Stoked

Sydney Morning Herald

Saturday April 1, 2000

Anne Davies

The Seven network rocked the pay TV industry this weekwith a Federal Court win giving it access to the networkof its rival Foxtel. Anne Davies wonders how muchlonger the rocky Foxtel marriage can last.

AT NEWS LIMITED they know when Rupert Murdoch is in town. The ashtray used by staff outside the front door of the Holt Street offices disappears and the floor in the foyer gets a polish. It was gleaming yesterday morning when Murdoch arrived at News's Sydney offices.

Murdoch's return to Australia always causes a flurry of speculation, but it has served this time to intensify rumours that major changes are afoot in pay TV.

The pay TV industry and, more importantly, the alliances between the big media players, are in a state of flux.

Over at the Foxtel offices on wharf 7, below Star City Casino in Pyrmont, executives have been shrugging off questions about the tensions between the pay TV operator's three major shareholders. ``We're just getting on with providing a really good pay TV service," is their stock reply.

But it is difficult not be be distracted by the rumours swirling through the industry about an imminent divorce between the Foxtel trio of Telstra, News Limited and Kerry Packer's Publishing & Broadcasting Ltd (PBL).

This week a new element was added to the volatile mix, and it can only intensify the pressure. Kerry Stokes, the owner of the Seven network, and would-be player in pay TV, won his Federal Court challenge seeking access to Telstra's coaxial cable network. The court said Telstra must give Seven access to the pay TV cable to run its planned Olympics channels and its AFL channel C7.

Justice Tamberlin said Foxtel did not have a valid contract with Telstra guaranteeing it exclusive use of Telstra's $3 billion infrastructure. Foxtel and Telstra had claimed they struck an agreement back in 1996 and that this pre-dated legislation, which led to both Telstra and Optus being required to open up their cables.

But Justice Tamberlin disagreed and in one moment, Foxtel found its special status had evaporated. ``Justice Tamberlin recognised the Federal Government allowed Telstra to make the multi-billion-dollar investment by taxpayers on the basis that it could be used by independent pay TV operatives and that it was not reserved for the exclusive use of Foxtel," Stokes said triumphantly.

Foxtel yesterday lodged an appeal, and it has vowed that it will not allow Seven to take advantage of its efforts in building up a customer base of 600,000 Foxtel subscribers. In other words, it will fight tooth and nail to stop Seven getting access to set-top boxes in people's homes, the Foxtel program guide and the Foxtel billing system.

That means Seven must either install a new black box in each home and set up its own billing and marketing systems, or be prepared to face another extended round of battles through the Australian Competition and Consumer Commission (ACCC) to gain access to Foxtel's systems, if it wants to make meaningful use of the victory in the Federal Court.

Seven is already gearing up for the next round of legal manoeuvres. But these could run well past the Olympics, which is just 168 days away, and make Seven's plans to show two extra channels of Olympic coverage on the Foxtel cable somewhat academic. In the meantime, there will be another consequence from the win by Seven.

The real impact could be on the already fragile Foxtel partnership. While Foxtel is pushing for an appeal against the Federal Court decision, Telstra is still contemplating its next move and may choose to sit on the sidelines. It can only spell more trouble for the partnership.

A three-way grouping of media and telecommunications giants was never going to be easy to manage, but as the digital revolution has accelerated, Murdoch (and Packer, who joined two years ago) have become increasingly unhappy with the original bargain they struck with Telstra over Foxtel. In brief, Telstra spent $3 billion, plus building the cable, and Foxtel got exclusive rights to use it for pay TV, but Telstra got exclusive rights to what then seemed the blue-sky part of the business data, Internet and interactive services.

But in 2000 the deal does not seem so sweet. Telstra is busy developing its Telstra.com brand and promising that it will become the dominant player in the broadband ``content" game.

Packer has the same ambition. Through ecorp, his Internet company, he jointly owns with Bill Gates's Microsoft the most popular internet portal in the country: ninemsn.com.

