The prospects for competition are still a long way off in Australia s staid pay TV sector

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1 The prospects for competition are still a long way off in Australia s staid pay TV sector TV International, February 10, 2009 Volume 17 / Issue 3 The Australian government's plans for a National Broadband Network are at the tender stage, with incumbent telco Telstra refusing to play ball. This means that a national fiberto-the-node network is still several years away. Australia's current broadband network has limited capacity, which is usually insufficient for IPTV signals. Therefore, the cosy non-competitive relationship between the three main platforms looks set to continue for some time. Pay TV subscriptions have grown steadily, reaching 2.3 million of the 7.69 million TV households by September Foxtel became fully digital in early 2007 and now has over 1.5 million subscribers. Most pay TV subs are DTH; the cable sector is small and there is no IPTV. DTT penetration is also on the rise, reaching 2.9 million households (including homes taking pay TV) by September Uptake was boosted when services united under the Freeview banner in November More channels will launch in 1H09. At present, the 15 channels on offer in urban areas are spin-offs from the established FTA channels. Three conglomerates dominate the pay TV sector: Publishing and Broadcasting (PBL), News Corp and Telstra. Each company has interests in terrestrial TV, pay TV and telecoms. The three companies are also partners in pay TV market leader Foxtel. Pay TV Cable and satellite subscriber numbers continue to grow steadily. However, there is no IPTV competition. Foxtel has more than double the number of subscribers of its main rival Austar (see fig. 1). Rumors of a merger between the two operators persist. Although negotiations have taken place, no deal was reached, reportedly because of Austar's heavy valuation. While Foxtel, Austar and Optus are three separate companies, they work under cooperation agreements that limit competition. Following an agreement with Foxtel, Austar does not operate in Western Australia, Sydney, Melbourne, Adelaide, Brisbane and Canberra. In return, Foxtel provides Austar with the Foxtel program platform, and it doesn't operate in Austar territories. Foxtel manages Optus's cable TV operations. Foxtel Foxtel launched as a cable-only service in It added a DTH option in 1998 and is now comfortably the pay TV leader, passing 70% of TV households. Foxtel is backed by Telstra with a 50% ownership share, with News Corp. and PBL each having a 25% stake. Revenues for the year ending June 2008 increased by 17% to A$1.7 billion (US$1.1 billion) compared with the previous 12 months. EBITDA rose by 48% to A$351 million. Foxtel's subscriber base ended June 2008 at 1.54 million, including 150,000 wholesale customers. The operator completed digital migration in early Excluding wholesale, Foxtel's subscriber base is split fairly evenly between cable and DTH. The company began offering its Foxtel iq DVR in 2005, with the 160GB Pacemanufactured box. Foxtel revealed that almost a quarter of its subscribers had DVRs by end-june 2008, equating to close to 385,000 homes. This is up from 322,000 at end- 2007, and 200,000 at end-june 2007.

