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Coronavirus losses may force Newscorp and Rupert Murdoch to rethink Foxtel business model

By business reporter Andrew Robertson
Posted , updated 
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News Corporation reveals $1.5 billion loss due to pandemic
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News Corporation is the latest international media company to reveal that it has been hit hard by COVID-19, with third-quarter accounts showing a $US1 billion ($1.5 billion) loss.

It is a setback that spurred Rupert Murdoch to join the growing list of senior executives forgoing their bonuses for this year.

But while the US, like the rest of the world, is feeling the heat from COVID-19, much of News Corp's pain came from Australia.

As the owner of 65 per cent of pay TV operator Foxtel, News Corp's accounts give an insight into how Foxtel is travelling.

And it's not pretty.

As Foxtel's future becomes ever more precarious, News has written down the value of its investment by $1.4 billion.

Telstra, which owns the other 35 per cent, has taken a $300 million hit.

The Bulldogs NRL team's interchange players sit on a bench in front of an empty grandstand.
The NRL suspended its 2020 season on March 23 in a big blow to Foxtel's Kayo Sports.(AAP: Dan Himbrechts)

It is a reflection of Foxtel's deteriorating performance.

Earnings in the quarter were down 31 per cent, or $46 million, on 2019 and the 2019 third quarter result was 23 per cent lower than 2018.

Drilling down further reveals how badly Foxtel is being hit by the pandemic.

Foxtel loses customers during COVID-19

On March 31, it had 408,000 paying subscribers to its Kayo Sports streaming service.

By May 2, with all major sports shut down, that number had shrunk to just 272,000.

That's a loss of a third of its customer base in just four weeks.

Entertainment streaming service, Foxtel Now, has fared better, but is still going backwards with its 317,000 subscribers being 9 per cent lower than a year ago.

The problems for Foxtel are many.

It is struggling to grow its overall viewing numbers, its cost base is high, its subscription fees are way more expensive than the competition, and its streaming services are cannibalising its cable operations.

Lachlan and Rupert Murdoch both wear navy suits
Rupert Murdoch, right, will forgo his bonus this year due to News Corp's woes.(Reuters: Peter Nicholls)

At 2.9 million, Foxtel's total subscriber numbers are the same as they were in 2016, but high-paying cable numbers are dropping as people switch to the streaming services, which are at least half the price.

For Foxtel, that's half the revenue, while at the same time paying the full cost of programming, such as drama and sport.

On the other side of the coin, Foxtel is simply too expensive.

Kayo and Foxtel Now are $25 a month (for the basic Foxtel Now package), while the cheapest cable subscription is $49.

Netflix heads list of cheaper alternatives

Contrast that with the competition.

For example, Netflix starts at $9.99 a month, Stan is a cent more at $10 a month.

Amazon Prime is $6.99 and Apple TV is $7.99.

Foxtel is not in the same ball-park and it shows in viewer numbers.

Netflix is seen by 12 million Australians after just five years in Australia. Foxtel has been here 25 years and is only watched by 5 million.

A screenshot of the Netflix home screen
Netflix is watched by about 12 million Australians after just five years in Australia.(ABC)

It's no surprise that some leading media industry analysts believe Foxtel's days are numbered.

As Foxtel's revenue shrinks and its losses mount, so does its debt, which now stands at more than $2 billion.

Banks are refusing to lend to the company, and it is only the generosity of its shareholders, and in particular, Rupert Murdoch, that's keeping it afloat.

In the past year or so News Corp has lent Foxtel $700 million, with Telstra giving $200 million.

In the days leading up to News Corp's latest profit result, independent telecommunications analyst Paul Budde made a gloomy prediction.

Foxtel must 'change business model'

"Foxtel is expensive as a subscription service, so you will see more and more people copping out of Foxtel because they are not using it, or sport is no longer there, which is what they wanted it for," Mr Budde told the ABC.

"In one, two, three years, then either they totally change their business model and become like another Netflix, or, you know, another model that they may think of, otherwise I don't think they will survive for much longer."

As Virgin Australia found out a few weeks ago, when shareholders stop stumping up the cash for a loss-making business, the consequences are dire.

It beggars the question of just how many more $1 billion-plus writedowns Mr Murdoch is prepared to tolerate.

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