Foxtel faces its streaming apocalypse

“Streaming has a completely different sensibility and matrix of value for consumers,” he tells The Australian Financial Review.

“We really do see a real bifurcation of markets. We saw that between Foxtel and Kayo when it was introduced. Generationally, pay TV is something that’s known and loved and used by an older generation that were young families 25 years ago. We will continue to run the streaming businesses and Hubbl’s separately from Foxtel.”

Practically, Hubbl is not very different from Apple TV or a Google Chromecast. It is an operating system built on technology created by media and telecommunications giant Comcast. After signing in to different apps individually – Netflix, Kayo or Disney+, for example – it surfaces all of their content on a home screen designed to make it easier to choose what to watch. It will promote more Binge and Kayo shows. It also has free-to-air TV, and can navigate what’s on live using an electronic program guide.

How much the Hubbl device costs depends on the customer. It’s $99 direct from Foxtel. Binge subscribers have been offered it for $49.50. Former Foxtel Now customers say they have been offered Hubbl for free. It is also sold at JB Hi-Fi and Harvey Norman.

“Being able to show the best of your content among the best of other content, without the walled garden, gives you a real opportunity to be showing there are always choices in your app,” Delany says.

“In a crowded market, it is always good to have skin in the game on how those apps are aggregated. The way that Hubbl works is such that we know we will sell more Kayo and Binge.”

Foxtel has 3.1 million streaming subscribers across Kayo, Binge and Foxtel Now. But those streaming customers each add very little revenue. They make up 66 per cent of Foxtel’s “customer base”, but just 23 per cent of its revenue. Foxtel’s 1.5 million set-top box customers contribute 63 per cent of its revenue.

In a note to clients, Morningstar analyst Brian Han wrote it was a business in broad structural decline. “It doesn’t help that sports content costs and marketing investments move only one way [that is, up], while total subscribers remain stagnant.

”In fact, total paid subscribers fell 1 per cent year-on-year in the second quarter to 4.3 million, with a 4 per cent increase in streaming subscribers more than offset by an 8 per cent decline in Foxtel set-top box subscribers.”

Han doesn’t think Hubbl was designed to be a big earnings driver. “Competition will intensify in the … space and industry equilibrium is unlikely to be reached for some years. It may just be part of a continuing strategy to maintain Foxtel’s services at the forefront of consumers’ minds.”

Sports calculus

When Foxtel and Seven signed a $1.5 billion deal with Cricket Australia last year, Delany said it was worth every cent. “We maintained those top five tier one sports,” he said at the time. “We’ve got significant momentum, and we intend to keep it up.”

The deal worked out to be $140 million a year for seven years, a jump of almost $20 million a year on the previous six-year deal.

The mammoth agreement it signed with the AFL months earlier, however, was worth a lot more.

From 2025, Foxtel will pay, on average, an extra $111 million a year more for the AFL rights than it has paid for the past five years – from an average of $307 million to $418 million. This is not money that is lying around.

Foxtel’s key commercial sports executive, Rebecca McCloy, told The Australian last month that it had signed 175 deals with 120 different sports partners and agents over the past 12 months.

Macquarie analysts estimate Kayo generated $454 million in revenue for the group last year, compared with $1.7 billion from traditional Foxtel customers. The price of the Kayo Basic product jumped 17 per cent to $35 in February, although those kinds of increases are hard to pull off repeatedly.

Delany says the deal with the AFL is different from next year. “The super Saturday is quite different. For eight to 10 weeks at the start of the season, the only place you’ll be able to watch live AFL in the country will be via Kayo or Foxtel. It’s almost double that for Melbourne. And so that was part of the trade.”

That, plus Hubbl – which has had a multimillion-dollar marketing push over the past month – will add momentum to Kayo, he adds.

“I think it’s always a function of volume and price, right? So, we’ll just have to deal with it as it comes. We’re continuing to grow. There’s every reason to believe next year will be a good year for growth. This year is turning out OK, actually. Notwithstanding the summer.”

