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Why Foxtel could fail

Foxtel, owned by News Corporation (ASX: NWS) and Telstra (ASX: TLS), has decided it’s time to start preparing for the arrival of the overseas powerhouses Netflix and Hulu.

Faster internet services in Australia (such as the NBN) will change the way services are provided by Foxtel. The fact that the company’s CEO, Richard Freudenstein, has approached its longtime free-to-air rivals is a sign it needs to change its product. Streaming movie and TV company Netflix has over 37 million members in 40 countries because it offers a wider variety of video, on demand, than traditional television networks.

With internet television, there are no commercials, no commitments, pause capabilities and viewers can watch anywhere at any time on almost any internet-enabled screen – it’s no wonder Foxtel is worried.

According to The Financial Review Mr Freudenstein has already approached his counterparts from Seven West Media (ASX: SWM) and Nine Entertainment Co to discuss its video-on-demand network. Despite being bitter rivals in the past, to encourage more Australians to switch to online TV, co-operation will be needed.

In 2012, Netflix realised US$3.61 billion in revenue whilst Hulu generated $695 million in the same period. Informa Telecoms & Media forecasts worldwide revenue will grow from its current $US10.6 billion to $US37.2 billion in 2017.

Revenues are drawn from advertising, transactions (like movie rentals) and subscriptions – similar to Foxtel’s current product offering. If the free-to-air networks can make an agreement with Foxtel, it is likely to lower capital expenditure and marketing costs.

Foolish takeaway

The biggest challenge for the media industry is through online threats such as this. If Australian media can successfully encourage viewers to transfer over to an online medium, they will be competitive against foreign rivals. However the biggest winner from the switch could arguably be Telstra, who has both a stake in the service (50%) and provides most of Australia’s internet bandwidth.

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Motley Fool contributor Owen Raszkiewicz does not have a financial interest in any of the mentioned companies. 

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