Free-to-air's opportunity to fleece Foxtel

Facing tough competition and a flat advertising market, there are few avenues to growth for free-to-air networks. But US-style pay TV retransmission fees could provide a path.

The performance of the listed free-to-air television networks over the back half of calendar 2012 posed one critical question: Where is revenue growth going to come from in a flat advertising market?

Seven, the market leader, saw TV revenue growth over the period of 1.6 per cent. Ten has yet to report but is likely to see revenue go backwards after a disastrous back half. Nine most likely is in the same position as Seven – a small gain at best.

Foxtel isn’t facing these problems. EBIDTA was up 12.1 per cent for the back half of 2012, rising to $463 million, with revenue up more than 7.2 per cent to $1.55 billion. All this with a measly 1.7 per cent increase in residential subscribers.

Despite the fact that the top 20 rating programs each and every night in Australia are those broadcast on free-to-air TV, Foxtel is only required to pay a tiny portion of its revenue to retransmit these?

How tiny? Very tiny. Foxtel pay 36.95 cents per household per month to broadcast all of the free-to-air channels – primary and multichannels.

This means over the course of 12 months, and based on recent subscriber numbers of 2.27 million, Foxtel is only required to outlay $10.06 million per annum for all of the free-to-air networks. Less than 1 per cent of total revenue. This is paid to collections agency Screenrights. Some may argue that this fee doesn’t reflect the value that carrying the free-to-air channels provides Foxtel.

With the trading conditions facing media right now, players in the space need all the advantage they can get. Free-to-air TV, while still the biggest game in town, is brutally competitive and economically challenging. Networks are trying to balance the needs of viewers with the needs of investors, and in most cases failing in one instance, or both.

Chase Carey is a man who understands the value of retransmission fees. The News Corporation chief operating officer has driven the agenda hard in recent years, with strong results. In the US, the main networks of CBS, Fox and ABC are generating close to $1 billion annually in retransmission costs from the cable providers.

Carey gave an impassioned plea to the United States senate back in 2010 around the matter, telling the senate subcommittee:

"We have the most valuable programming on television, with more viewers in prime time than the top three cable channels combined. Yet what we are asking for is a fraction of the rate paid to the most expensive basic cable channels on television.

"Without reasonable revenues, broadcasters will simply not be able to compete with cable channels. We have already seen an increase in sports migrating to cable, such as college football’s Bowl Championship Series and other major events in the MLB, NFL, NBA, and college basketball. Local news, which is very expensive to produce, could be eliminated entirely or become less local in nature. Ultimately, this result would be devastating for the more than 30 million Americans who rely exclusively on over-the-air television because they don’t have cable, satellite, or telco video service."

Carey argued that retransmission costs served to protect consumers by protecting the networks ability to provide high-end sports, local news and locally produced programming. The real losers wouldn’t be News Corporation, it would be the households without access to a cable signal.

News was successful in getting what it wanted around retransmission, and is on track to continue to increase retransmission revenue over the next three to five years. Media analyst firm SNL Kagan believes the retransmission area will deliver the US free-to-air networks over $6 billion in total revenue by 2018. Shareholders and investors are very enthusiastic on Carey and News Corporation’s decisive action around retransmission.

Analysts believe CBS, ABC and Fox are generating around $1.22 per month per household in retransmission currently. If Foxtel was required to pay the two leading free-to-air channels, Nine and Seven, that same amount in Australia it would generate both networks over $33 million each annually. Ten, with lower audience, could be reasonably expected to command half of that.

And if retransmission continued to grow as it is in the US, within five years Seven and Nine could earn more than $60 million per annum. And this would be achieved by asking for a monthly carriage rate that is still well below that paid to most networks cable services carry.

Free TV Australia has been lobbying this very issue over the past 12 months – with the industry body favouring a US-style scheme similar to what has worked so well for News Corporation. Foxtel, also owned in part by News Corporation, isn’t as keen to see a rule change. In its submission around the same area it argued that no rules changes were necessary and the current system was serving everyone just fine.

The issue of retransmission is a vitally important one in the current landscape. A turbulent ad market and unprecedented change and competition are causing upheaval in media, with only a handful of beneficiaries. A media company seeking to exist with a single revenue stream – advertising – is facing an uphill battle, especially when trying to compete with a similar service that has the benefits of two streams of revenue (subscription and advertising).

Investors in the current climate would be right to be seeking more assertive action from networks on the topic of retransmission. Around $30 million per annum may seem small in comparison to free-to-air TV topline revenue but, in the absence of any large-scale growth opportunities right now, it’s one of the best chances for growth they have.

News Corp is the parent company of News Ltd, owner of Business Spectator.

Ben Shepherd is a media and technology consultant. He blogs at Talking Digital, can be found on Twitter @shepherd and LinkedIn

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