Why Foxtel needs Time Warner

Time Warner’s rejection of a $US80 billion offer from media mogul Rupert Murdoch’s 21st Century Fox may or may not be the opening gambit for a drawn-out process, but the fact that both parties were having a conversation highlights that the media consolidation game is picking up pace.

As the big cable infrastructure companies strive to come together (Comcast’s proposed $48bn deal to buy Time Warner Cable and AT&T’s $49bn acquisition of DirecTV), the content makers need to keep pace with the content distributors, lest one party manages to wrest the initiative on carriage fees -- which is what the distributors pay to the likes of Fox and Time Warner to carry their channels.

Maintaining a whip hand over the distributors is a clear trigger for why Fox is keen to make a big play for scale. The key factor is content -- lots of it -- and Time Warner’s premium content juggernaut HBO is an attractive asset.

The potential marriage of two global media giants may have some local ripple effects that bear consideration, especially if the recent furore around Foxtel’s deal with HBO to gain exclusive first-screening rights on season 4 of Game of Thrones is anything to go by.

By preventing local competitors such as Quickflix and Apple's iTunes store from fast-tracking the episodes, Foxtel was able to get first dibs on a highly committed audience base. While many where happy to access the content on Foxtel, many others opted to pursue alternate routes.

Game of Thrones is a runaway hit when it comes to online piracy and Australian consumers are, unsurprisingly, active participants.

The prospect of a Fox-Time Warner combo could potentially see further locking in of first-release rights on prime programming -- which makes perfect business sense but may not lead to a positive consumer outcome. That would only further embolden those unwilling to pay for bundled content to obtain it illegally, when all they want to see is one single series.

While the Coalition government has voiced its aspirations to force internet service providers (ISPs) to crack down on pirates, the real solution to the problem may lie in how content distributors choose to make the programming available. For now, the emphasis is on getting consumers to sign up for content bundles rather than giving them more personalised offerings on their TV or mobile devices. And things are likely to stay that way for some time, because bundled offerings are the key to allowing cable operators to rationalise their content and carriage costs.

I may only watch a couple of channels on Foxtel but the price I pay for the subscription bundle flattens the costs of running the 20 channels that I don’t watch. The impact of unbundling essentially hollows out a foundation that a potential Fox-Time Warner merger will look to further reinforce.

That means putting streaming upstarts like Netflix and their 'a la carte' content offerings back in their place -- and Fox may be willing to pay whatever is needed to ensure that it gets its hands on HBO.

According to Bloomberg, Fox and its advisers value HBO at more than $US20bn.

HBO doesn’t just produce content that audiences crave but also has an online streaming service, HBO GO, that is comparable to Netflix. HBO may not have as large a user base as Netflix but it has a vast treasure trove of programming, and the entry of Fox would only add more programming to the mix.

According to Albert Fried & Co senior analyst Rich Tullo, a merger of Fox and HBO would create a group that controls 20 of the top 50 shows watched today on all streaming services.

Earlier this year, HBO signed a licensing deal with Amazon Prime to give its members unlimited streaming access to past seasons of shows such as The Sopranos and Deadwood, as well as select seasons of current series such as True Blood and Boardwalk Empire.

The push to seed its content on an online platform highlights the shifting environment that Fox and Time Warner are navigating. The syndication model still works -- it’s just moving from established TV channels to online streaming channels such as Amazon, Hulu and Netflix.

A combined Fox-Time Warner would hold unprecedented bargaining power when it comes to furnishing the emerging channels, and that’s well worth spending billions on.

One way to counter that dominance has been for Netflix to start producing its own and extremely popular content like House of Cards and Orange Is the New Black. Unfortunately, in Australia the likes of Quickflix and EasyFlix don’t possess that capability and are tied to the syndication and licensing noose that Murdoch’s ambition could further tighten.

News Corp Australia is the publisher of Business Spectator.