Up until a few years ago, Foxtel has enjoyed an uninterrupted run as the monopoly premium Pay TV provider in Australia.

But the arrival of international SVOD players and the rise of local challengers has made a dent in Foxtel’s business.

We believe the challenges that Foxtel faces are structural in nature and Foxtel could find it tough to recover lost ground.

In the past four and half years, there has been perhaps no bigger topic in the media industry than the arrival of Netflix and other SVOD players in Australia. With Foxtel being the largest Pay-TV provider, it has been at the receiving end as Netflix has captured a substantial portion of the latent demand for SVOD services in Australia.

In response to these competitive pressures, Foxtel cut prices in late 2014, taking the basic starter bundle from $49 to $25 a month. The effect of this price cut saw an uplift in subscriber numbers, driving marginal revenue growth in 2015. However, the nature of this growth (volume growth through price decrease) proved to be short lived and Foxtel ARPUs and earnings have continued to remain under pressure with no letup in sight.

With the launch of multiple new SVOD players in the next 6 months (Disney+, Apple TV+ and potentially HBO Max), the pressure on Foxtel is only expected to increase.

In this report, we outline the reasons why we believe that Foxtel will continue to remain under pressure and why a turnaround in its fortunes could be a long drawn out process.

1. the video content market getting increasingly competitive and that is not expected to change in the near term

2. falling ARPUs and falling EBITDA driven by lower pricing is expected to worsen as new SVOD services could kick start a pricing war in the short term

3. growth in subscribers coming from cannibalisation of existing base and lower ARPU products and free and promotional pricing offers

4. debt burden continues to remain elevated with little to no appetite for market refinancing options plus major shareholder Telstra looks to have abandoned ship on the face of it by unwilling to participate in any debt refinancing

5. Sport remains the only asset, but is seeing disruption from new players i.e. telcos

6. Foxtel’s 1Q20 earnings update is in-line with Venture Insights’ view that Foxtel is facing a number of structural challenges which will see subscribers and ARPUs decline even as the Australian SVOD market is about to see a renewed bout of competitive intensity with the launch of Disney+ and Apple TV+.

7. On a QoQ basis, Pay-TV subscribers decreased by 75,000 (-3%), Foxtel Now subscribers declined by about 60,000 subscribers (-15%) and Kayo subscribers increased by 33,000 (+10%), though this is much lower than the 100,000+ subscribers that it added in the previous quarter.

8. Weak growth in Kayo subscribers reaffirms our view that Kayo subscriber growth will be seasonal and linked to major sporting events. In this regard, while Kayo has seen a spike in subscriber growth due to the Rugby World Cup, our analysis of Google Search trends indicates a 3-4x increase for the search term ‘Cancel Kayo’ towards the end of Rugby World Cup. In addition, we do not expect the upcoming summer of Cricket with the Pakistan and New Zealand series to drive any significant uptake in Kayo subscriptions.

Contents

Key takeaways

Foxtel and the coming streaming wars

• The video content market is getting increasingly competitive and that’s not expected to change in the near term
• Falling ARPUs and falling EBITDA – SVOD pricing wars coming up…
• Kayo – risks of cannibalisation and seasonality in subscriber gains
• Programming costs and debt burden remain elevated while revenues decline
• Sport remains the only real asset but is seeing disruption from telcos
• 1Q20 Foxtel earnings update

Final thoughts

List of charts/tables

Figure 1. Australia is a small market with plenty of choice in the video market

Figure 2. Foxtel’s ARPUs have been falling (2014-2019, A$ per month)

Figure 3. SVOD price comparison (A$ per month)

Figure 4. Foxtel’s EBITDA (A$mn)

Figure 5. Will Kayo Sports cannibalise Foxtel?

Figure 6. Google trends search result for the term ‘Cancel Kayo’ from November 2018 to November 2019