Two years ago, Foxtel’s future was looking precarious as its outdated ‘set top box’ business model rapidly lost market share to global streaming services like Netflix, Disney and Amazon.
Since then, Foxtel has made great strides in securing its long-term future. First by significantly lowering its cost base after cutting around 270 permanent jobs at the beginning of the coronavirus pandemic. Second, by securing vital exclusive content deals, including beating local rival Stan for Warner Bros, WarnerMedia, HBO and HBO Max content. And third by pivoting away from traditional cable into streaming services.
These moves have turned Foxtel’s fortunes around with News Corporation’s financial results for the December quarter showing that Foxtel Group’s total subscriber base rose to 4.08 million during the period, a 21% increase year-on-year. Streaming video now accounts for 56% of Foxtel’s subscribers, compared with just 8% in 2016. This came after streaming video experienced a 66% increase in subscribers year-on-year, with Kayo and Binge both exceeding one million.
Foxtel CEO Patrick Delany said demand for streaming services in Australia remains strong, despite slowing subscriber growth for global players such as Netflix and Amazon. He added that a potential IPO for Foxtel is still on the cards, but a matter for the group’s shareholders.
Despite rising from the ashes like a phoenix, Foxtel still faces a number of longer-term structural problems.
First, Foxtel operates only in Australia and lacks economies of scale. This is in stark contrast to global rivals Netflix, Amazon and Disney who have only entered Australia as an afterthought for the purposes of making some extra money for little additional effort. They have already made their required rate of return in the global market and do not need to succeed in Australia to survive.
Second, Foxtel is still saddled with a high cost base. It’s traditional broadcast business requires an army of staff, sound engineers and satellites. And it still has to manage traditional expensive legacy hardware like cable boxes.
Third, Foxtel faces cannibalisation of its own subscriber base as subscribers migrate from traditional high margin cable to lower margin subscription video-on-demand (SVOD) offerings like Kayo and Binge. These SVOD services typically contain less ads and are priced well below Foxtel’s traditional cable offering.
Finally, Foxtel is still saddled with billions in debts which need to be refinanced or repaid.
An IPO offers NewsCorp a solid exit strategy.
