Foxtel growth stalls

Foxtel, the monopoly pay TV operator, is expected to see just 3% growth in new subscribers, hit by weak consumer confidence, higher operating costs and a slump in new subscribers.

Foxtel, which is jointly owned by Telstra Corporation (ASX:TLS) and News Corp (ASX:NNC), is understood to have seen 3% growth in subscribers for 2012/13 to about 2.4 million people, according to the Australian Financial Review (AFR). But the AFR reports that many of the newer subscribers are signing up for the cheaper Telstra T-box, which costs just $15 a month, compared to the current revenuer per user of close to $100.

The newspaper reports that higher programming costs are partly to blame, with Fox Sports paying close to $100 million per year for the National Rugby League (NRL) broadcast rights. That’s nearly double the $50 million Fox was paying under the previous deal. Fox Sports also faces greater competition from free-to-air broadcasters showing more sports events on their digital channels. Nine Entertainment is broadcasting the Ashes cricket series on its GEM channel, while Ten Network Holdings (ASX:TEN) holds the rights to the domestic Big Bash 20/20 cricket series.

For News Corp, the performance of Fox Sports and Foxtel is critical, with the assets lumped-in with publishing and digital assets – including a large stake in REA Group (ASX:REA). Analysts have estimated that Fox Sports and Foxtel will account for more than a third of News Corp’s earnings.

Foxtel’s average revenue per user (ARPU) stands at US$98.80, amongst the highest in the world and much higher than its global peers such as Time Warner Cable at US$75.30 and DirectTV at US$84.70. Analysts don’t believe that it’s sustainable at that level, and will need to come down. Still, Foxtel manages to spike its earnings growth by offering more expensive devices, additional set-top boxes, and enticing subscribers with new products such as Foxtel Go, which allows consumers to watch programs on tablet devices.

Foolish takeaway

In a small market like Australia, as the monopoly pay TV provider, Foxtel will eventually see market saturation, where everyone who wants Foxtel already has it, and earnings growth will become harder. Telstra and News Corp have a tough job in maintaining the pay-TV operator’s growth.

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Motley Fool writer/analyst Mike King owns shares in Telstra.

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