Foxtel could be Telstra Corporation Ltd’s next Sensis

Is Foxtel in structural decline? With the demise of Presto it certainly seems like it

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Telstra Corporation Ltd (ASX: TLS) sold a 70% stake in its Sensis business to private equity for $454 million back in 2014.

The Sensis business was best known for the White and Yellow Pages – virtual dinosaurs in today’s digital world. However, analysts had valued the business as worth as much as $3 billion at the time, and as much as $12 billion in 2005.

Pay-TV provider Foxtel could be Telstra’s next Sensis. Despite being valued in the billions currently, Foxtel faces structural decline thanks to the rise of subscription video on demand (SVOD) services like Netflix, and the move to IP streaming of television.

The company has agreed to buy out its partner, Seven West Media Ltd (ASX: SWM), from its SVOD service Presto – which has struggled to gain traction and attract subscribers. Presto will then be shut down by January 2017 and integrated into Foxtel Play, making it the second business to succumb to the Netflix-effect, following the demise of Quickflix Ltd (ASX: QFX). Quickflix collapsed in April this year as we reported here.

Presto had lagged far behind Netflix and local offering Stan in terms of subscribers since Netflix arrived in Australia in March 2015.

netflix-stan-presto-june-2016
Source: Roy Morgan Research

 

Stan – a joint venture between Nine Entertainment Co Holdings Ltd (ASX: NEC) and Fairfax Media Limited (ASX: FXJ) – could well be the next casualty, given the company is also struggling to retain paying subscribers.

Getting back to Foxtel, the company has also been forced to lower the price of its SVOD offering – Foxtel Play – to prices between $10 and $15 a month, from the current entry point of $25 a month. That price is comparable to what Stan and Netflix charge per month for their various offerings.

But if Foxtel Play customers want Sport or Movies, they’ll have to fork out an extra $25 and $20 respectively per month. It could also see more full-service Foxtel customers – currently paying $50 a month now for the basic plus Sports package – switch to Foxtel Play with sports for roughly $35 a month.

Foolish takeaway

Foxtel is likely to see its earnings before interest, tax (EBIT) margins of around 17% hammered over the next few years as more subscribers switch to lower-cost offerings, the company is forced to lower its prices and some customers switch off completely. That’s bad news for Telstra – and its 50% partner in Foxtel, News Corp (ASX: NWS). No wonder the telco tried to get News Corp to spin off Foxtel earlier this year.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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