Archive for February, 2003

ONLINE GAMBLING MARKET OVERVIEW

Friday, February 28th, 2003

Australians are spending around $100 billion per annum on gambling and gaming, a result of an annual growth of 30% since 1995. In the process they lose over $10 billion per annum! Incredibly, this figure is larger than the education budget and more than double the average amount spent each year on videos, books, newspapers, magazines and CDs combined. Based on these and other figures, online gambling in Australia is estimated to be a $15 billion-a-year market (that is $2 billion more than the present yearly revenue generation of all of our current ‘cultural industries’ put together!). Most online gambling activities are taking place within the gambling industry. Internet gambling is estimated at less than 1% of total gambling. The current ban on this form of gambling will put the breaks on this potentially very lucrative market segment.

Over 60% of all gambling revenues come from gaming machines. This growth has been fuelled by a fast rollout of new poker machines and by a rush of new casinos in Canberra, Melbourne, Cairns, Brisbane and Sydney.

Table 1 – Gambling per state (and New Zealand)
State
Gambling revenue )*

New South Wales
25.40

Victoria
14.05

Queensland
5.92

South Australia
2.79

ACT
1.34

Tasmania
1.27

Western Australia
1.26

New Zealand
NZ$2.75

AU$ billion
)* excluding casino gaming in Queensland, Victoria, Western Australia and New Zealand
(Source: International Gaming and Wagering Business 1996)

While Australia has the dubious honour of being one of the leaders in the gambling world, the same will apply to other Western and Asian markets. Regulation will be the only thing that can stop this application from becoming a ‘killer’ application. Gambling from home will take away business from casinos, hotels and clubs. Key applications for interactive TV are (horse) racing, football and other sports. Viewers will be able to place bets using a remote control, smart cards and PIN numbers.

The gambling market will stimulate growth in the interactive market in groups aged between 30 and 45 years; other characteristics are: married with children. Online gambling will take out some of the glamorised environments of casinos and clubs – often accompanied by alcohol, peer pressure and over spending. It was estimated that in 2002 there were well over 2 million interactive gamblers.

The key players in the electronic gambling market will be the lottery companies (Tattersall, Tabcorp, TAB NSW, TAB of Queensland, NSW State Lotteries). Together, these organisations have a turnover of close to $20 billion.

In 1997, NSW TAB launched iBet, the world’s first Internet-based online betting system. The service aimed not only at punters in the state of NSW, but also at betters in other Australian States as well as overseas countries.

In 1999, Coms21 combined: eBet (prev NTN Australasia), IWN Australasia, Supa-Link and a cashless games systems operation into a new company eBet. The company signed deals with New Zealand TAB, Tattslotto and Tattersalls. eBet has since won approval for its Cashless Gaming Systems to be used in NSW pubs and clubs, and the company has also expanded overseas. At the end of 2001 the company had over 6,500 users and revenues of over $6.2 million for the year. (See company profile: eBet Limited).

For online gambling regulations, see:
Australia – Broadband – Content;
Australia – Internet – Regulatory (Internet and Online).

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INTERACTIVE GAMING MARKET STATISTICS

Wednesday, February 26th, 2003

There were, in 2002, an estimated 2.5 million interactive game players, mainly youngsters. Already in 2000, close to a third of all households in Australia had a dedicated games computer installed (23% penetration in 1998). Over 60% of all household PCs installed are used at some time for computer games. By 2001, 10% of all households had a DVD player installed, this market segment is expected to grow the fastest and at that time, games were the ‘killer’ application on this machine.

Table 2 – Revenue computer games market – 1995-2001
Year
Units
Revenue

1995
9.0 million
$50 million

1996
11.5 million
$75 million

1997
12.5 million
$110 million

1998
14.0 million
$120 million

1999
14.0 million
$130 million

2000
16.0 million
$160 million

2001
17.5 million
$190 million

(Source: Paul Budde Communication estimates based on company information)

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FOXTEL MOVING TO CONTROL AUSTAR – FEBRUARY 2003

Saturday, February 1st, 2003

In February the bondholders in UnitedGlobalCom (UGC) will have to vote if they are willing to sell their rights to Castle Harlan Australian Mezzanine Partners (CHAMP). CHAMP has four Brussels based companies, which are working on the purchase of UGC.

An analysis of this deals looks as follows:
CHAMP will acquire 51% of Austar (63.2% of United Austar’s 80.7% share) if the deal that is currently on the table gets the go ahead.
CHAMP will pay $US 34,500,000 ($A 61 million or 0.17 cents per share) for the 51% stake.
CHAMP will then seek to acquire the publicly listed shares (19.3% ) at $A0.17. (If the same pro rata share with UA is maintained in that acquisition CHAMP will acquire a further 12.2% of Austar.
CHAMP would then own 63.2% of a delisted / privatised Austar with UA owning the other 36.8%.
The total cost to CHAMP of the 63.2% stake at the offer price will be $USD 42,752,941 ($A 76,543,000) valuing Austar at $A 121 million.

Champ will get the deal for a paltry 17 cents Australian a share, well below the $8+ that some paid for those shares to buy themselves in. In all it will cost them $A 61 million. Not a bad deal.

