Pay TV viewers switching off

The difficult outlook for the Australian economy is making life hard for Australia’s pay television companies, led by Foxtel and Austar.

Household disposable income growth will be significantly affected by the expected increase in unemployment, which will impact the number of households subscribing to pay-TV, and the cancellation rate is likely to increase.

While Foxtel and Austar are continuing to introduce new and hi-definition channels, as well as enhanced digital set-top boxes, they are doing so at discounted prices to both attract and hold subscribers.

However, over the entire five year period, IBISWorld estimates that industry revenue grew at an annualised rate of 8.9% in the past five years. This robust growth is due to increasing household penetration with pay-TV services, and expansion of enhanced value digital services at higher subscription prices.

Government regulation and control of this industry have a significant impact on its performance. There are limits to ownership and control and even to the transmission of major sporting events.

The industry is still in a growth and development stage and has undertaken significant capital expenditure in the past. While growing in terms of subscribers and revenue, the industry only commenced to generate profits in 2005-06.

Over the five years to 2013-14, IBISWorld estimates that industry revenue will grow at an annualised rate of 3.6%.

Forecast subdued economic growth to the end of fiscal 2010 is expected to offer a very challenging operating environment for players in this industry. Sluggish growth in subscribers is expected, along with higher cancellation rates by existing subscribers, as unemployment rises.

However, stronger economic growth from 2011 onwards is expected to lead to a return to solid growth in revenue and profitability. Continuing increases in subscribers from 2011 and improved programming will also assist revenue growth.

Increasing average revenue per subscriber will also occur, resulting from the introduction of new digital and HD TV and other services at a higher cost, on a bundled service basis, and from increasing advertising revenue, as this industry’s share of viewing increases further.

The industry will also have the benefit of being the joint broadcaster along with the Nine Network of the 2010 Winter Olympics and the 2012 Summer Olympic Games in London.

One factor that will affect this industry over the outlook period is the continuing evolution in which pay-TV is being bundled, along with a number of other services, such as telephony and internet access. This mode of operation is expected to intensify in the future.

The industry is not expected to achieve the same level of penetration or growth, as is the case in the US, until a significant level of new competition is allowed in the industry from a variety of operators using a range of existing and new technologies. The industry also has to invest in a significant amount of new programming. Some of the recent new deals with major sporting codes in Australia for pay-TV access may assist.

Key success factors for operators in the industry:

• Having a loyal customer base
  Able to keep existing subscribers and minimise any ‘churn’ by offering a variety of channels and interactive services.
• Superior financial management and debt management
  Due to the current financial state of the industry, having access to significant operating and capital funds from borrowings or other sources. Although this has now improved significantly since 2005-06.
• Market research and understanding
  Monitoring changing consumer needs/wants and desires and offering new channels over time.
• Must have license
  Operators must have a license to operate services and then negotiate access to the fibre optic cable, satellite or other network infrastructure.
• Ability to negotiate successfully with regulator
  Significant regulation occurs in this industry and these need to be understood and complied with.
• Having a large supply contract
  Supply of quality and on-going film/channel product (in line with subscribers viewing needs and desires) at a reasonable price is vital
• Ability to quickly adopt new technology
  Technology is advancing rapidly, particularly with digital services, and needs to be monitored. Capital funding resources need to be available to offer expanded services.
• Business expertise of operators
  The industry has until recently operated at a financial loss. While financial conditions have improved since 2005-06, significant business expertise is required to continue to manage this situation, particularly to expand/extend new digital services.