Has Telstra found its NBN starpower?

Austar's confirmation of reports that have been circulating for a fortnight that Foxtel has been talking to its major shareholder, John Malone's Liberty Global, about a possible bid for the regional pay television operator is going to cause significant disquiet among Telstra's telecommunications rivals.

Telstra, of course, owns 50 per cent of Foxtel and, if Foxtel were to acquire Austar, would control a national pay TV service with about 2.4 million subscribers.

Only a few days ago Optus' Paul O'Sullivan – perhaps prompted by the initial report of the discussions between the Foxtel partners and Liberty in The Australian two weeks ago – gave a speech on the Gold Coast in which he warned of the potential distortion in the post-national broadband network market for telecommunications if Telstra decided to use the $11 billion of net present value it will receive over time from its deal with NBN Co and the Federal Government to buy market share as customers were migrated from its network to the NBN.

"Make no mistake, as you have seen in the early years of mobile and in the early years of the internet, there will be a land grab in the first years of the NBN," he said.

"In fact it will be stickier for customers because it will be carrying television, it will be carrying broadband and customers will be using multiple services. It will be a very difficult service to churn once customers begin to buy it."

If Foxtel were to acquire Austar and Telstra retained its 50 per cent share of an expanded Foxtel, it would be able to offer bundled fixed line voice and data services over the NBN and over its wireless network and pay TV over its HFC cable and/or the NBN and Austar's satellite service and even over its wireless network.

O'Sullivan referred to a "winner takes all" outcome where the groups which dominate content and applications could generate massive externalities and create a "cliff edge" for challengers, much like the way Google and eBay have been able to aggregate so many eyeballs that they become dominant and unchallengeable.

Having resigned itself to losing its copper network, and being coerced into agreeing to stop using its HFC network for anything other than pay TV, there is no doubt that Telstra is giving serious consideration to developing a bigger media presence to generate the content that will enable it to offer consumers a triple play of telephony, internet and video services in a post-NBN world.

A beefed up Foxtel would, if it acquired Austar, also help Telstra protect its dominance of regional areas, which will face significant competition for the first time once the NBN is rolled out.

It is no secret that Foxtel has been keen to acquire Austar in the past, given that there would be very substantial synergies from combining the groups, which share content. The earlier proposals foundered largely on the basis of value but also because, until it was forced by the Labor Government to accept that it had to exit fixed line services, it regarded itself largely as a telecommunications company.

Foxtel's Kim Williams, confronted by the impact of multi-channelling and the programming protection the anti-siphoning legislation provides the free-to-air networks, is seeing the growth in his subscriber base tapering off despite a burst of new product offerings and the addition of a range of new distribution channels. The synergies from Austar would be very appealing.

Williams has also made no secret of his belief that it would be far cheaper for Foxtel if it could distribute its services via satellite rather than over Telstra's HFC cable, which raises the possibility that after a successful acquisition of Austar Telstra might shut down the cable – or sell it to NBN Co.

While NBN Co and the government are committed to truly high-speed broadband, ownership of the HFC networks (Optus has a similar network) would not only ensure that all fixed line services were carried over its own infrastructure but, given how long it will take to roll-out its own cable throughout metropolitan areas, it might be a way of getting a faster take-up and earlier generation of cash flows and make for an easier and smoother subsequent transition of customers to the NBN.

Foxtel is a partnership between Telstra (50 per cent) News Ltd (25 per cent) and James Packer's Consolidated Media (25 per cent). In the past News and Packer have tried to increase their interest but Telstra hasn't been interested in reducing its interest. Its partners also tried to sell their own joint venture, the very profitable Premier Media group that produces the Fox Sports programming, into Foxtel but Telstra baulked at their valuations.

With the "other" media baron, Kerry Stokes, owning 22 per cent of ConsMedia and apparently enjoying a new and improved relationship with Packer and News, and Packer and Lachlan Murdoch now in effective control of Ten Network, an Austar acquisition could trigger a broader restructuring of the ownership of Foxtel and Premier Media that aligned Telstra's interests with those of the most dominant media proprietors.

There is no certainty of a deal. Malone's Liberty, which owns about 54.5 per cent of Austar, isn't known for his generosity in deal-making and the starting point for a deal is probably around $2 billion.

It will be a while before Telstra actually gets its hands on any of the taxpayer cash being shovelled into NBN Co and in the meantime a big chunk of its free cash flows are being devoted to rebuilding its market shares ahead of the NBN.

If there is to be a land grab for customers ahead of the NBN, however, there is a considerable advantage to being a first mover and, thanks to its Foxtel interest, Telstra has a pre-existing position that it can significantly strengthen and extend and a potential strategy its competitors will find very difficult to counter.

It also has a more conventional commercial rationale of the major cost savings that it can use to convince the market that providing its half share of the funding for a big acquisition is a sensible standalone decision.