Telstra's friendly fire

Telstra has announced the latest addition to Australia’s growing list of video-on-demand streaming services. The company has teamed up with American provider Roku, rebranding the Roku 2 device as Telstra TV.

The service will be similar to the Apple TV and Chromecast systems offered by Apple(NASDAQ:AAPL) and Google (NASDAQ:GOOG). Rather than making people subscribe and provide the content themselves, Telstra TV will instead aggregate content providers and allow viewers to watch them on their TV rather than computer.

The company hopes to attract customers who have not yet subscribed to Foxtel, potentially attracting new broadband subscribers and preventing the loss others to competitors such as iiNet(ASX:IIN) and Optus who have been aggressively advertising new products to accompany the launch of Netflix (NASDAQ:NFLX).

Such a move makes sense. However, one thing that needs to be considered is the impact on Foxtel, of which Telstra owns 50%, along with News Corporation (ASX:NWS).

Foxtel had 2.6 million subscribers at the end of the 2014 financial year, giving it revenues of $3.1 billion, which equates to average revenue per user of just under $100 per month. For most subscribers, around $50 of that will be made up of the essentials package and sporting content. However, the remaining $50 will be spread around its various entertainment bundles and must be at risk.

The details regarding the suite of service providers that can be accessed on Telstra TV have not yet been released. So far Telstra has announced that Netflix, Presto (owned by Foxtel) and Stan (owned by Nine Entertainment (ASX:NEC) and Fairfax (ASX:FXJ)) will be part of it. The combined cost to subscribe to all three services is less than $30 per month, which makes it much cheaper as an entertainment option than the $50 that the average Foxtel subscriber would pay. The loose $20 would also leave room for a user to buy or rent a movie from Telstra’s Bigpond Movies service in the unlikely event the other three don’t offer a specific title.

Unless Foxtel's few exclusive entertainment titles (such as Game of Thrones) are enough to convince subscribers to stick with the more expensive provider, average monthly revenue per user is likely to fall. Whilst the number of subscribers may not drop, the number of packages they subscribe to, or the price they charge, likely will.

Until more details are released, we won’t know what the likely impact will be. However, at first glance Telstra appears to be hoping that a little bit of collateral damage to its jointly owned Foxtel service will be a small price to pay in the much larger battle for the country’s broadband connections.

Disclosure: Staff members at Intelligent Investor own shares in some of the companies mentioned in this article.