Australian Broadcasting Corporation


LOCATION: http://www.abc.net.au/7.30/content/2002/s562749.htm

Broadcast: 23/05/2002

Wide impact anticipated in proposed Foxtel-Optus deal

Reporter: Mark Westfield

KERRY O'BRIEN: The Australian Competition and Consumer Commission will decide in the very near future whether to allow a program-sharing deal between major pay-TV players Foxtel and Optus.

The pay-TV industry in Australia hasn't, so far, been a huge success.

Less than a quarter of Australian homes have signed on.

The program providers have had running battles with the free-to-air networks over sports and program rights and are still suffering enormous losses.

The proposed Foxtel-Optus deal should at least stem the loss of money, but there's more to it than that.

It could end up affecting everyone who uses a telephone and the bills they have to pay.

Business and economics reporter Mark Westfield.

CHRIS ANDERSON, CHIEF EXECUTIVE, SINGTEL OPTUS: This is an industry in which no-one can make any money, in which the consumer is not being serviced in the best possible way and an industry, frankly, that hasn't got a future.

MARK WESTFIELD: If Australia's pay-TV industry was an MBA case study, it would be a classic example of how not to start a business.

KIM WILLIAMS, CHIEF EXECUTIVE, FOXTEL: The establishment of subscription television in Australia was malformed from the outset.

It produced some fairly unusual economic outcomes, or uneconomic outcomes.

MARK WESTFIELD: In the seven years since pay-TV started in Australia, it has racked up nearly $5 billion in losses, mostly because of the low take-up and because Foxtel and Optus pay three times the world average for Hollywood movies.

Something had to give.

Two months ago, the main pay-TV groups did a deal.

CHRIS ANDERSON: This is a fairly, for us, a fairly simple deal.

It's a content supply deal.

We buy the Foxtel content.

KIM WILLIAMS: This starts the long road of making Foxtel into a sustainable business.

And Foxtel, to achieve that, is taking some pretty heroic leaps.

It's assuming indemnities to Optus, it's allowing its major competitor to actually have access to Foxtel content.

MARK WESTFIELD: In the short-term, at least, Optus seems to be a big winner.

Foxtel will take over Optus's $600 million commitment to Hollywood and Optus customers get access to the best Foxtel channels.

JOHN HUGHES, OPTUS CUSTOMER: We are now getting Foxtel sports on top of our Optus sports, which means we're getting twice the amount of basketball we were getting previously, more cricket -- everything that my son could possibly want by way of sports we're getting.

MARK WESTFIELD: The Hughes family are typical customers of Optus, Australia's second-largest phone company.

Not only do they have pay-TV, but they also rent their phone line from Optus.

This is called 'bundling'.

JOHN HUGHES: When we were offered the telephone service, the attraction initially was 20 cents per local call as against somewhat more with Telstra, but also, under what I understand to be the bundling concept that Optus offer, we found that our pay-TV charges came down fairly substantially once we had the telephone service as well.

MARK WESTFIELD: Pay-TV is only part of this story.

Foxtel and Optus vision were founded in the mid-'90s by telephone companies -- Telstra and Optus.

Their priority was to win or retain customers to their phone networks.

They used pay TV as a teaser, the sizzle.

The sausage, was and is phones.

NICK FALLOON, EXECUTIVE CHAIRMAN, NETWORK TEN: One of our main concerns about this deal is it will continue that dysfunctional part for pay-television, because, again, we think it's mainly about telephone defence, about Telstra being able to entrench its position in local telephone and being able to bundle its phone services with Foxtel's content.

KIM WILLIAMS: The Foxtel-Optus supply agreement is about subscription television.

It's not about telephony.

CHRIS ANDERSON: I think that, from Telstra's point of view, up until recent times, they have seen pay-TV as a telephony defence, but we see it as a very viable part of our business, assuming you can fix up the structurally flawed cost structure, because our consumers have shown that they like to buy a pay-television service and they like to wrap it with a telephony service and a data service.

