While Foxtel and its partners have a
co-starring role with the Seven Network in the C7 case in the Federal
Court, there’s one aspect of the Pay TV business you won’t hear the
partners boasting about – that Foxtel is on the verge of becoming
profitable and has the prospect of being the most profitable media
business in this country within three years.

Why? Well, a big
reason is the elimination of C7 as a competitor and the 2002 deal that
saw Optus sue for peace and join the Foxtel empire, a deal which was
ticked off by the ACCC and the federal government.

With regional
operator Austar now a re-transmission platform and not much more,
Foxtel, with its digital conversion program substantially over, will
reach break-even this year and will be profitable in 2007.

In
fact, it’s quite conceivable that Foxtel could become the most
profitable TV operation in the country in a few years – assuming
there’s no financial impact from the C7 case – with most of its
revenues coming from subscriptions, but with a growing amount of money
also flowing in from ad revenues (much to the chagrin of the free to
air TV operators).

Foxtel subscriber numbers totalled 1.18
million at the end of June, up from 1.100 million a year earlier (the
June 30 figure includes 157,000 wholesale subscribers compared to
196,000 at the end of June 2004).

Revenues totalled $1.064
billion, up from $872 million, and the operating loss was $128 million,
compared to $149 million. But in the last quarter, revenues jumped 26%
as more subscribers paid higher amounts as they switched to digital
packages.

The net loss for the year was $109 million,
unchanged from a year earlier. The loss narrowed sharply at the
operating level to only $11 million in the final quarter, compared to
$32 million.

That has got analysts chatting and they now believe
Foxtel will lose around $25 million at the operating level, or about $2
million a month. Not much when revenues will jump to well over $1.2
billion.

And in 2007, financial year analysts say the Pay TV
operator will earn around $180 to $200 million on a pre tax, pre
interest, pre depreciation basis.

With substantial tax losses,
Foxtel’s strong profits will drop substantially to the bottom line,
meaning Telstra, News and PBL can expect swelling in returns in 2007.

In
2008, these returns will grow. If you take the depressed 23.5% gross
margin that the Nine Network had in the last half of 2005 when earnings
were down, and apply it to Foxtel in the 2008 year, then earnings could
jump to around $300 million, with revenues close to $1.4 billion.