Murdoch, too, has begun pouring resources into News Interactive, which is housed on the wharf next to Foxtel. The trouble is neither can use Foxtel or Telstra's cable to deliver their services. Having got nowhere with Telstra on a possible sale of PBL earlier this year, PBL is talking to Telstra's rival Optus about a relationship.

It's no secret that Optus has found the pay TV business a hard slog. It has only a third of the subscribers that Foxtel has and its business does not seem to be growing. Over the past six months Optus has been talking to anyone who will listen about off-loading its pay TV division. But in recent weeks the speculation has intensified that PBL is the leading suitor.

The deal under discussion would look something like this: a new company would own the cable, in which PBL or ecorp would have about 25 per cent and Microsoft 25 per cent, with Optus, and possibly the public, owning the rest. Ninemsn would be the leading brand on the new Internet service offered over the cable. The sticking point at the moment is price. The Packer camp are firmly of the view that their content is worth more than the entire cable, about $4 billion.

They point out to Optus that there will be many broadband conduits to the home in the future. On the other hand, quality content, like that available through ninemsn and PBL's other media assets, will be in short supply.

The defection of PBL from Foxtel to the Optus camp would not be fatal but, by all accounts, PBL is trying to entice News Limited to join it in the new venture, too. Packer and Murdoch have learnt the hard way how costly it can be to be on opposing sides on matters concerning pay TV. The battle over rugby league conservatively cost the duo $600 million and, since they patched up their differences, they have seemed keen to work together. According to sources at News Limited, it was PBL that came to News asking whether it would be interested in becoming part of the deal with Optus.

But it might not prove easy for either to exit Foxtel, unless Telstra agrees. And it is almost certain that Allan Fels at the ACCC will have something to say about them having a foot in both pay TV operators. An Optus spokesman has insisted that there is no deal on the table. But with Murdoch in town, rapid developments can be expected.

The race for broadband

Broadband refers to the size of the ``information pipe" to your house. Nearly all houses have a narrowband pipe the phone line which is perfect for a voice call but slow for the Internet. The race is now on to provide a bigger information pipe, a broadband pipe, to the home.

About 650,000 homes already have such a connection in the form of the pay TV cable. If you want to pay Telstra or Optus an additional $65 a month, they will install a cable modem, which will give you lightning quick access to the Internet.

Satellite can also be used to provide a broadband pipe while a new technology called ADSL, which Telstra plans to start deploying from August, can also turn the old copper phone lines into a much larger information conduit.

And there is yet another technology digital transmission over the airwaves, which some companies plan to use for datacasting services from 2001.

The Form Guide

Telstra owns the copper phone network into virtually every house. In addition it owns the coaxial cable pay TV network passing two million homes (and connected to 450,000) which carries the Foxtel pay TV service. The favourite in the broadband race.

Foxtel operates the pay TV service of the same name, using Telstra's network. It is a partnership between Telstra (50 per cent), Rupert Murdoch's News Limited (25 per cent), and Kerry Packer's Publishing and Broadcasting Ltd (25 per cent). By all accounts the partnership is not a happy one, particularly as Foxtel is limited to putting pay TV on the cable, while Telstra has reserved for itself the interactive and data business. An uncertain future.

Cable & Wireless Optus is the second-largest telephone company. Optus's UK parent wants to rationalise its worldwide business down to a core of mobile and business telephony so its pay TV business is up for sale, and it is entertaining offers on selling a share in the cable as well. A strong contender, which could win with the right jockey.

Austar is the third pay TV operator. It uses satellite to deliver pay TV to regional Australia. It also plans to deliver broadband services via satellite. Will do well in its own market.

Seven Network wants access to Foxtel's pay TV cable. It already has a pay TV sports service, C7, which shows the AFL, which is available on Austar and Optus. It wants to put this service and two channels of Olympics on all three pay TV services. A brash upstart which will have a fight on its hands.

PBL has pursued a deliberate strategy of being in all parts of the communications business since James Packer assumed the reins. As well as owning the Nine Network, PBL controls Internet glamour stock ecorp. It also has interests in one.tel and other media assets. Now it is eyeing Optus's cable. A cunning operator that will do well.