December 14th 2002

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Articles from this issue:

COVER STORY: Why the Liberals were wiped out in Victoria

CANBERRA OBSERVED: First strike? With what?

VICTORIAN ELECTION: Cause of Liberals' decimation clear

Higher costs force up cover price of News Weekly

STRAWS IN THE WIND: Physician heal thyself

The panacea of free trade (letter)

Free trade: myth and reality (letter)

HOUSING: A solution to young home-buyers' nightmare

Universities: quantity replaces quality (letter)

Medicare (letter)

Ignored Australians (letter)

ECONOMICS: Just how real are Japan's money woes?

COMMENT: The cause one dares not criticise

SUGAR: Sugar cane farmers rally to unite industry

MEDIA: Counting the cost of the Pay TV war

HISTORY: Revisiting the Dismissal

ASIA: Taiwan Strait's delicate military balance

BOOKS: Dry: In Defence of Economic Freedom, by John Hyde

Books promotion page

Counting the cost of the Pay TV war

by Tim Wallace

News Weekly, December 14, 2002
Foxtel and Optus, longtime arch-enemies in the pay TV wars, have declared a trade pact. After nearly a decade of stalking each other through the inner suburbs of the major cities, they've had enough of competition. They've decided to get along and share the remote control.

There's a lesson in there for all of us. But the learning didn't come cheap. Total losses so far for the major players in Australian pay TV are put at $4 billion by Australian Financial Review journalist Neil Chenoweth, a veteran observer of the Murdoch empire, which is the pivotal player in this market.

The bills started escalating in earnest from about 1994, following the break-up of a prototype coaxial axis. Kerry Packer's Nine Network, the Seven Network, Rupert Murdoch's News Ltd and Telstra had together hoped, according to Chenoweth, "to safely guide the establishment of pay TV without threatening their existing businesses". But things didn't go to plan and the fellowship split. Packer cast his lot in with Optus; Murdoch teamed with Telstra to form Foxtel.

Hidden aim

Neither of the telcos were particularly interested in pay TV per se; what interested them were the spoils of the wider cable telephony market. Pay TV was their entrée into people's homes; because after that, the idea of signing on for speedy internet access freeing up the telephone line at a discount rate started looking a lot less extravagant.

Attracting pay TV subscribers depended on two factors: Hollywood product and sports content. Each side clamoured to outbid each other for the new Madonna movie, a Mimi MacPherson-narrated nature documentary or endless reruns of I Dream of Jeannie and Lost in Space.

The Packer and Murdoch camps, meanwhile, went at it hammer and tongs over Rugby League. News set out to snatch league coverage from Nine and Optus through the simple expedient of establishing its own competition, Superleague. That meant gutting the existing Australian Rugby League competition, which Packer didn't take kindly to.

News Ltd is estimated to have spent $500 million before striking a deal. In 1998 it agreed to let Packer's Publishing and Broadcasting Ltd become an equal owner in Foxtel, each with a quarter share (and the other half being owned by Telstra). Foxtel and Channel Nine have since teamed up, along with Channel Ten, to wrest AFL rights from Channel Seven (much to its chagrin, with Network chairman Kerry Stokes taking the whole gang to court alleging a conspiracy to deprive Seven of the AFL rights).

Having seen the burying of the hatchet over one particularly bitter dispute, we might have surmised that with the passing of a little more time and money, other pay TV conflicts would eventually evolve into partnerships and a solution to the costly Hollywood bidding war be found.

And so it has. Under their deal, Optus will hand over the video card and the remote control to Foxtel, which will assume Optus' financial obligations under its movie and other content arrangements. When contracts come up for renewal, or new rights become available, Foxtel won't be bidding against Optus any more. It will supply its content to Optus as well as supply Optus content to its own subscribers: the promise is all Optus programs available on Foxtel and all Foxtel programs available on Optus.

As attractive as that might sound for consumers, it is even more attractive to the operators. Foxtel, facing a high subscriber churn rate of 20 per cent, sees advantages in being able to provide Optus content, as well as discounted bundling of pay TV with broadband internet connection and phone plans. As for Optus, it was threatening to pull the plug on its entire cable if the Australian Competition and Consumer Commission didn't give deal a green light.

So this what we have: the same content being offered on two different cable networks that have about an 80 per cent overlap with each other; and did I mention that these overlapping networks now offer the same content?

It might in hindsight be considered major foolishness to have allowed the wholesale duplication of mult-billion-dollar infrastructure for this end. Laid separately, the Telstra and Optus networks could have reached nearly 5 million homes, instead of the 3 million or thereabouts reached by their overlapping networks. There is one cable too many in a few areas and one cable too few in many areas.

The community pays for this. It pays directly through in the destruction of shareholder and taxpayer wealth through the expensive duplication of telecommunications infrastructure to no good end. It pays indirectly through the opportunity cost in the failure to maximise the benefits of broadband access by providing to it to as many people as possible.

There is another cost as well: the damage being done by rapacious commercial interests to our beloved sporting codes, which are gradually being corrupted by their addiction to the riches of sporting rights. In time we will have the opportunity to reflect on how they cope with the withrawal of those riches. It is unlikely to be an easy cold turkey, and the sporting codes will not be left unscathed.

  • Tim Wallace

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