Foxtel in spotlight over customer 'spin-down'

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This was published 8 years ago

Foxtel in spotlight over customer 'spin-down'

By Dominic White
Updated

Foxtel is set to come under intense scrutiny when it reports fourth-quarter results next month amid evidence that a considerable number of its customers has abandoned its drama and movie packs – some of them in favour of new, cheaper streaming services led by Netflix.

The cable and satellite TV monopoly, which is owned by News Corp and Telstra, has experienced significant "spin-down" – customers cherry-picking channels and cutting their bills – since it changed its pricing model in November. Sources are divided on whether the negative reaction has been comfortably within the anticipated range.

Would a cut to licence fees save commercial networks?

Would a cut to licence fees save commercial networks? Credit: Viki Lascaris

Despite this, Foxtel is expected to have grown its subscriber base rapidly in the period to June 30, helped by chief executive Richard Freudenstein's decision to slash the price of its basic service from $49 to $25 and give households more chances to select which channels they want to receive.

The company, which makes about $1 billion in underlying profit – more than the three metropolitan commercial free-to-air network owners combined – is also expected to report record low churn (the percentage of customers defecting).

That is in spite of the troubled launch of Foxtel's iQ3 set-top box, the second part of Mr Freudenstein's three-pronged strategy to increase household penetration, along with its launch into broadband.

Foxtel's high-margin drama tier is thought to have been hit hardest. Like the movie pack, it costs $20 each a month. (The $25, lower-margin, sports package is not thought to have been negatively affected).

"The price changes were a bold move but intuitively, it is obvious that people may replace a $20 tier with a cheaper streaming service unless they can perceive value in hanging in there," said one industry source. "The industry all has a job to do to persuade people of that."

Foxtel created the drama tier in November. It features premium HBO channel Showcase, home of Game of Thrones, which was previously in the old $25 premium movies and drama pack.

Some of those reducing their Foxtel bills have signed up instead to subscription video-on-demand services, in particular market leader Netflix, which costs as little as $8.99 a month and is believed to have reached more than 500,000 Australian homes since launching on March 31.

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Nevertheless, it is believed that spin-down peaked before Netflix launched in late March and has since levelled off, with some customers increasing their bills again.

Sources said the spin-down was largely by long-time consumers re-evaluating their Foxtel bills for the first time in years in the wake of its widely publicised price changes. "People are inherently lazy but if they see a substantive change they will pick up the phone," said one source.

Foxtel anticipated some customers would spin down when it changed its pricing, a move that was designed to boost its stalled premium cable and satellite subscriber growth, and indeed tackle the looming threat from subscription video on demand.

At the time Citi cut its profit and revenue forecasts for Foxtel for 2015 and 2016 in response to the investment in the new pricing, delayed iQ3 box and broadband.

Mr Freudenstein refused to comment on the forthcoming results because News Corp and Telstra are in blackout periods.

But he said: "Foxtel's new pricing and packaging strategy continues to be very successful. If you look at the third-quarter numbers, subscribers grew 7 per cent year on year and churn was 10.9 per cent, down from 13.1 per cent in the prior corresponding period ".

Foxtel has not released subscriber figures for its own streaming service, Presto, which it co-owns with Seven West Media. Stan, which is owned by Nine Entertainment Co and Fairfax Media, owner of The Australian Financial Review, has said it has had 300,000 sign-ups – which include those on free trials.

Foxtel has had tense discussions with Telstra's sales team as it puts pressure on the telco to meet challenging targets.

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