Foxtel is not the growth asset News Corp needs

News Corp will report its first quarter results on Thursday morning, and no doubt we will hear a lot about how fabulous things are in property, book publishing, print and the newest addition — 100% control of Foxtel.

This will be the first full quarter all of Foxtel has been included in News Corp’s business, after the revamp between News and Telstra that saw Fox Sports merged into Foxtel and Telstra’s share fall to 35%. That deal over-concentrated News’ assets in Australia after years of buying businesses in the UK and in the US to diversify away from down under. And, like it or not, the fortunes of the Murdoch clan’s second company are tied to the fortunes of the Australian economy.

News’ most valuable asset, the 61% owned REA Group, is based here (its valuation of A$9.75 billion is the bulk of News’ (A$10.9 billion) market value; as are the majority of the company’s newspapers. The company now has 65% of Foxtel (which includes Fox Sports) and its high-priced, increasingly risky sports contracts for cricket, AFL, NRL, rugby union and soccer, and 100% of Sky News Australia. 

Investors recognise this vulnerability. News shares are down 20% on US markets (the US dollar price is more accurate than the Australian currency price because more shares are listed and traded in America) since the start of this year. More than half that figure — 12% — has come since the fourth quarter and full-year report in early August as investors got a look at Foxtel’s incorporation and didn’t like what they saw.

Contrary to the story News Corp executives, brokers and its media outlets have been telling the world, Foxtel is not a growth asset, and faces weakening income from subscriptions, advertising and other areas if it can’t substantially boost subscriber numbers past the 2.8 million where they have been stuck for the best part of three years. Hence the cricket contract with Seven West Media to try and stop the usual summer loss of subscribers (churn tends to rise in the non-football months).

The first figures for the cricket one-day games might be weak but they are the start of a campaign by Foxtel to try and inject momentum into the business and into the News Corp share price. This is why Foxtel CEO Patrick Delaney is talking a lot about streaming sport, which he sees as a growth area.

Streaming sport is an ambition, but likely not a salvation. Foxtel has previously failed with their streaming video business Presto (with Seven West Media) which left rivals such as 7plus, the ABC’s iView and SBS On Demand fighting Stan (soon to be controlled by Nine) for a position behind Netflix. Telstra also maintains a lock on streaming rights for the two biggest Australian sports — AFL and NRL as well, as the growing netball competition. 

Telstra revealed in its 2017-18 annual report that there are now 1.29 million Telstra TV devices in the Australian market, an increase of 463,000 (or 55%) in 2017-18. Most of those would likely also be Foxtel subscribers on top of taking the other offerings from streaming services such as Stan and Netflix, plus the free-to-air streams. Telstra said the number of Sports Live Pass (streaming) users “increased by nearly 1 million to 2.3 million across AFL, NRL and netball, with most users receiving the service as part of their mobile subscription”.

Focus on that figure from Telstra. It’s the streaming sport subscriber base Foxtel needs to convert, and Foxtel will be locked out of them for another three or four years on both football contracts.