Is the internet killing pay-TV?

James Packer’s Consolidated Media Holdings Limited (ASX: CMJ) yesterday reported a 12% fall in full year net profit to $85m compared to last year, mainly thanks to acquisition costs associated with Foxtel’s takeover of AUSTAR.

Foxtel, which is 25% owned by Cons Media, 25% by News Corporation (ASX: NWS) and 50% by Telstra Corporation (ASX: TLS), contributed $42m to Cons Media’s underlying net profit.

In good news out yesterday morning, Foxtel, in partnership with Channel 9, the free-to-air TV channel, has retained the National Rugby League (NRL) broadcasting rights for another 5 years at a cost of over $1 billion. Free-to-air rivals Channel Ten – owned by Ten Network Holdings Limited (ASX: TEN) and Channel 7 – owned by Seven Group Holdings (ASX: SVW), had also submitted bids.

In addition, Foxtel gained the rights to deliver NRL games over mobile and tablet to subscribers. Whether the new NRL deal and mobile rights will allow Foxtel to increase subscribers is another story. The pay-TV operator is coming under increasing pressure from broadband internet players and Apple and Google TV pay-per-view models, which are cheaper options and allow subscribers to customise their content easier than through a Foxtel subscription. In the last year, the company increased Foxtel subscriber numbers by just 30,000 to a total of 1.68 million. Including AUSTAR, Foxtel has 2.3 million subscribers.

Cons Media’s other business is a 50% share in Fox Sports (Australia) alongside News Corp. Fox Sports contributed $49m to Cons Media’s underlying net profit, but this has been falling over the last four years, as costs have risen more than revenues, due to investments in new technology.

That probably won’t be a problem for Cons Media for long. News Corp has submitted a bid for $3.50 per Cons Media share, with James Packer and the Australian Competition and Consumer Commission (ACCC) giving their seal of approval to the deal.

It’s not yet clear whether Seven Group Holdings will make a competing bid for Cons Media, but the company has applied to the ACCC for approval so that it too can make a bid. Seven  holds more than 25% of Cons Media, with James Packer holding just over 50%.

The Foolish bottom line

There are still a few hands left to play in the Cons Media game. The problem for any acquirer is that both the Foxtel and Fox Sports businesses appear to be facing a number of headwinds. Whether these are structural changes or just part of the business cycle remains to be seen.

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Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned. The Motley Fool‘s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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