Subscription television in Australia

Analysis by Bob Peters

Services, operators and markets | Local channels | The main players
Channel packages and pricing | Usage and ratings
The business model | History and background

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Services, operators and markets

There are more than 90 English-language television services or channels currently available to subscribers of the three major local subscription television groups. That total channel count is made up of about 75 unique subscription-only services; eight time-shifted subscription-only services; up to seven retransmitted free-to-air television services; and up to five menu, channel guide and help services.

In addition, subscribers may also be offered some, or all, of the following: up to 26 channels screening recent movies on a pay-per-view basis; 30 audio-only services; and up to 13 retransmitted radio services, including two foreign-language radio services, as well as two foreign-language television services.

The three major local operators of subscription TV services, which are also referred to as pay TV or multi-channel services, are Foxtel and Optus TV (each of which operate in the metropolitan markets) and Austar (which operates in regional markets). Between them, these three operators had a total of more than 2.16 million subscribers at the end of 2007, which represented a national household penetration rate of more than 27 per cent, and generated more than $2 billion in revenues during 2007.

A lesser number of subscription TV services are also provided by a handful of smaller local operators, the most notable of which are SelecTV (which provides satellite-delivered services throughout Australia) and TransACT Communications, including Neighbourhood Cable (which uses cable to deliver services to the regional cities of Canberra, Queanbeyan, Geelong, Ballarat and Mildura).

The main players

Foxtel is the largest local subscription TV operator in terms of subscriber numbers with 1.335 million direct subscribers at the end of 2007. In 2006/07, it reported earnings* of $237 million from total revenues of $1.42 billion. It wholly owns seven and partially owns 13 of the 70-plus subscription TV channels that it distributes. Its services are delivered in the five metropolitan markets and on the Gold Coast via cable and satellite. Foxtel is a private company owned by Telstra (50 per cent), News Corporation (25 per cent) and Consolidated Media Holdings (25 per cent).

Austar is the second largest local subscription TV operator with 668,786 subscribers at the end of 2007, all located in regional markets. In 2006/07, it reported earnings* of $174 million from total revenues of $568 million. It partially owns 12 of the 70-plus subscription TV channels that it distributes via satellite (except in Darwin where cable is used). Austar is a public company in which Liberty Global Inc of the USA has a 54.4 per cent equity interest.

Optus TV is the third largest local subscription TV operator. It operates in Sydney, Melbourne and Brisbane as a reseller of the Foxtel cable service and accounts for all or most of Foxtel’s wholesale subscribers, which at the end of 2007 totalled 157,000. In its fiscal year ending 31 March 2008, it reported revenues of $140 million from its subscription TV operation. Optus TV is owned by Singtel Optus, which in turn is a wholly owned subsidiary of Singapore Telecommunications Limited of Singapore.

* Earnings before interest, taxes, depreciation and amortistion.

Local channels

The majority of subscription TV channels in Australia are owned not by the service operators such as Foxtel and Austar but by other entities (many of them foreign) who are usually the originators of the channels’ content, such as BBC Worldwide, Discovery Networks, ESPN, Turner Broadcasting, National Geographic Channel or Hallmark Channel. Typically, the channels either produce content themselves or license it from external sources. Apart from sport, news, weather and some entertainment and drama, most of the other content originates from overseas.

The ownership of local subscription TV channels can be a profitable activity, especially for the more popular channels. Although financial results are generally not available for individual channels, recent figures are available for two larger local channel-owning companies: XYZnetworks (XYZ) and Premier Media Group (PMG).

XYZ owns and operates eight local channels: Arena, Country Music Channel, The Lifestyle Channel, Lifestyle FOOD, MAX, Channel [V], Channel [V]2 and The Weather Channel. It also distributes two other channels (Discovery Channel and Nickelodeon), and holds a 50 per cent interest in Nick Jr. The company is equally owned by Austar and Foxtel. In 2006/07, it reported earnings* of $22.3 million and profits before tax of $19.2 million on total revenues of $142 million, of which $92.1 million were subscription revenues and $48.6 million were advertising revenues.

The producer of virtually all local sports content on subscription TV, PMG owns six local channels: Fox Sports 1, Fox Sports 2 , and Fox Sports 3 and Fox Sports News, as well as the How To Channel and Fuel TV. The company is equally owned by News Corporation and Consolidated Media Holdings, each of which have a 25 per cent shareholding in Foxtel. In 2006/07, PMG generated earnings* of $111.0 million on revenues of $329.2 million.

* Earnings before interest, taxes, depreciation and amortistion.

Channel packages and pricing

Subscription TV operators generally combine their television and other service offerings into packages. Typically, each operator has an entry-level package of between 14 and 30 unique subscription-only television channels which are usually combined with some or all of the retransmitted free-to-air services and also, in the case of the three major operators, 30 unique audio services.

Packages of additional channels are also offered as add-ons to the entry-level package, and these are usually arranged thematically around areas of interest, including sport, movies, documentaries, general entertainment, lifestyle, children’s entertainment and music videos.

In May 2008, entry-level packages included a 14-channel Neighbourhood Cable package for $19.95 (an average $1.42 per channel) per month and a 31-channel offering from Austar for $39.95 (an average $1.29 per channel) per month.

At the other end of the price range, the top-tier channel packages from Foxtel and Austar offered access to all their English-language television services, which were $105.95 and $107.25 per month respectively.

