Optus and Foxtel's content-sharing deal has, finally, been allowed to take
its natural form.
It may have taken the best part of a decade, and $8 billion, but this week's
release of the undertakings for the proposed Foxtel and Optus content-sharing
deal has brought the pay TV industry a huge step closer to the structure that it
probably should have had from the outset.
The economics of pay TV, and the modest size of this market, suggest that it
should always have been a monopoly. Flawed policy, brutal competition, and the
fundamental problem that the industry was hijacked at birth by groups for whom
it was a strategic element of larger and more valuable agendas, distorted and
frustrated the emergence of a viable industry model.
There have been several sets of policy flaws. The first was the then Labor
Government's vision and bungling of a competitive model for the industry. It
should have been a monopoly and the media incumbents and telephony companies, or
at least Telstra, should have been locked out.
From when Optus decided a broadband cable would enable it to attack Telstra's
local loop monopoly, pay TV became a bloody sideshow to the main event. Telstra
CEO Frank Blount responded ruthlessly by rolling out a cable that exactly
shadowed Optus's network.
The strategy was brutally effective in not just preventing Optus's using pay
TV to drive local call revenues, but in massive losses that continue to weigh
Optus down today. Telstra's losses were of little consequence against the core
revenue and profit it preserved and the damage to Optus.
Having, with the help of News Corp and PBL, won the pay TV wars decisively,
Telstra and the vanquished Optus have sought to sort out the mess they created.
Good policy could have helped. If this government had listened to the
Productivity Commission, opened up the broadcast media environment and
accelerated its move towards its digital future, it would have been easier to
let the players and the market sort out pay TV.
Instead it chose to protect free-to-air networks, restrict development of
digital broadcasting and deter new players. With a mandated oligopoly in
free-to-air, the notion of an unregulated pay TV monopoly was abhorrent.
If the pay TV industry structure was corrupted by poor policy and being
caught up in a different game, a sensible approach to putting it on a sounder
footing was compromised by the key player having a governance structure that
frustrated attempts at change.
For Telstra, Foxtel was purely about telephony defence. For News and PBL it
was a media company made more attractive because Telstra was effectively footing
most of the substantial losses while paying them handsomely for recycled
Relationships between the partners became stressed when the media groups saw
potential in turning Foxtel into a vehicle for a range of media and
communications products including telephony and Internet offerings and
clipping Telstra's ticket on the traffic generated.
Not surprisingly, Telstra wasn't keen and a tense stand-off developed. It was
resolved by the collapse of One.Tel, which painfully taught the Packers and
Murdochs that they should stick to their knitting.
If pay TV is to be regarded as a discrete sector of the overall electronic
media which government policy has effectively decreed and is, for a market our
size, naturally a monopoly, the starting point for a solution has to be a
synthetic merger of the two main players.
A monopoly dictates regulation. It was inevitable, once Foxtel and Optus
announced their initial deal, that a regulatory framework would be needed.
While this week's series of undertakings from Foxtel, Optus, Telstra and
Austar after months of intense talks with the Australian Competition and
Consumer Commission is complex, it is familiar in form.
The parties have proposed access regimes with access pricing frameworks for
the shared content and the infrastructure that supports it and distributes it
the Foxtel set-top universe and the Telstra cable.
Similar regimes apply to Telstra's core services, gas and energy networks and
pipelines. It isn't a revolutionary concept.
To make this regime work at a practical level, Foxtel has committed to
creating capacity for new content and service providers by digitising its
platform creating an incentive for Foxtel to carry others' content to soak up
the extra capacity and by basing the access pricing framework on a sunk capital
base notionally reduced from the $858 million it has spent to $278 million. It
isn't an incremental cost-based approach to pricing but it is a concessional
The structure works for Foxtel and Optus because overseas experience says
that the broader the range of content offered the more subscribers it attracts.
The content will also be available to other distributors with infrastructure or
In effect, Foxtel is inviting content providers to make its product more
attractive and Optus and others to drive demand by flogging the service with
their telephony offerings.
In an ideal world, Telstra would be prohibited from bundling Foxtel with its
telephony products, but it is a pre-condition of the deal.
For Telstra, however, its dominance of local telephony means that bundling is
a defensive strategy, not an aggressive one, and one that would need to be very
sensitively managed to avoid cannibalising its core margins.
Optus and others don't face the same constraints, which say that at the
margin the deal ought to promote competition in telephony as well as opening up
the pay TV sector to new content suppliers and resellers.
The undertakings don't represent a ``done deal" because the ACCC is now
taking further market soundings to test the detail. There could be some more
fine-tuning of that detail.
In structure and philosophy, however, the refined version of the Foxtel/Optus
content-sharing agreements is compelling because it creates the outline of a
vibrant pay TV business open to third parties at both the content and
distribution ends and, vitally and belatedly, shifts the emphasis firmly away
from telephony defence towards creating a pay TV sector that is economically
viable in its own right.