21 March 2016
by Dominic White
Why Telstra Wants Out Of Foxtel
Departing Foxtel CEO Richard Freudenstein played a key role in the renewal of its blockbuster sports rights deals with ...
"Make it Yours", Foxtel's new advertising campaign will shout through the television set on Sunday night.
It's Foxtel's latest effort to persuade us we can get all of our entertainment needs met by subscribing to its cable and satellite service, as 2.7 million homes already do, paying as much as $135 a month for its plethora of HD channels and services.
Foxtel, which is owned by Rupert Murdoch's News Corporation and Telstra, is Australia's most profitable media company, making around $1 billion a year and boasting key sports rights and blockbuster shows such as Game of Thrones.
But its primacy – and world-leading pay TV margins – are under threat because many people are making Netflix and other subscription video-on-demand services theirs too, at a much cheaper cost per month.
"Foxtel is basically a dartboard for digital disruption," says Simon Mawhinney, chief executive at Allan Gray Australia, the fund manager which holds shares in Southern Cross Media, APN News & Media and Fairfax Media, owner of The Australian Financial Review.
No one yet knows how deep the disruption confronting Foxtel will prove to be. But it was at the root of a seismic day in the 21-year history of the company this week.
Thursday saw the execution of a much-rumoured management overhaul. Richard Freudenstein, chief executive of almost five years, was out, and News Corp Australia chief executive Peter Tonagh was in.
Then the Financial Review revealed that Telstra is looking at the exit sign. Potential advisers are working up plans for an initial public offering of all or some of its 50 per cent stake, which could be worth $4.5 billion.
There's no official mandate, although UBS and Credit Suisse have both worked for Telstra in the past and have been linked to possible roles, but the news sparked inevitable talk that Murdoch will ultimately move to take control of the venture by exercising his pre-emptive rights.
News Corp, say some seasoned observers, would probably not want the hassle and additional scrutiny of a sharemarket listing for Foxtel.
As speculation swirls on Foxtel's future ownership, a picture is emerging of an increasingly dysfunctional relationship between News Corp and Telstra, the two behemoths of Australian media and telecommunications, as they ponder what to do about their new problem child.
Day-to-day relations on the Foxtel board are cordial, by all accounts. Telstra, which won't comment when asked about its IPO considerations, repeated its mantra this week that Foxtel remains "strategically important".
But the truth is that both Telstra and News can both blow hot and cold on their strategy for Foxtel, sometimes at levels seemingly bordering on petty.
In November, Fairfax Media revealed that Freudenstein had flown to New York to seek Murdoch's approval for a $30 million injection of funds to bolster its marketing fight against rising competition from Netflix and other digital interlopers.
Murdoch, rarely one to shy from spending to defend market share, gave his blessing to the proposal. But Telstra, which made profits of $4.3 billion in 2015, took significantly longer to sign off its half-share of the $30 million – a source of considerable frustration, it is believed.
News, too, is capable of sending mixed messages. While Murdoch retains the grand vision for Foxtel, bean-counters at News Corp in New York can have different agendas.
Meanwhile, Telstra chief Andy Penn, who was previously on the Foxtel board, has stronger views on Foxtel then his predecessor, David Thodey. He is acutely conscious that Foxtel is operating in a difficult and fluid market over the long term.
And don't mention the "S" word – Sensis – in the Telstra boardroom. Telstra rejected calls to sell the Yellow Pages company in 2006, when it could have got close to $20 billion. Eight years later, it dumped 70 per cent of it for just $454 million to US private equity firm Platinum Equity.
Sensis got eaten by the internet. Some in Telstra fear the same could happen to Foxtel.
Sources say Freudenstein, doubtless tired of navigating the complex shareholder relationship, gave one year's notice of his intention to leave near the end of 2016, which would have meant he had done five years in the role.
But News Corp, which has management control of Foxtel, decided to move quicker, as is its wont. It shifted former Foxtel executive, the well-regarded Tonagh, into the role.
The move not only saved Foxtel the cost of an outside hire but also resolved the top-heavy management structure at News Corp Australia, where Michael Miller remains as executive chairman.
Freudenstein remains on the board of News's real estate advertising company, REA, but is otherwise "pursuing other opportunities", for now at least.
Freudenstein slashed the price of basic Foxtel from $49 to $25 as a pre-emptive strike against Netflix, oversaw the launch of Foxtel internet TV service Go and its streaming service Presto, and played a key role in the renewal of its blockbuster sports rights deals with the AFL and the NRL.
But critics note that Foxtel's iQ3 set-top box has been a technological flop and the company missed a trick when it lost out on the English Premier League rights to Optus last year.
"Richard is one the best media executives in Australia, but he was dealt a very difficult deck of cards with so much disruption going on," says one media executive.
Now it will fall to Tonagh to take on the difficult task and manage Foxtel through what could be the most turbulent period in its history.
He prepares to take over as Netflix prepares to celebrate its first birthday in Australia. Just one year in, more than 1 million Aussies are estimated have signed up. They don't get live TV or sport, but they are paying as little as $8.99 a month for access to Netflix's library of shows, movies and originals like House of Cards and Making a Murderer.
Then there's smaller SVOD rival Stan, owned by Fairfax Media and Nine Entertainment Co, and Foxtel's own Presto, which it owns with Kerry Stokes's Seven West Media.
Foxtel's new ads will point out the fact that Foxtel itself has a deep library of on-demand shows and films. It will aim to "reframe people's perception of how you view Foxtel", says one person familiar with the campaign.
Tonagh well knows that it will take more than one advertising campaign.