Foxtel Digital, the Australian cable and satellite pay-TV operator, has been a success story for digital television services in Asia. It is one of the fastest growing digital pay-TV operators in the region and is determined to break through the one million barrier in terms of digital subscribers in 2005. The operator is playing a key role in bringing digital television to the mass market in Australia. It launched digital services in the first half of 2004 and has seen strong growth already. When it launched services in 2004, it hailed the new digital service as ‘revolution in television’ in Australia.

In November 2004, it announced that it reached 500,000 digital subscribers, just eight months after the launch of the service. At the end of December 2004, the number had increased to 560,000 digital subscribers. This equates to around 60 percent of Foxtel’s complete subscriber base. It is slowly moving all its analog subscribers over to digital. The operator had a strong final quarter in terms of the demand for its digital service with over 180,000 upgrade and new orders for its digital service in the three months to December 31^st 2004.

Analysts’ View

In terms of its first year performance of digital subscribers, analysts believe this was in line with expectations. Alex Pollak, a media equity analyst, Macquarie Equities commented, “I would not say the subscriber numbers have exceeded expectations. I would say the growth has been okay. I am not sure I would consider it stellar growth.”

However, while the early numbers have been encouraging, they potentially could have been even better. Foxtel has seen some teething issues when launching the digital service in 2004. In particular, strike action by installation contracting companies in the first half of last year slowed progress. A second leading media equity analyst who requested anonymity commented, “The digital launch had a few snags. Strike action meant there was a long queue of people who wanted to switch from analog to digital. There seemed to be the perception that if you were a new digital subscriber, then you got the STB quicker than if you were a subscriber on the analog service. There were some execution issues initially. But, the fact there were queues for STBs at least shows where was a strong demand for the product. The queues have shortened and there now does seem to be some acceptance of the digital product.”

High-capacity PVR in 2005

This year, the challenges will be to continue to grow the subscriber base as well as bring new services such as Personal Video Recorders (PVR) to the market. Foxtel is likely to be extremely progressive here, bringing to market a PVR with a 160 GB capacity hard drive, which would be one of the biggest boxes on the market today.

In an exclusive interview, Foxtel Digital’s Executive Director of content, development and delivery, Patrick Delany talks about the major challenges facing the pay-TV operator in 2005 and what lessons the operator has learned since it launched digital services in 2004.

Satellite News: When we spoke last year, you said there was a great deal of confusion among Australian consumers about the concept of digital television. Considering the marketing campaigns you have launched and the new subscribers you have gained, do you think the Australian customer has got the message about digital now?

Delany: Absolutely. We were aware that there was a degree of confusion prior to our digital launch. We planned our marketing message for launch and in the months ahead to make sure that was not an issue for us. We used the word “digital” in our name – ‘Foxtel Digital’. But, what we made very clear was that our “digital” was unlike any they had seen or heard before. We used four main messages – better quality pictures and sound; more channels; an NVoD (Near Video-on-Demand) box office and interactive features that enhanced our main driver channels (sports, news etc). Those messages played very well. We predicted that consumers would be somewhat overwhelmed to start with and then in the months that followed the launch, we concentrated mainly on the content to get a simple message through and used our own on-air to talk about digital features. It was an interesting balancing act, making sure we did not overwhelm people, but at the same time, hit them so hard between the eyes they were still seeing stars about our new digital service.

Satellite News: When do you expect to launch High-Definition Television (HDTV) and PVR services in Australia? Are you on track to launch PVR by the middle of this year, as you predicted at this stage last year?

Delany: We are ahead of that timetable on the PVR and very happy with the performance we have seen. We have not announced the launch date yet, but it will be before June. In terms of the business model we will use for PVR, I think we want to take a very broad approach initially to keep our options open. In the United States, the rental model seems to do the best, whereas in the United Kingdom, an upfront fee is popular. I think when we launch we may give people options.

HDTV is something we are starting to think about, but going back to the size of the market in Australia (approx seven million households), the amount of bandwidth you have to use makes it very difficult for us. HDTV has not taken off very much with consumers here at all. We do see it as a competitive opportunity, because if everything continues to go to plan and we are able to extend the number of transponders we use and the channel options, maybe we can use some HD services. It certainly will not be this year.

Satellite News: What is your own personal view on the best business model for PVR services?

Delany: What’s important is the view the business takes, which is still in process. We are weighing up the pros and cons of upfront fee versus monthly payment.