So to that extent, we think that the consumer dictates what they want.

MARK WESTFIELD: The deal will also allow Foxtel's half owner, Telstra, to sell pay-TV with its phone services.

But the host of small Australian phone companies, along with program makers, fear it will freeze them out.

This is an issue troubling the Australian Competition and Consumer Commission and its prickly chairman, Allan Fels.

PROFESSOR ALAN FELLS: The key concern arises from the fact that Foxtel would have a fairly high degree of control of content of pay-television.

It would have control of movies from Hollywood and a great deal of sport, and in the past, up until now, there's been some competition between them and Optus.

NICK FALLOON: This is the cross-roads of setting the agenda, not for the next one or two years, but for 10 years and into the future.

MARK WESTFIELD: There's more at stake than a fix for pay-TV.

In the new digital interactive age, all broadcasters will want to come into your home through the set-top box.

Network Ten's Nick Falloon is concerned that if the deal proceeds, Foxtel will become the gatekeeper to the home and the networks will have no alternative but to offer viewers a competing box.

NICK FALLOON: This country can only afford, ultimately, one set-top box platform, and I'm not just talking about the set-top boxes, but the smart card and the billing system.

So if you accept that fact, and I think it's a pretty obvious fact, the alternative is we'll get two cables down the same street, like we've had in pay-TV in the past.

CHRIS ANDERSON: Is Nick Falloon arguing that we should pay for free-to-air's set-top box, that our consumers, Foxtel and Optus's, should pay for the free-to-air?

What is he concerned about?

What we want is competition.

This allows competition.

MARK WESTFIELD: If the deal's critics win and it is blocked, then, according to Optus, the alternative could be far worse.

CHRIS ANDERSON: If this deal is not approved, then clearly we would have to review our future certainly in pay television and certainly in local telephony.

MARK WESTFIELD: If Optus pulls out of local call telephony and pay-TV, this will leave Foxtel and Telstra in complete control of the Australian market.

NICK FALLOON: I don't believe them when they say they'll close their local telephony business, but that's a matter for them.

I think they're bluffing when they say that.

CHRIS ANDERSON: Is Nick saying I should recommend to my shareholders that I lose $350 million a year every year?

Clearly, I wouldn't do that.

What am I bluffing about?

All I want to do is take the very best of pay-television product in Australia and allow my consumers, our customers, to make their minds up what bundle of package they want.

And in doing that, yes, we become -- Optus becomes, a stronger competitor to Telstra, but the consumer gets a better deal.

MARK WESTFIELD: Optus customers are the big winners if the deal goes ahead, but they'd be big losers if it fell over.

JOHN HUGHES: I'd be very disappointed.

I'd be especially disappointed if, as Optus have threatened to do, Optus were to roll up the cable and go home.

I'd then be obliged to take the Telstra telephone service because there wouldn't really be a viable alternative, and I'd be obliged to take the Foxtel package, which would be offering me a hell of a lot more than I'm really interested in for cable TV.

MARK WESTFIELD: With Australia on the cusp of the digital age, the regulator's decision will set the course, not just for this troubled industry, but for Optus as a telephone competitor and indeed, the future of television as a whole in Australia.

NICK FALLOON: They should block this deal and focus, with the government, on setting up a regime that does move pay-television and digital television forward in this country over the next decade, rather than creating a new monopoly and handing control to these parties.

KIM WILLIAMS: If this deal is blocked, it would provide uninterrupted continuity and consistent public policy catastrophe in subscription television.

KERRY O'BRIEN: It's been a long saga already hasn't it, the story of pay-TV in Australia -- obviously a long way to go.

KERRY O'BRIEN: And given that Foxtel is 25 per cent owned by Rupert Murdoch's News Corporation, I should point out that Mark also writes for the 'Australian' newspaper, another part of the Newscorp stable.