2 The DVR service was improved in September 2008 when Foxtel unlocked a fourth tuner, allowing subscribers to watch live TV and to record two other programs simultaneously. Previously only one recording could be made while watching another live broadcast. In November 2008, Foxtel's EPG was extended to allow consumers to record shows two weeks in advance, up from one week before. Foxtel launched a five-channel HD service in June The Foxtel Box Office HD ondemand service is also available, permitting subs to watch movies for 48 hours after paying for them. The operator had sold 15,000 subscriptions to the Foxtel HD+ service prior to launch and 40,000 just two months after. HD subscribers must upgrade to an iq2 settop box to receive HD signals. In addition to three tuners, the settop offers double the storage capacity (320GB) of the SD box. Foxtel agreed a deal with Optus to acquire six transponders on the D3 satellite which is planned for delivery in The company has an option to take a further two transponders. Foxtel already has the majority of available space on the Optus C1 satellite. Foxtel will migrate some services from Optus C1 to D3. Foxtel pushes its 29-channel Get Started entry-level package for A$31.95 per month. The Platinum top package retails for A$ According to Foxtel, about 40% of its customers take the top-priced package. Foxtel continues to voice its opposition to the anti-siphoning rules that require 11 key sports to be carried on free-to-air TV. Foxtel claims such rules mean that it is unable to follow the premium-sports strategy that News Corp so successfully deploys elsewhere. Foxtel holds the pay TV rights to Australian Rules Football (AFL) following a five-year deal agreed in The 2010 Vancouver Winter Olympics and the 2012 London Summer Olympic games will be screened by Foxtel as it jointly secured the rights with terrestrial channel Nine. The deal includes live rights for free-to-air, HD programming and subscription TV as well as internet and mobile rights. Local reports suggest the rights cost the two companies US$105 million. Foxtel has movie supply deals with Paramount, Sony, Fox and Universal. These studios, along with Liberty Media, are partners in the Premium Movie Partnership, which supplies the Showtime, Showtime 2 and Showtime Greats channels. Foxtel has an agreement with PMP to supply content until December Foxtel has a separate supply deal giving it first-run pay TV rights with 20th Century Fox. The studio also has a free-to-air deal with Network Ten, with Foxtel and Network Ten able to air Fox shows at the same time as they air in the US. While Ten gets first look at all Fox shows, Foxtel enjoys exclusivity on the shows it gets. Although the deal means that, for the first time, US shows do not debut on Australian free-to-air before pay TV, Ten considers that the limited window' a show gets on pay TV is beneficial as it boosts awareness for the free-to-air run. In December 2008, Foxtel secured a deal with Nine Network and Warner Bros. for exclusive first-run carriage of several new US shows. Chuck, Privileged, Pushing Daisies and Terminator: The Sarah Connor Chronicles all began airing in January Austar Launched in 1995, Austar is the second largest pay TV operator. In addition to its 120- channel TV service it also offers broadband access and mobile telephony. It also controls 50% of XYZ Entertainment, a channel supplier co-owned with Foxtel. Austar is the sole provider of pay TV services in almost all of its service area, which numbers 2.5 million homes outside the capital cities (excluding Hobart and Darwin) and

3 Western Australia. Austar is predominantly a DTH service, although it operates an 8,000- subscriber cable network in Darwin. By end-september 2008, Austar had 713,658 subs, up 8.4% from 658,087 a year earlier (see fig. 2). However, there are signs that subscriber growth is slowing. Revenues were A$414 million in the first nine months of 2008, compared with A$369 million for the same period in EBITDA in 1Q-3Q08 rose by 22.6% to A$154 million. For FY08 Austar targeted "a 20%-plus operating cash flow growth rate." The operator stated that growth would be "underpinned by a continued acceleration of the company's revenue and pay TV uptake as well as a disciplined cost base." ARPU in 3Q08 rose by 2.9% on 3Q07 to A$78.55, boosted by a rate hike at the beginning of the year as well as stronger demand for interactive products such as its MyStar DVR service, which ended the quarter with 57,544 subscribers, up from only 15,876 in March The company wants 30% of its subs to take the DVR. Using hardware supplied by Thomson, MyStar includes a free-to-air tuner, which allows customers to access DTT signals. Its 160GB DVR comprises four tuners and handles both digital satellite and DTT reception. Liberty Global holds an indirect controlling stake in Austar through its ownership of UAP and United AUN, which hold a combined 54% share. The rest of the equity is dispersed widely. Foxtel was long rumored to be interested in acquiring Austar, but talks between the companies ended after they failed to agree a price. Optus Optus is a 100%-owned subsidiary of the regional telecoms giant SingTel. It operates Australia's third pay TV service, with about 150,000 subs, and was the last of the three to introduce digital services. However, in contrast to the market leaders, its cable offer has been unable to deliver consistent subscriber growth. Optus has a long-standing agreement whereby Foxtel supplies TV services to Optus's subs. Optus offers triple-play services. Optus launched digital cable TV (called Optus TV featuring Foxtel Digital') in 2005 to 1.4 million homes in Sydney, Melbourne and Brisbane. Optus also acts as a non-exclusive agent for Foxtel Digital in areas where it does not have its own cable. For the fiscal year ending March 2008 Optus reported that its pay TV revenues increased by 15.1% to A$140 million compared with A$121 million in the previous year. In the six months to September, pay TV revenues were A$69 million, up A$4 million on the same period a year earlier. IPTV There were 5.6 million broadband subscribers at end-september 2008, equivalent to 67.6% household penetration. Incumbent Telstra accounted for 39% of subscriptions, while its nearest rival, Optus, takes 16%. The tender process for the fiber-to-the-node National Broadband Network is making progress. The government is preparing to narrow down its preferred bidders, having received an Australian Competition and Consumer Commission report analyzing each bidder's proposed access terms and pricing conditions in January. The network is expected to cost A$15 billion to construct. SingTel-owned Optus, Melbourne-based Acacia and Canadian company Axia NetMedia are the most likely contenders for the NBN tender, following communications minister Stephen Conroy's decision to remove Telstra from the process after it submitted only a

