It’s week 5 of The Commercial Experience. Thanks to everyone who is reading. If you’re enjoying it - let other people know! And let me know too. Would love to know what you’d like to see.
A disclosure from me. Last week I bought some shares in News Corporation. Not that many. About $1500 worth. I’m by no means a sophisticated or even remotely educated investor. But I do have some shares … and for disclosure they are listed here - Shares Held - by Ben Shepherd - The Commercial Experience (substack.com)
The reason behind buying a small amount of Newscorp was based around my optimism around the evolution of the Foxtel business. Last week saw the coming together of 3 events that gave me a fair bit of belief in the approach.
Firstly, Binge has found its place. It’s a highly competitive offering at a very compelling price. And it’s scaled significantly over the past 12 months even when COVID filming restrictions have limited new title volume. This month sees the beginning of almost 2 years of new releases - and Binge has a bunch of the key programs we will be talking about over summer. The next 3 months give Binge its best marketing platform since it launched.
Secondly, last week Foxtel launched the new IQ box. It’s unshackled from the cable, and is entirely based on a connection over the internet. In my view, this moves Foxtel from a cable pureplay, to a more interesting dual-play (more of that below) that evolves its core business and provides it with a modern flywheel.
Thirdly, Kayo and Binge continue to grow momentum with customers. Search volume shows steadily increasing momentum across the two brand terms. It also shows there’s a lot of ceiling available, especially when you consider the gap between Binge/Kayo and Stan. (see below)
Foxtel as a business has evolved beyond being a fixed cable offering. This has unshackled it from the economics of the fixed cable business - which are great until they’re not.
Traditional pay TV is a good business as long as subscription and advertising revenue can keep pace with content and infrastructure costs. Pre 2014, this was a more protected business as the alternatives to pay TV were either expensive (buying DVDs), or illegal (torrents). Foxtel owned the box, and the connection, they sold the advertising and this provided them enough money to keep buying content. For a lot of the content, the competition was really a one horse race. Pay TV had no real competition, and the FTA networks could only buy so much content as they only had so much spectrum.
2014 and the entrance of OTT at scale interrupted this in all areas. The OTT providers started bidding against Foxtel, and winning loads of new titles. The OTT products also bought a bunch of catalog content, again the domain of Foxtel. They provided consumers with a barrage of content for 10-12 dollars a month. And it was all available over the internet - no equipment needed, no contracts.
Admittedly, it took Foxtel far too long to adapt to where consumers were heading. It’s understandable in a way. Foxtel had a lot to try and protect in a legacy business that had functioned for 2 decades with little in the way of headwinds. But consumers changed rapidly, and the entire entertainment industry changed with it. By the time Kayo launched in late 2018, and Binge in May 2020, it’s likely there were 10 million households with an OTT service already.
As standalone products, Binge and Kayo are not entirely dissimilar to the core Foxtel business. These OTT businesses follow a similar momentum to a cable based content distribution business. The difference being neither Binge nor Kayo own the platform on which they’re accessed by their customers. So in essence they need to run at a profit within themselves, and are heavily dependant on both the platform owners (Google, LG, Samsung etc) as well as the content providers (leagues, producers, studios)
When it comes to hardware, ditching the cable on IQ is a big opportunity for the Foxtel business. It gives them two routes to market - as an OTT tenant (as it is in the above example with Binge and Kayo on other devices) and as an OTT landlord.
My belief is that there is huge value to be extracted from being a landlord and not just a tenant. Apple is a tremendous example of this. It’s the landlord of the iOS platform. And for this it is earning $10b per year from Google purely for default search distribution preference, and it earns more than $64 billion from App Store commissions. This is a hugely valuable business line, and is often glossed over due to the relative behemoth scale of the rest of Apple’s business. $74 billion annually - this is $10 billion more than the entire Disney business (parks, TV, cable, OTT, merchandise, theatrical)
Being an OTT tenant generates volume and reduces customer barriers to entry, but the economics of OTT are not entirely dissimilar to the fixed cable economics which have proven challenging for the legacy Foxtel business. You need to be in this space, but it’s very competitive and very content driven.
Foxtel aiming to become an OTT landlord is the real evolution - as it creates a commercial flywheel which, once spinning, can generate significant cash and shareholder value.
The differences in tenant v landlord can be seen above. A tenant is reliant on an external platform, and they are making all their revenue from purely the OTT service. Subscription revenue, advertising revenue (if applicable), and ideally they collect enough data to boost both new subscriptions, hold existing ones, and create a smarter ad product. Not bad but not differentiated.
Being a landlord as well as OTT operator is different. You have OTT services you own and operate, but you also distribute SVOD and BVOD services you don’t. This opens up distribution revenue, cross platform advertising revenue, as well as a wider trove of data. The data and the distribution volume really change the dynamics of the business. See below.
Opening up to more services brings more content, which should bring more users and usage. This creates a higher perception of value from users, but also provides significantly more data and intelligence on users. More users and more data brings more leverage, which can be utilised through higher distribution fees and ultimately advertising inventory allocation. These new lines of business bring incremental revenue, which can be pumped into improving the owned and operated OTT services (Binge/Kayo) and the core product (IQ), and ideally the wheel continues to spin faster.
If you want a comparison, Roku is the closest analog - but Foxtel has much better owned and operated content than Roku does presently. Roku has developed a strong business in 1/ charging for hardware, 2/ charging OTT services for distribution and presence, and 3/ requiring ad funded OTT services to give Roku a chunk of inventory that it can sell as part of a cross service advertising product, allowing it to fuse its data and insight gathered across services into a compelling connected TV ad product. The fourth and developing part of the business is becoming a content player itself with its own free channels.
This business has proven highly lucrative for Roku shareholders.
Currently, Roku trades at 25x it’s full year 2020 revenue. Newscorp currently trades at just over 1.3x its 2021 financial year revenue.
The big challenge will be getting the new IQ boxes in homes. Right now Foxtel has about 1.8m households with a broadcast subscription. It will want to move these over to the box, and also find a way to incentivise Binge and Kayo subscribers to use the new IQ as their go-to entertainment hub.
The economics of owning the platform are so much better than being a tenant. A tenant earns revenue from subscription and advertising. Not a bad mix, sure, but the landlord has the superior leverage. A landlord can earn from subscription, advertising on the platforms they own, advertising on the platforms they don’t own, hardware sales, distribution revenue and the value that data and intelligence provides across all services on the platform.
And if Foxtel forges ahead with this approach, I am very optimistic about their future. Even if the box approach doesn’t work, the OTT products have a lot of upside. And if the box approach does work, it could provide Foxtel with the ability to own and operate across a platform. This would make it a much different proposition to its immediate competitive set. Whatever happens, it seems Foxtel has completely unshackled itself from the cable, and is focused on the future … and the value this could create.
Want more?
Listen to this - Bad Blood - The Final Chapter - on Apple Podcasts
Watch this - Kevin Can F Himself - on Amazon Prime
Read this - Ethan Strauss on Gawker
Hi Ben - isn't this just Foxtel coming round to do what Telstra TV did years ago?