Foxtel thinks you should pay for sport — would you?

Pay-TV operator Foxtel has launched a fresh challenge to the government’s anti-siphoning laws. Foxtel, owned 50/50 by News Corporation (ASX: NWS) and Telstra (ASX: TLS), has called for Communications Minister Malcolm Turnbull to consider amending or removing the law as part of his plan to reform media regulations.

The law dates back to 1992 after Australia had experienced a surge in subscription-based media, and gives the country’s free-to-air stations first right of refusal over major sporting events.

Foxtel CEO Richard Freudenstein used his speech at the American Chamber of Commerce on Tuesday to claim that the free-to-air stations were so dependent on favourable media laws that it was akin to a ‘medical addition’.

Australia’s three major stations, Seven West Media (ASX: SWM), Ten Network Holdings (ASX: TEN) and soon-to-be-listed Nine Entertainment Co were quick to offer a rebuttal. Seven West CEO Tim Worner hit back at Mr Freudenstein’s accusation that the free-to-air stations were gaming the system, saying that “if [that’s] true we must be playing a very ordinary game given the record rights fees being secured for AFL, NRL and cricket just to name three.”

Mr Freudenstein’s motivation for removal of the law is obvious. Foxtel has struggled to meaningfully increase household subscription numbers above 30% or 2.4 million households, and delivering more premium sporting content is seen to be a method of quickly jumping above that limit. It has already secured the right to show all nine AFL matches per week, as well as all A-League matches, but will attempt to add events such as Wimbledon and Australian World Cup soccer qualifiers which attract huge audiences to free-to-air stations.

Foxtel has been drastically changing its business model over the past 12 months to provide greater appeal to tech-savvy Australians. It has launched streamed versions of popular Foxtel channels, as well as the option of pay-as-you-go contracts and has offered event-specific packages in the past.

Investors in News Corp and Telstra should be excited by the progress at Foxtel. Foxtel in 2012-13 had $3.2 billion in revenue and $267 million in income, compared with News Corp’s revenue of $8.8 billion and net income of $506 million (Foxtel results not included), and Telstra’s revenue of $25 billion and net profit of $3.9 billion. Strong income growth in coming years could therefore have a reasonable impact on the share price of both companies.

Foolish takeaway

The media industry is continuing to transition to an online-led streaming model where the company with the largest subscriber base will most likely win. Australia’s free-to-air stations are understandably trying to keep one of their biggest drawcards — major sporting events — away from pay-TV provider Foxtel. Sports are key not only for the advertising revenue it generates, but also for advertising upcoming TV shows, which consumers are increasingly moving online to view.

Unsure of the future of TV?

Australia’s listed free-to-air TV channels are down 80% (Ten) and 70% (Seven) since early 2010 with few catalysts for a significant rebound soon. Instead, if you’re interested in stocks paying a big, reliable dividend, you should discover The Motley Fool’s favourite income idea for 2013-2014 in our brand-new, FREE research report, including a full investment analysis! Simply click here for your FREE copy of “The Motley Fool’s Top Dividend Stock for 2013-2014.”

Motley Fool contributor Andrew Mudie does not own share in any of the companies mentioned.

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