4 partial network rollout plan in December However, analysts believe that Telstra remains a key player. The company's decision to submit a limited network plan was part of its ongoing strategy to force the government to give it regulatory concessions before it commits itself to national rollout. Building a NBN without Telstra is unworkable the company is too powerful and controls too much infrastructure. Conroy understands this and is likely to bring Telstra back into the fold at some point, which may lead to Telstra winning some of its demands such as no sub-loop unbundling; no joint-ownership of the network; and the government not breaking up Telstra into network and retail operations. IPTV activity has been limited to trials, with future development dependent on the fiber network. Access speeds remain slow, despite the government attempting to improve the situation. Any IPTV plans are likely to be based on the new network. Telstra CEO Sol Trujillo said of IPTV: "the question now...is how can we make it complementary with other services that we can deliver as we continue to add value for customers. We have lots of thoughts and ideas." The company will not outline a potential service until the government clarifies its NBN plans. Telstra abandoned IPTV trials, using Microsoft Internet Protocol TV software, in DTT DTT launched in most major urban areas in Since 2003, the networks have been required to transmit 20 hours of locally-produced HD programming per week. Research from the communications regulator ACMA found that DTT was watched in 42% of Australian homes by end However, alternative research found the figure to be lower than this. Informa estimates 2.90 million DTT homes (including pay TV households) at September 2008, up from 2.32 million a year earlier and 1.68 million in September The initial analog switch-off target of end-2008 in some areas proved unrealistic. A revised target date of end-2013 was set in December 2008 when the government passed new legislation. The Sunraysia region will be the first to go all-digital, by end-june 2010, followed by Canberra and New South Wales in Sydney, Melbourne, Adelaide, remote western, central and eastern Australia will be last territories to switch off analog signals. DTT services were united under a single banner in November 2008 when Freeview Australia soft-launched. The official launch followed in January, when Freeview-branded settop boxes and IDTVs became available. Members of the Freeview consortium include national broadcasters ABC, Seven, Nine, Ten and SBS, as well as regional broadcasters Prime, WIN and Southern Cross. The broadcasters agreed to provide A$50 million worth of airtime to promote the platform. Each of the five nationals will launch a new channel on Freeview in 2Q09. At present, urban homes receive 15 channels, including five HD ones. Network Ten will introduce a dedicated sports channel, Channel 1, while ABC is hoping to launch a dedicated children's channel. Seven, Nine and SBS were yet to announce details of their new offerings. Another benefit of Freeview is a consolidated EPG. Broadcasters have only transmitted program data since late With this information now collated in one place, one of the platform's major drawbacks has been solved.

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