Media barons clash over money, pay TV and new media

It is rather interesting to see two of the old media barons reverting to an old-fashioned media tussle.

There are several angles to this:

The clash between the media moguls;
The battle for pay TV, in relation to both regulatory gaming and long-term business opportunities;
The incomprehensible telecoms/media mix of Seven’s new telco and new media assets.

It is also interesting to note that so far News Limited is not involved in the current developments. In that respect it is also important to keep in mind last year’s failed attempt by Lachlan Murdoch (note: not as News Limited) to do a deal with James Packer’s Consolidated Media Holdings (CMH). That deal would have seen Murdoch and Packer each taking a 50% stake in a joint venture vehicle to run that company. At the moment Kerry Stokes has upstaged Lachlan, as he does now have a stake in CMH, and we haven’t heard a great deal about Lachlan’s next moves in this area.

So we expect more to happen here.

As will be discussed below, Telstra’s opportunities to become a leading force in the new media market should also not be underestimated.

The Media Clash

Let’s first address the media clash ………

We have seen James Packer breaking with his family’s past, basically deserting the media business, except for his financial interest in some of the pay TV activities – but this probably has a lot to do with the strategic financial value of this stakeholding.

It is still uncertain if Telstra can maintain its majority share in Foxtel. Developments there could be heavily influenced by regulatory changes, a sphere in which media barons flourish. The reason they have been able to make such a lot of money in the past has more to do with gaming regulations to their advantage than with programming or marketing.

Ever since James took over the management of the Packer Empire he has shown no interest in the emerging new media market, or in the traditional TV business. Instead he has gone deeper into the gambling business and so far this has given him more headaches than good results.

Kerry Stokes, on the other hand, has used the decline in traditional media to strengthen his shareholding in the Australian market. The market is deteriorating but there is still a great deal of money to be made during its slow decline.

At the same time he has moved into some of the new media as well – but more on that later.

It appears that Stokes has the upper hand in the media war – he has a far more integral involvement in the media business and can use his insights into it to his advantage. For that reason we predict he will behave like a fox, patiently waiting for the next opportunity, while Packer’s interest will soon move back to gambling. Chances are that over time Stokes will win this battle, for James it will only be the price that matters,

All of the above has more to do with financial brinkmanship than with the actual media business. The one who blinks first will have to pay the highest price.

Pay TV

As mentioned, pay TV has been the main reason Packer has kept a foot in the media door, while Stokes, to his chagrin, has been left out of this business ever since it was launched in the mid-1990s. These are the key reasons why Stokes wants to be involved, while Packer’s interest, once again, is only financial.

Pay TV is at the crossroads of change and this is well understood by both players in this market, Foxtel and Austar. With the government’s commitment to the NBN, the pay TV operators will have to decide which market they want to operate in -infrastructure or content – and both have indicated that they see a good future for their companies in delivering their content over the NBN.

This is the right strategy but it will nevertheless not be all plain sailing, as, for example, Foxtel and Austar have almost identical content and it would not make sense to compete with equal products over the NBN. The security of geographic monopolies (Foxtel only operating in the cities and Austar only in regional areas) that the two now enjoy in their present pay TV market will no longer continue.

So the two players will have to sort out their business models. But it is certain that good quality entertainment content will continue to be a valuable service. This is not dependent on the kind of infrastructure that is used to deliver that content.

And so, with both pay TV operators clearly showing strategic leadership regarding the future of their business, we are confident that the pay TV business will remain a flourishing and profitable market, moving forward into a broadband-based future. If anything the new facilities that new technologies are offering these companies should further enhance their position in the market.

So, after the short-term financial gains that may or may not eventuate based on regulatory changes to Telstra’s position in this market, there is a long-term future also from a media business perspective.

As a side comment, given Telstra’s changing strategic behaviour in their market it could (and we believe should) take a leadership role here itself. It shouldn’t wait for regulations, but instead should use its present strong position, and the fact that infrastructure and ownership changes are going to occur based on the government’s NBN decision, to its advantage and launch its own (structurally separated) new media company by combining Foxtel, Sensis and BigPond Media into one new company.

This would, at the same time, open up a totally new media landscape in Australia.

New Media

Here we would like to limit our observations to the Seven Network.

In 2007 the company moved, for what remain rather incomprehensible reasons, in three different directions: TiVO (Personal Video Recorders), Unwired (wireless broadband) and engin (VoIP).

We extensively analysed and commented on this situation (see: Australia – Digital Media – Media Companies) and nothing that we have seen since has changed our position. The write-offs, ongoing losses and uncertainties around the (ad)ventures remain the same.

With TiVo, Seven most certainly has done some interesting things with companies such as Internode and iiNet via its broadband network, but we remain pessimistic about the long-term future of the proprietary-based TiVO system in a world that is increasingly moving to open systems.

Seven’s announcement to start rolling out a WiMAX network will need to seen before it can be believed. While WiMAX certainly has a role to play in telecoms, in regional areas in particular, the company’s link between telco and media remains one big question mark. It simply doesn’t make sense for Seven to compete with the telcos in this space.

For the time being Stokes’ announcement needs to be treated as an off-the-cuff remark, more to appease investors worried about these ‘odd’ investments than as a serious plan.

Paul Budde