Telstra's Foxtel triple threat

Business Spectator

It was a neat coincidence that News Ltd's $2 billion offer for Consolidated Media was approved by Cons Media shareholders even as Telstra boss David Thodey was endorsing the prospect of Foxtel offering a ‘'triple play'' of pay television, telephony and broadband services.

News' interest in Cons Media, of course, lies in its 25 per cent share of Foxtel and 50 per cent interest in Fox Sports. News already owned 25 per cent Foxtel and the other half of Fox Sports so the acquisition will turn Foxtel into a joint venture between Telstra and News.

At yesterday's investor briefing Thodey said Telstra would be comfortable with Foxtel pursuing the strategy that News' associate BSkyB successfully executed in the UK, where it has become the biggest broadband operator by bundling its pay TV offering with telephony and broadband. The effectiveness of the triple play bundle has also been proven by cable operators in the US.

Shifting focus

Telstra itself has bundled Foxtel with its telecommunications offerings but, understandably, hasn't been prepared to discount its own services to create more compelling offers. It is equally understandable why it has in the past prevented Foxtel from offering a triple play and competing against it and undermining its customer base and margins by discounting those services itself.

So why the change of attitude?

The smaller strand of the explanation relates to the fact that in the past Telstra has had an ambivalent attitude towards Foxtel, which was created to defend its fixed line business against Optus. While Foxtel provided traffic volume for its networks, particularly the HFC networks, Telstra didn't understand or care much about the content on the Foxtel platform – it saw Foxtel through a telecom's lens. There has been periodic tension between the Foxtel partners and conflicts between the strategic objectives and agendas of Telstra and its media partners.

With the ownership now split evenly, and Thodey and News' Kim Williams having a good relationship (Thodey says the Foxtel relationship is stronger than he's ever experienced it) common purpose appears to be more easily agreed.

The NBN connection

It is also more readily apparent. The larger part of the explanation for Telstra's relaxed attitude towards a Foxtel triple-play offering relates to the national broadband network (NBN).

Thodey is a pragmatist and has accepted that over time, regardless of which major party is in government, Telstra will eventually be purely a retailer of fixed line services in a highly competitive post-NBN environment.

In that environment Foxtel is not only a potentially attractive source of large-scale and less-contestable earnings in its own right but potentially a differentiator for Telstra as the playing field in fixed line services is levelled.

With other telcos able to gain access to Foxtel that might not appear a material competitive advantage but if Foxtel offers a triple-play and offers discounts for a bundle of pay TV and telecommunications services that drives subscription growth Telstra will get 50 per cent of the benefit. Foxtel is a joint venture so Telstra will get direct access to the cash it generates. 

It would also have different equations to those of its competitors when directly discounting its own services as part of a triple-play.

The obvious long term strategy in an NBN environment is to grow Foxtel into a media and telecommunications heavyweight via a bundling strategy that gives Telstra exposure to several streams of income and margin that would be smaller if Foxtel remains locked out of telecommunications or where a significant share of its telephony and broadband income could shift entirely to Telstra competitors.

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