Satellite News: Are there likely to be any new service launches in 2005?

Delany: We are continuing to expand our platform with more interactive services. We are doing even more football in 2005, more games and adding Rugby Union to Rugby League and AFL (Australian Football League). We are launching a finance application where you can put in your favourite stocks and it will automatically update. We will probably do a movies application where you can look up details on movies and actors and possibly see reviews. We are doing more of what I call “Sky U.K. Wimbledon-style” applications where you have got multiple matches being played at once and give people the choice to select between live games. We will be doing that with other sports this year. We will also be looking to exploit our PVR platform. So making sure we are able to deliver VoD services as well as NVoD. That is very much on the horizon. We could possibly be delivering VoD services within 12 months of PVR launch.

Satellite News: You reached 500,000 digital subscribers in November. Was that ahead of expectations? When do you expect to reach one million subs?

Delany: It was in line with expectations. We also had good increases in ARPU (Average Revenue Per User) and reductions in churn, and we decided to accelerate the rollout–we are succeeding because we are giving consumers something very different to what they’ve experienced before and they are very hungry for it. When we spoke last time, the goal was to get everybody over to digital in two years. We are on track. In terms of one million direct subs, we are very close to that now.

Satellite News: Will you keep the same marketing and sales strategy in place in 2005? Could you tell us your approach in terms of gaining new subscribers in 2005? Will you look to expand the range of channels?

Delany: We use a “top down sell” where we encourage people to take all of the channels on the platform or one of our other three recommended “packages” so they get to experience the maximum number of channels, and then try to maintain them, rather than doing what I call a “fries and coke sell” where you sell at your lowest level and then try and get people to move up packages. Because there is such a big difference between the analog product and the expanded digital product we are getting good ARPU uplift. In terms of new channels, we have got more than 130 channels now and Australia is not a big market. We want to get a better range of programming, less repeats, renegotiate programming deals when they come up so we can try and improve our variable margin and wherever possible pass that value on to customers. So, I think at this stage it is not just about more channels, but doing what we do now much better.

Satellite News: Could you tell us about the usage and revenues generated by interactive services since the launch of the digital service? How will you look to beef up the interactive services in 2005?

Delany: Most of our interactive services don’t use a return path. We are only just getting beginning to use the return path now. We are with OpenTV, so our big applications like ‘MultiView Sport’ use interactive with multi-camera angles. With our weather application, you are interacting with the box. In terms of the revenue models, research is indicating to us that people see real value in those items, which are included in the basic package. Most of our interactivity is in the basic service. In terms of all the interactivity we have rolled out, it has been a lot in nine months, it hasn’t used a return path other than the Box Office, and the Box Office is ahead of expectations in terms of buy rates. We have introduced voting which kicked off on interactive news with the Australian General Election later in 2004 and was very broadly used and that is where it fits at the moment. We will look at other ways this year where we can drive revenues from the return path.

Satellite News: What are your plans in terms of multiroom services?

Delany: We have always had pretty good take-up of second STB units. But, we have found with the digital product that people are exceeding our expectations on that. Once they order the upgrade or digital, they are taking two STBs. We are doing pretty well here. We have always had a good percentage of second boxes.

Satellite News: When we spoke before, you spoke about the value equation, and that previously customers that the price for the service was too high in terms of the value equation. Do you believe that perception has changed?

Delany: Very much so. That is indicated by the growth we are getting and that more people are buying more Foxtel services. Our churn rates have also plummeted. So, people are very happy with the product. One thing that is doing very well is our Box Office and that is ahead of targets as well. We are finding very good buy rates and we are finding it is very complementary to the service.

Satellite News: How do you see the digital television landscape changing in Australia throughout the next 12 months?

Delany: Foxtel has completely changed the landscape in terms of digital television in Australia and in nine months we have outstripped the number of digital households that our Free-To-Air (FTA) competitors achieved after almost four years. So, in the next 12 months, what I expect to happen is that growth rates will continue and now we have more than 500,000 advocates/households around Australia it should accelerate. When people think of digital television in Australia, they mostly think of Foxtel. That is a good place to be. We have certainly answered the competitive call of FTA and I think everything that we hoped in terms of growth, increase in ARPU, reduction in churn has certainly happened.

–Mark Holmes

(Mark Furness, Foxtel Digital, [email protected]; Alex Pollak, Macquarie Equities, [email protected])