“As an industry, we need a competitor – a serious competitor – to Netflix and Amazon,” Murdoch told a conference in California last week.

This statement, and other developments in the US, will have been heard loudly in the headquarters of Foxtel back here in Australia. What will News Corporation, holder of the management rights and joint owner of Foxtel with Telstra, be planning for the only true new media company in the News Corporation part of the old media empire?

Murdoch’s statement was but one of many recent developments in the US highlighting the momentous changes happening in the traditional pay TV industry.

The new trend of “cord cutting”

HBO’s CEO, Richard Plepler, rocked the industry in mid-October when he announced the Time Warner subsidiary would launch an “over the top” (or OTT) video streaming service in 2015. HBO, the producer of popular TV series such as Game of Thrones, Sopranos and True Detective, has been a mainstay of the traditional pay TV model in the US.

HBO has broken ranks from the standard cable TV bundle lineup for one reason – increasingly the US TV audience is deserting traditional cable pay TV. This is a new trend with its own catch phrase – “cord cutting”!

Over 10 million viewers in the US are now “broadband only” and HBO wants to “remove all barriers” to providing its content lineup to “cord cutters” and new millennial’s who are not even entering the pay TV ecosystem. HBO will now deliver its portfolio of TV drama directly to these customers and bypass the middleman – cable TV companies such as Comcast and Time Warner Cable (a separate company to Time Warner since 2009).

Indeed the cable TV companies that dominate the US subscription TV industry are now clearly becoming broadband companies. In August this year new research highlighted that the top US pay TV companies have more broadband services than TV subscriptions.

Pay TV companies transitioning to broadband

Companies such as Comcast and Time Warner Cable (who incidentally are in the process of seeking regulatory approval to merge) now look to broadband for continued revenue growth, with the pay TV model in decline.

Another signal came this week when Comcast was spotted filing for the “True Gig” trademark. Such a brand statement from Comcast could only mean it is shifting gear to focus on competing with the traditional telcos, AT&T and Verizon, and Google Fiber in the broadband market place for higher speeds. The new DOCSIS3.1 cable broadband standard provides such an opportunity for Comcast and other cable companies to compete with Fibre to the Premise technologies at Gigabit (or 1000Mbps) speeds.

So what does the changing TV and broadband landscape in the US signal for Australia?

Foxtel takeup low and also late to broadband

Foxtel’s takeup is low by international standards – stuck at around 30 per cent of Australian households for many years. Launched in 1995, Foxtel began life primarily as a defensive play for Telstra against the imminent threat of the Optus Vision cable pay TV network. After winning the highly strategic and costly battle to defend the Telstra fixed line telephony and (future) broadband monopoly, Foxtel settled into the traditional pay TV model of providing subscription TV over cable and satellite networks.

The combination of high startup costs and the restrictive anti-siphoning regime protecting Free to Air TV meant that pay TV did not grow to dominate the Australian TV media as it has in other markets. While still profitable, Foxtel does not have the size or clout of some of its foreign sibling pay TV companies.

On top of this it has been late to market with its broadband offering – a standard part of most pay TV strategies in other markets. Muted for many years, its launch of a broadband, TV and telephony bundle has been announced for “late 2014”, but at the time of writing no further details are available as to exact timing and product offering.

But if the signals from the US are any guide, the future is now even more uncertain. Competition from the OTT offerings is likely to grow in Australia quickly. Netflix and Amazon have not arrived formally, but subscriptions to the US offerings via Virtual Private Networks (VPN) are growing to significant levels.

Perversely, the recent data retention law fracas could actually see this increase as more consumers explore the use of VPNs to keep their online activities private. Some Australian broadband providers may even find ways to bundle VPNs with their basic service offerings, dramatically lowering the technology hurdles for the average user.

The recent announcement that the Australian Football League (AFL) is planning to retain the rights to stream football matches live via the internet must also be taken seriously. This is becoming the norm in American sport content delivery – it is only a matter of time before the Australian sport codes follow suit.

Foxtel has launched a number of services to keep abreast of the online content delivery market. Foxtel Play and Foxtel Presto have been launched for internet delivery of content.

But should it continue down this path and attempt to compete with the disruptive players that Murdoch is so concerned about? If the US media industry is feeling threatened by the growth and takeup of Netflix and Amazon, then Foxtel should be terrified.

The alternative is to follow in the footsteps of Comcast and Time Warner Cable and focus on broadband much like a traditional telco. We have even seen Verizon join forces with Netflix and start bundling a Netflix subscription with new fixed broadband services in New York.

Foxtel and the Coalition’s NBN – threat or opportunity?

Foxtel could become a Retail Service Provider (RSP) under Australia’s National Broadband Network (NBN) model. Its relationship with Telstra may complicate such an arrangement, but in principle such an approach could be quickly achieved.

But the NBN is not necessarily a safe path given the uncertainty of key elements of the Australian Government’s policy on the NBN. The Vertigan Panel has recommended a split and eventual divestment of NBN Co’s technology assets, including the Hybrid Fibre Coaxial (HFC) network used by Foxtel in the major metropolitan areas. NBN Co has responded by splitting its HFC team into a separate business unit reporting to the CEO, a move supported by the Minister of Communications.

In order to get a head of the game and grab control of the situation Foxtel could offer to “buy” the HFC network from its partner Telstra. This would effectively short cut a risky government acquisition of the HFC network and later divestment process that would throw it open to wider potential bidders.

Telstra may or may not consider such a re-structure as to its advantage. It will depend on the future preference Telstra has for a post Vertigan style split of Australia’s NBN technology assets. Would it prefer to own and control the HFC or the Fibre to the Node / Premise networks? It is unlikely to be able to own and control both for competition reasons.

A strategy where Foxtel competes with Netflix and Amazon is unlikely to be comfortable for Telstra. Its recent sale of the Yellow Pages business Sensis highlighted the dangers of hubris in respect of local brands in today’s global online market. Telstra’s current CEO, David Thodey, may think twice about following the “Google Schmoogle” strategy of his predecessor by backing the local Foxtel against the global disruptors.

In any case Foxtel is facing an uncertain future. Its core market of being a pay TV service provider is facing disruptive change from Netflix, Amazon and other OTT video streaming entrants along with the likely delivery of premier sports directly over the internet. The recent 50 per cent price cut to its basic package is testament to the threat on the horizon.

Comparable cable companies overseas such as Comcast and Time Warner Cable in the US, Vodafone owned Kabel Deutschland in Germany and Ono in Spain, and Liberty Media owned Virgin Media in the UK are all becoming first and foremost broadband companies.

Will Foxtel follow their international counterparts and become a broadband telco or will it compete with the disruptive OTT media streaming players? It’s a tough choice – but an important one!

Gary McLaren has over 25 years experience in the telecommunications sector and is the principal at McLaren Williams Consulting. He was the Chief Technology Officer at NBN Co from its formation in 2009 to 2014

Foxtel is owned jointly by Telstra and News Corporation (publisher of Business Spectator).