The future of television – consumers win

Australians have never had so much choice when it comes to viewing media content and unsurprisingly we are viewing more content than ever.

In the average month:

With Internet penetration now at 80% of households, we are now seeing the emergence of a growing list of media content providers offering very similar content to traditional Broadcast TV at prices well below Foxtel’s entry price that will challenge the existing traditional broadcast TV model as well as Foxtel’s dominance in the subscription television space.

So what does it all mean for the Australian media sector? Does the range of choices mean the death of traditional broadcast TV providers? Will these new platforms achieve the critical mass they need to make a profit, be sustainable and really challenge Foxtel? What is the impact of Australian Government policy regarding media ownership and sports content?

In answering these questions it’s worth considering Netflix and its financial performance to date.

Netflix is now in its 13th year of operation and has achieved amazing growth with over 57 million subscribers, 18 million of whom are outside the USA. It’s a great story and it generated over $5 billion in revenue for the year ended 31 December 2014. The company is well on the way to its goal of $10 billion in revenues. In 2007 Netflix was still a DVD business, delivering over 1 million DVDs a day to its customer base. The transformation into an online streaming business is only in its eighth year, making Netflix relatively young.

Despite these great top-line numbers Netflix reported a meagre profit after tax of $267m for the year ended 31 December 2014. To give you some context, in the year ended 30 June 2014, Australia’s two leading commercial broadcasters reported underlying earnings of:

Seven West Media: $236m
Nine Entertainment: $144m

For Netflix, content streaming is currently a low margin business. Content acquisition and marketing are costly. For the new Australian entrants into the content space, life will be tough and they will need deep pockets and a long-term outlook to achieve meaningful returns for shareholders.

The structure of some the new Australian players (Stan – a joint venture between Nine and Fairfax; Presto – a joint venture between Foxtel and Seven West Media) demonstrates that it’s a “big boys’ game” and in my view is about new revenue streams and defending their main business model from the attacks from new entrants.

For Nine, Seven and Foxtel, Stan and Presto provide a platform to exploit existing content rights and maximise revenue while at the same time disrupting Netflix and others as they launch into the Australian marketplace.

For Netflix their launch into Australia is solely about growing their content streaming business. They have a single-minded focus that will make them more of a threat to the existing Broadcast TV and subscription TV models. It will be fascinating to watch their launch, the response from other players and who comes out on top. It’s impossible to predict who may win or lose at this stage and the suggestion that Netflix subscribers won’t pay GST demonstrates this will not always be a fair fight.

The commercial broadcasters are not about to rollover and let Netflix have an easy ride in Australia. Content rights are complex and, when it comes to Australia, arguably the most important content rights are firmly in the grasp of the commercial broadcasters. Sporting rights remain critical in Australia as demonstrated by the AFL’s expectation of exceeding $1.25b from their next rights negotiation. If you want eyeballs in Australia you need sport – in fact you need AFL or NRL in the winter and cricket and tennis in the summer.

There seems no major change on the horizon in the Federal Government’s current view that watching the footy on TV is a basic right of Australians. On that basis Seven, Nine and Ten will continue to get eyeballs for sporting events and be able to use sport as the platform to promote other shows and maintain a dominant position in viewing figures and continue to achieve strong advertising revenues. While these revenues will come under pressure from the number of platforms and audience fragmentation, from an advertiser point of view commercial TV will remain a great choice if you want a big audience for your product. Broadcast TV’s model is not broken – in my view, it still works (although is clearly being challenged). Broadcast TV has the Government support, long term content rights and has the financial resources to continue to diversify revenue streams and maintain or grow profits for a good number of years yet.

While the old and new media players battle it out for supremacy, the real winner is the consumer.

Choice is good and choice that is cheaper is even better.

As a Foxtel subscriber on their top platform I am used to paying circa $150 a month for their content – which I love. As a family we flick between Foxtel, commercial broadcasters and ABC/SBS easily. The Foxtel PVR provides flexibility to record, catch up on missed episodes and skip ads. We still enjoy the family experience of watching shows together – The Block, My Kitchen Rules, and Masterchef are all regulars in our household and once the kids are in bed, Game of Thrones and BreakIng Bad provide high quality content for the grown-ups. We are channel/platform agnostic and just want convenience. I think we are fairly normal.

As a household, though increasingly our media consumption is not only from the sofa; we all use Foxtel’s Go app, my 13-year-old son consumes YouTube videos at a ferocious rate; my 11-year-old daughter loves media content from Instagram and other social platforms and my four-year-old could not live without ABC iView.

The level of multi-screen activity in my house is growing exponentially . . . I marvel at my 13-year-old’s ability to be playing Minecraft on the Xbox, with his laptop on his lap showing a YouTube video as he responds to messages on his iPhone – and he regularly says “Dad, stop checking your work emails and watch the TV show”.

For consumers there is more choice than ever and the cost is coming down. The future for my household is probably a more basic Foxtel package (gives me the PVR plus Sport), combined with a subscription to two or three out of Netflix, Presto, Stan, Fetch, Quickflix and that’s before we talk about Apple TV, Google Chromecast etc.

As a consumer I win – my net cost for media content will be lower than I currently pay and the range of content available will increase significantly. All I will need is an app that lets me seamlessly flick between all these platforms and manage the viewing experience. (Hint to App developers).

For households that found Foxtel’s entry price too high, the $10 to $15 per month offerings from the new players will attract new customers. Once they get used to watching what they want, when they want, where they want, there is no going back. Foxtel could then gain over time as people get used to the convenience of the streaming services but want the added functionality of the PVR.

In my view the future of TV has never been brighter for consumers.

For the media companies, while the battles are just commencing, traditional Broadcast TV has as much chance of winning as anyone else and arguably deeper pockets.

May the best Media Company win – and while they fight it out I’ll sit back and watch re-runs of Top Gear from every room and on every device in the house (and on the bus, ferry and in the coffee shop).

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