If it sounds to good to be true, then it probably is.
In the past two days, the pay television industry has been touting a win-win-win deal.
The two big contenders Optus and Foxtel have done a deal. They say it is good for both of them and good for the consumer and good for Australia.
The Foxtel partners are Telstra, Rupert Murdoch’s News Corp and Kerry Packer’s Publishing and Broadcasting. Optus is owned by SingTel, in turn controlled by the Singapore Government.
Foxtel’s cable pay television network is capable of reaching 70 per cent of Australian households, but fewer than 20 per cent have signed up. The households are in the capital cities and surrounds (excluding Darwin and Hobart). They include Wollongong, Newcastle and Geelong and quite a few smaller cities in the south-west.
Optus has 240,000 subscribers – again in the main cities.
In the seven years since pay television was permitted in Australia the commercial operators and the government have made a comprehensive hash of it, on any measure. Consumers have been aggravated at the high cost and limited choice. And the commercial operators have made huge losses. About $8 billion has been poured in to pay TV and until this week, the market value of the pay TV operations has been almost nothing.
The reasons are the same reason that Australia has made a complete hash over the introduction of digital television – too much government regulation directed at the wrong outcome (to ensure the existing free-to-air networks retain their extraordinarily high profitability) for the wrong reason – to appease those networks in the naive hope they will not spoil the Government’s re-election hopes.
When pay television was first permitted we did not have any equivalent of cross-media ownership laws. Packer the queen of screen and Murdoch the prince of print were allowed in. the sole aim seemed to be to ensure a weak pay-TV set-up so the rivers of revenue from free-to-air television were not imperilled. Advertisements were restricted on pay-TV, for a start. And then the free-to-air commercial networks extracted from the Government some anti-siphoning rules which required free-to-air broadcasts of certain big-ticket-item sporting events.
A further error was a failure by Government to insist on a separation between delivery network and service provision. It fell into the same mistake as it did with the partial privatisation of Telstra. Instead of selling half the whole it should have sold the whole of a half. It should have split Telstra into network operator and service provider and sold the latter. The network (whether government or privately owned would have then given open and equal access to all takers, including the old Telstra).
Similarly with pay-TV. Foxtel is a network owner and content provider. So is Optus. It is a pernicious vertical monopoly because the network owner will always favour itself among content or service providers and, unless restrained, will prevent others from accessing its network to deliver their content.
With this week’s deal, the content is fused and all of what was hitherto Optus content would be available to Foxtel subscribers (that is subscribers who used Foxtel’s infrastructure to receive Foxtel content) and vice versa. Further Optus would be able to package Optus telephony services with its pay-television service and Telstra (through Foxtel) would be able to do the same thing.
In short, pay-television subscribers whether via Foxtel’s cable or Optus’s cable will access exactly the same television content and will get discounted access to Optus’s or Telstra’s telephony. Cheaper phones and more choice of TV content for the consumer with the prospect of cheaper TV content as economies of scale kick in with more subscribers – presumably including a channel which broadcasts large pink snorting animals with squiggly tails flying overhead.
The obvious perils of this vertical monopoly have been recognised even by this Government, which gave power to the Australian Competition and Consumer Commission to “”declare” certain networks. When declared, the network would have to allow any content provider access on reasonable terms. Telstra’s phone network and Foxtel’s cable network were “”declared” in 1997. A lot of high-cost legal activity and challenges followed. Another declaration was made in 1999 and upheld in the Federal Court in 2000 allowing – for example – Kerry Stokes’s Channel Seven’s pay TV arm access to the Foxtel cable network to sell its sports programming, the most significant part of which has been (at least until now) the AFL.
This is not a question of a particular market failure being fixed by regulation. It is a failure of the regulatory regime in the first place being “”fixed” by further regulation – more bureaucracy, more lawyers and the consumer missing out.
It is astounding that a technologically advanced nation like Australia with high concentrations of population in Sydney, Melbourne, Adelaide and Perth could make such a hash of something as simple as television. On pay TV, we are not up to where Mexico City, Buenos Aires, Singapore were five years ago and are sill behind Dubai, Belize City and dozens of other smaller, poorer cities who have cheaper pay TV with more choice.
It should have been quite simple. A monopoly pay television network (whether private or public or mixed) should have been established to put the cable and satellite combination in. Then all the content providers who wanted to could have competed on that network on a level playing field. But oh no, successive Governments had to allow Packer and Murdoch fingers in all pies – both network and content. Keating and Howard should have had a policy of you can be sable of the cable or potentate of content, but not both.
When Optus and Foxtel were allowed to compete in the provision of a cable network we had an overhead cable network and underground cable network going in at the same time. Some streets got both, others got neither and both companies lost money. It gets worse. Some of this cable will not take telephony and most won’t take digital television.
This week’s deal will at least eliminate the need for two new sets of cable. But it does not eliminate that problem. Here in the ACT Transact is rolling out its cable. That poses a few questions. Will ACT residents be able to insist that they receive Foxtel or Optus programs down that cable along with Transact’s telephony and content? Or will they have to have two cables coming into their house? This is a big question for regulators. We know a content provider can insist on access to a declared cable, but can a cable owner or subscriber attached to that cable be able to insist that certain content be provided along it for a reasonable price? Professor Fels?
Further, Telstra’s copper wire and Foxtel’s analogue pay TV networks have been declared as open to other providers. But what if the Foxtel network is digitised? Will it be declared open, or will the combined forces of Packer, Murdoch, Telstra and the Singapore Government be able to twist the Australian Government’s arm to ensure that only their content goes down that line, without competition at a price decided by what the (coerced) market will bear.
In this, however, there is one glimmer of joy. With a monopoly Australian content controller, only one Australian buyer will go to the Hollywood studios to renew contracts to access US movies. Before there were several who bid each other up to ludicrous heights. Before this week, Optus had a $600 million millstone around its neck until 2006. When those contracts are renewed Hollywood will be the loser. That will mean lower costs for Australian pay TV operators, but in a monopoly environment the chances of them being passed to consumers are fairly remote.