Some operators also offer per channel add-ons. TransACT, for example, was offering about a dozen separate English-language channels for either $1.95 or $2.95 each per month.

Other services are also available from the three major operators. These include a World Movies channel (priced at between $6.95 and $9.95 per month); foreign-language channels (between $13.95 and $19.95 per channel per month); adults-only channels ($12.95 per channel per month); multi-room options ($19.95 per additional outlet per month); and Austar MyStar and Foxtel iQ branded digital video recorder set-top boxes ($14.95 per month).

Austar’s average residential subscriber spent a total $69.93 per month in 2007 (excluding installation costs), while Foxtel ‘s average revenue per user was $84 per month during the six months to December 2007.

Usage and ratings

The time spent viewing television tends to be higher in households that have access to subscription TV services, and a sizeable proportion of viewing in such households is devoted to subscription-only channels rather than free-to-air ones.

It is not surprising that the overall time spent watching television is higher in households with subscription TV given both the greater range of television services available in such homes and the fact that they value these services to such a degree they are willing to pay for them.

Generally speaking, the share of total viewing devoted to subscription-only channels in subscription TV homes has been rising steadily over the years in line with increases in the number of channels on offer by the major operators.

Comparisons between viewing patterns and trends in homes with and without subscription TV is complicated because the free-to-air and subscription TV industries tend to focus on different time periods when analysing television ratings and usage.

Free-to-air TV focuses on a 40-week ratings year which excludes the first six and last four weeks of the calendar year and a two-week period around Easter. In contrast, subscription TV concentrates on either a 48-week or a full 52-week per year ratings period.

According to OzTAM, during free-to-air TV’s 40-week ratings period in 2007, subscription-only channels accounted for a majority (58.7 per cent) share of all-day (6 am to midnight) viewing in subscription TV homes and a lesser (47.5 per cent) share of evening viewing (6 pm to midnight).

Subscription-only channels tend to attract higher ratings outside of free-to-air TV’s prime-time period (6 to 10.30 pm) and its official 40-week ratings period when the free-to-air networks commonly broadcast less popular programming. During the 12-week out-of-survey period in 2007, for example, subscription-only channels accounted for a 61.5 per cent share of daytime viewing and a 53.1 per cent share of evening viewing in subscription TV households.

The business model

While it took almost a decade for the major local subscription TV operators to achieve sufficient subscriber numbers and to renegotiate sustainable programming supply arrangements in order to reach a break-even position, they are now highly profitable and fast-growing.

The business model for subscription TV is fundamentally different from that of free-to-air television. While the latter is funded principally by advertising revenues in the commercial sector and Federal Government allocations to the non-commercial broadcasters, the bulk of total revenues for subscription TV operators takes the form of subscription revenues; advertising revenues represent only a very small proportion of their total revenues.

This mix is clearly illustrated in the revenues of the two major local operators in 2007. Subscription services accounted for 92.4 per cent of Austar’s total reported revenues, while advertising revenues accounted for only 1.6 per cent. And subscription revenues made up 86.4 per cent of Foxtel’s total reported revenues.

History and background

While subscription television services have been popular in the USA for decades, pay TV only began in Australia in 1995. Its comparatively late start was intertwined with the introduction of competition in the local telecommunications industry.

The first subscription TV operator to market was the now-defunct Australis Media group, whose Galaxy branded service was launched in early 1995 and closed down in mid 1998. The industry’s current top-three players commenced service in August (Austar), September (Optus) and October 1995 (Foxtel).

Competition for certain types of programming, especially sports and movies which were considered to be key subscription drivers, was particularly intense among the three aspiring operators in the metropolitan markets (Australis, Foxtel and Optus). This resulted in contractual arrangements being entered into for some content at prices that were excessive, and ultimately unsustainable. Regional operator Austar was also adversely impacted by this costly programming scramble, because it acquired much of its key programming from the metropolitan operators who typically held the Australia-wide rights.

Without the backing of a major telco, the under-capitalised Australis Media floundered. Meanwhile, profits at its two major telco-supported rivals were to remain elusive for close to a decade until their original programming contacts came to be renegotiated at lower rates and a content supply arrangement was agreed to in 2002 between themselves and approved by the Australian Competition and Consumer Commission. Austar also accumulated sizeable operating losses which threatened its ongoing viability until a financial restructuring supported by a major American cable investor and a local venture capital firm enabled the company to achieve profitability during its seventh full year of operation.

From mid-1997, subscription TV operators were allowed to carry advertising following the expiry of a Federal Government-imposed moratorium.

In 1999, Foxtel commenced satellite distribution to complement its initial cable delivery platform, which enabled it to provide services into all five metropolitan markets as well as the Gold Coast. In 2004 Austar and Foxtel commenced their respective digital services and, within less than three years, all of Foxtel’s subscribers were receiving its digital service.

Foxtel launched its iQ branded personal digital recorder in February 2005 and by the end of 2007 it had achieved a penetration rate among its subscribers of more than 20 per cent. In February 2008, Austar introduced its own MyStar branded personal digital recorder.

Shortly after one of the smaller local operators, SelecTV, announced its intention to add a low-cost, 20-channel English-language subscription service to its initial foreign-language channel offerings, which had commenced at the start of 2006, the two largest operators introduced new lower-priced entry-level channel packages. Foxtel’s offering was announced in May 2006 while Austar’s was launched in September 2006, with each priced at $36.95 per month.