technology and operations officer Les Wigan and chief customer, marketing and revenue officer Hilary Perchard. Wigan came over from Fox Sports for the Kayo launch. Perchard joined less than a year ago.
Also a big part of the preso was Julian Ogrin, CEO of Kayo, Binge and Flash, who joined just over three years ago.
It felt more like a presentation of a streaming startup than it did a legacy subscription broadcaster.
But of course, they tried to emphasise the positives of having the heft of Foxtel. As content and commercial chief Amanda Laing, who joined in 2018, argued, the ability to offer content to premium subscribers on Foxtel, and also to streaming subscribers across Binge and Kayo, was the equivalent of “one kitchen serving many restaurants”.
Incidentally, I got the sense that original programming will not be a key driver of Foxtel’s plans. “We made Wentworth” has become somewhat tired as a drama credential. It was notable that Foxtel Originals boss Brian Walsh who was once - for better or worse - one of the dominant personalities within the Foxtel culture, was not even a part of the presentation.
If this was a preso about a streaming company, it would have been hard for any investor to resist. They’re nailing the technology. They’re nailing the marketing. They have more genres they can launch into.
If this presentation had been from a streaming-only company, and taking place five years ago, it would have been market leading.
But, just like the Fairfax blue team of the future and white team of the past, the question is whether Foxtel’s white team can keep the plane flying long enough for the blue team to take over.
The signal yesterday is that the day the satellite signal is switched off is coming. Within a few years, everything from Foxtel will be based on Internet delivery. After years of News Corp’s editorial hostility to the NBN, the company’s TV fortunes now, ironically, depend on it.
I would not be surprised if Foxtel stops making satellite dish installations within a few months. The IQ5 box is primarily about internet delivery of content.
The main thing the old Foxtel side of the business hase going for it is legacy subscribers who are used to paying more each month, and an aggregation play via the IQ box.
The challenge there for Foxtel is that it has not made that much progress on the aggregation. Most streaming services are unavailable. Netflix and ABC iView is useful, and Amazon Prime is coming.
But if you wanted all your streaming subscriptions in one place, you’d have the excellent Fetch box, or the Apple TV box. And you’d be keeping an eye on whether Optus pushes into offering an interface for its SubHub.
You had to wait a long way into the presentation before discovering where most of the Foxtel Group’s revenue is coming from. It’s declining fast, but 86 per cent of it is still from the broadcast subscribers.
Streaming delivered $343m; broadcast $2.11bn. In reality, the company is still a broadcaster, not a streamer.
One slide revealed that earlier this year, the churn rate for subscribers who spend $50 to $99 per month approached 20 per cent. And those paying less than $50 approached a surprisingly large 50 per cent churn rate.
At least it made the lower churn rate of the top tier subscribers look better, at less than 10 per cent.
And that’s part of the challenge. How to go on milking those high value broadcast subscribers while remaking the business around streaming.
Again, much like the way that newspapers’ lifespan has been extended, the strategy has been about pushing up the prices for rusted-on customers.
And that was the main story for investors. Profit growth will come through discipline - managing costs and old fashioned marketing, which includes pushing up price to subscribers where possible.
In terms of that cost discipline, one of the thing the company revealed yesterday was that it cut a third of its workforce in the 2019 financial year. I don’t think anybody realised at the time just how drastic that had been.
The company is still a large one. If Foxtel was listed locally, it would be bigger than Nine in turnover terms.
Nine’s revenue in FY21 was $1.2bn. Foxtel’s was $2.8bn.
And Foxtel claims an EBITDA profit of $460m, compared to Nine’s $333m.
But, as I say, Foxtel still has a lot of debt. And it’s hard to think of any other way of clearing that, except via selling the company onto the ASX.
If we use the market capitalisation of Nine as a proxy, that currently sits at $4.5bn. So there is definitely potential for Foxtel to float, clear its debts and give its shareholders one last payday. The questions seems more one of at what valuation?
Whether either Telstra or News Corp retains significant stakes in the listed Foxtel afterwards would be interesting. Could, for instance, News Corp persuade Telstra to sell its entire 35 per cent stake, while News Corp stays above 50% ownership and retains control of the company?
But first, the market needs to be persuaded that Foxtel has a streaming future that is brighter than its broadcast legacy.
The media behemoths have a habit of working these things out just in the nick of time. With a new team who seem to have figured out their strategy, and getting on with executing it, unless there’s a market crash, I suspect we’ll see Foxtel make it onto the ASX.
As ever, I welcome your thoughts, to email@example.com or via the comment button. I’d love to know what you make of Foxtel’s prospects.
And, I do hope that you’ll choose to subscribe to the paid tier of Unmade if you haven’t already. The first post just for paying subscribers is coming soon. And when I begin the Unmade podcast, the audio chapters of my book Media Unmade will also be subscriber only.
If you jump in now, there’s twenty per cent off the annual price. I doubt you’ll ever get a better price.
Meanwhile, my plan is to spend the weekend reading the ACCC’s report into the digital advertising ecosystem. It what (some of) you are paying me for.
Have a great Friday and a great weekend.
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