After the football seasons end, some people cancel their Kayo subscriptions. Kayo has fallen every December quarter since its launch. The summer cricket slate has a big impact on cancellation numbers – if England or India are playing Australia, churn is far lower. This past summer, it was Pakistan and the West Indies.

Over the next year or so, the NRL will tap broadcasters to begin to renegotiate its own deal, extended during the pandemic and worth about $220 million a year to Foxtel. In other words, for three years, the NRL – which some argue is more valuable to a broadcaster – will be paid hundreds of millions less than the AFL. It will expect a similar sized deal to its rival football code.

Cutting at the bone

If price is one lever Foxtel can pull, cutting costs via a major restructure is another. Since the end of the 2020 financial year, Foxtel has slashed more than 28 per cent of staff, reducing employees from 2177 to 1558, according to its corporate filings. It has cut some engineering staff recently. There is more to come.

In the background, Foxtel’s traditional subscribers are still declining at almost 10 per cent a year.

“Given they are lucrative at $85 a subscriber, this is unlikely to be recouped via Kayo and Binge,” Macquarie’s Darren Leung says. “This ultimately leads to a vicious cycle where lower revenue means more cost out – and likely in content (we colloquially call this cutting at the bone). That means fewer subscribers because the content isn’t attractive, which leads to more cost out.”

Kayo appears to have hit a ceiling with a subscriber base of 1.2 million to 1.4 million people. “You can see this with flat year-on-year subscribers. It moves quarter-on-quarter mainly due to seasonality associated with sports,” Leung adds.

On Friday, Netflix reported 269.6 million paying subscribers globally, and said it would no longer share quarterly customer numbers.

“I think we’ve passed that moment where there was a land grab only for subscribers, and you’re seeing prices start to rise. You add up all the streaming services, they’re now far more expensive than Foxtel ever was,” Delany says.

“Nothing will replace completely a 1995 streaming pay TV customer. But we’ve got to adapt to the world we’re in. We’ve been pretty open; in order for us to move forward, we have to be match fit. We’ve got to continue to reshape the business. And that’s in terms of our workforce, our technology and our content.”

Entertainment bloodbath

With the impending end of Foxtel’s long-running, exclusive relationship with Warner Bros Discovery and HBO, the future of Binge is itself a live question.

Foxtel is inextricably linked to the Murdoch family. It is controlled by News Corp, which owns 65 per cent. Telstra owns the remaining 35 per cent. Just last month in the US, Murdoch was asked about Fox’s approach to streaming. He described competing with Netflix, Disney+ and Amazon Prime in entertainment as “a sea of blood”.

“Everyone’s bled out … we’re not going to engage in a bloody streaming battle; that’s not for us. We are a different company with a very different focus,” he said.

News and sport – they were the main game. In Australia, things must be different.

Foxtel is required to spend 10 per cent of its expenditure on new, local drama. It makes sense to put that content, and its other sports rights, in front of as many people as possible, Delany says.

“We see our business as a business that monetises rights,” he says. “There is one vessel to monetise rights for a certain segment of Australia with Foxtel, and there are other vehicles that we’ll use to monetise rights in other areas. Philosophically, you have to go with the trend – you can’t avoid the trend or push another way.”

Outside the top streaming players such as Netflix, Amazon Prime and Disney+, the second tier players are regularly talking. Sources close to these platforms say News Corp has periodically discussed partnerships between Binge with Stan’s owner, Nine Entertainment (which owns the Financial Review). Nine chief executive Mike Sneesby has met with Paramount+ executives.

“Entertainment is getting more competitive,” Leung says. “They are all fighting with strong content for the same share of households’ viewing and budget. There’s not much left from a subscriber growth perspective, so you are hoping that the industry works together and pushes price at the same time.

“Long story short, I think [Foxtel] is a tough business with structural pressures from the industry and competitors, but it also has a legacy revenue stream that it is losing over time.

“This requires a shift in the thinking of the cost base, or innovation for new revenue. Hubbl is not the answer.”