UGC is controlled by billionaire US cable mogul John Malone, a business associate of Rupert Murdoch and shareholder in News Corp.

Castle Harlan is a New York based venture capitalist that partnered in Australia with Australian Mezzanine Finance to form Castle Harlan Australian Mezzanine Partners (CHAMP). The Australian principals of CHAMP (formerly Australian Mezzanine) are Bill Ferris and Joe Skryznski. Joe Skrzyinski is a long time friend and former business partner of Kim Williams (CEO of Foxtel). Joe and Kim put together the Pay TV package for David Hill and the ABC back in the early 1990’s. Australian Mezzanine Finance was to raise the $40 million to finance that business (which eventually folded when Brian Johns took over the ABC from David Hill).

Austar is the last "independent" Pay TV player in Australia and the only potential competitor to Foxtel now that the ACCC has sanctioned the Foxtel / Optus deal. As I have indicated at several occasions I predict that Optus will exit cable TV business within the next few years.

Austar gets the majority of its key programming from Foxtel. It also has "exclusive” arrangements with Foxtel in its non-metro areas and a "no compete" agreement in the metro areas. These agreements carried over from the Australis/Galaxy days and were a pay off for Austar supporting Foxtel in convincing the Hollywood studios to renege on their supply agreements with Australis.

A legacy of the Austar/Australis deals is that Austar pays Foxtel less than Foxtel pays the Hollywood studios for its movies! That means that every time Austar signs a new subscriber Foxtel loses money.

Clearly that is a deal that Murdoch must eventually buy back.

For more information see:
United Pan-Europe Communications (UPC)
Australia – Pay TV – Historical Analysis – 1998-Present
Australia – Pay TV – Historical Analysis – 1994-1997

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THE AOL BROADBAND DEBACLE – FEBRUARY 2003

Saturday, February 1st, 2003

As we reported last month the real problems at AOL are only now starting to emerge. An exodus of top executives, crushing debt and the biggest annual loss in US business history are only the beginning of the issues facing America Online.

The world’s leading Internet service provider faces potentially huge revenue losses for its dial-up offering in the next few years as broadband becomes the predominant form of Internet access.

While broadband subscribers account for only about a quarter of the US online audience today, half of all online homes will be soon using broadband connections, most of them provided by cable and telephone companies. AOL may be able to maintain a commanding share of the dial-up audience, but the overall size of this market will decline significantly.

It was with amazement that when I talked to the AOL representatives in Australia a year ago they indicated not to be interested in broadband and that their target market families with kids only needed dial-up. They were not even planning for broadband.

Competition from broadband service providers isn’t the only problem for AOL. Even if it succeeds in upgrading current customers to broadband, the result will be hundreds of millions in lost subscription revenue as broadband is where the current market growth is and AOL isn’t there.

Unfortunately the company will first have to fix its core dial-up business. New money needs to be coming in and management should make the most of the existing service’s huge base of subscribers by rebuilding ad revenues and establishing more premium services. They may also experiment with prices by adding less expensive options for new customers while boosting rates for the flagship service.

However, it will be an uphill battle as by now the company should have started spending its management resources and investment funds in the booming broadband market and not in the dying dial-up market.

See also:
AOL Time Warner Inc;
USA – Broadband Networks and Services;
Global – Broadband – An Overview, Statistics, Forecasts;
Global – Broadband – Market Analysis by Paul Budde;
Global – Broadband – Trends and Developments – Industry Structure;
Global – Broadband – Trends and Developments – Infrastructure;
Global – Broadband – Trends and Developments – Markets.

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THE END OF CABLE TELEPHONY – FEBRUARY 2003

Saturday, February 1st, 2003

There is further information that there are serious problems regarding the telephone service that Optus is providing over this network. There are over 500,000 cable telephone users who use a Motorola cable phone box on each house. This equipment modulates the telephony back to the headend. Motorola have given a hard deadline of end 2003, after which that product will no longer be available. Support to the existing installed base will continue.

I have questioned Optus a couple of times regarding the non-growth in cable subscribers over the last 12-18 months and it now becomes clear why that hasn’t happened.

Optus have two possible ways to go:
One is to change all their cable modems to a DOCSIS 1.1 system. This can give a VoIP plug-in on the cable modem where a normal phone can be plugged in. This has other benefits for Internet access but requires a big changeover capital investment.
The other option is to transfer all telephony customers to a Telstra resale service and cease offering direct connect telephony.

The DOCSIS option would be the best one if there were a long-term expansion plan for HFC based services. However, as we have indicated in the past, it probably amounts to throwing good money after bad and, in my opinion, it is highly unlikely that the significant funding required will be made available. There have been no indications whatsoever in the last two years, which could mean that Optus is keen to focus some serious effort on the HFC network.

On the other hand, we know that Optus is super keen to get a good broadband resale deal from Telstra. The Foxtel/Optus deal and the handover of a critical operation centre to Foxtel are clear indications that Optus is getting ready to demand something in return, and the resale deal is very high on their wish list. However, this, in combination with the telephone dilemma, would likely make the whole Optus cable unviable.

Australia – Cable Modems and Cable Telephony
Optus – Company Analysis – 2002-2003
Australia – Broadband – HFC – MDS – Satellite

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