What's behind Seven's Foxtel hunt?

Seven has made no secret of its expansion ambitions, but buying into pay-TV monolith Foxtel lends even greater clarity to the network's long-term vision. With wireless distribution and solid content channels under its belt, can Seven bring IPTV into the mainstream?

When Seven Network bought into the TiVo empire and last year helped bring the hugely popular device to Australia, it was a decade late and now seems to be coming up a dollar short.

TiVo's high price and a wealth of competitors has kept it from becoming the runaway success it has been in the US, although reportedly solid sales and recent distribution deals with JB Hi-Fi and Myer suggest it may be slowly finding its footing.

Yet it now appears TiVo was only the beginning of Seven's fight to climb the broadcasting food chain: Telstra CEO David Thodey was recently reasserting his company's love for Foxtel, the broadcasting monolith that all but owns Australia's pay TV market, after Seven Network boss Kerry Stokes spent $234 million to buy 18.3 per cent of 25 per cent Foxtel owner Consolidated Media Group (CMG).

Although it's hardly likely to wrestle a controlling interest over Foxtel given Telstra's 50 per cent ownership, Seven's mooted buyout of Consolidated Media Group reflects the company's long-running ambition to diversify its broadcasting portfolio from its stable of free-to-air broadcast channels. Cross-over investments like this one seem like a concerted effort to deliver on that ambition.

An eventual position on the Foxtel board would theoretically change the tone of the company's management, opening the door to greater synergies between the FTA and pay TV markets and presenting new opportunities to get a leg up on competitors as digital TV steadily gathers momentum — and appeal for crucial advertisers and sponsors. This would also help strengthen Seven's position with respect to Freeview, the FTA industry's hail-Mary pass designed to counter the growing threat posed by an increasingly high-definition and newly-profitable Foxtel, whose iQ PVR has been a much bigger success than TiVo.

While forging a closer relationship with the dominant pay-TV provider could be a smart defensive move, Seven's long-term game may be better reflected in the opportunities presented by IPTV

Perhaps the most interesting thing about this deal, however, is where it could take Seven in the long term. While forging a closer relationship with the dominant pay-TV provider could be a smart defensive move, Seven's long-term game may be better reflected in the opportunities presented by IPTV — the potential of which Foxtel has already been exploring in the past, and into which Telstra and Foxtel are also reputedly eager to tap.

With a reworked front and back-end content system and avowals that it will offer video-on-demand, catch-up TV and streaming Winter Olympics coverage, Foxtel is counting on a more flexible range of delivery options to consolidate its lead in the broadcast market — particularly as a reinvigorated Telstra explores its options for IP-based content.

Seven's own ambitions in the carriage space became clear with its late-2007 buyout of Unwired, the spectrum-rich wireless internet provider which now falls under the ambit of Seven subsidiary Network Investment Holdings (NIH). The Unwired buy gave Seven access to a range of wireless spectrum covering 90 per cent of Australia's population, providing a robust data backbone which it could feasibly deliver all manner of video, data and other IP-based content. As I noted at the time, this made it a strong contender to target telecoms markets that have been historically dominated by Telstra.

The only problem with this arrangement is content, and that's where a closer relationship with Foxtel could be of benefit. If it can get cozy with the country's largest supplier of pay-TV content, and maintain its relationship with its Freeview partners-in-FTA, Seven can cherry-pick the best of both worlds and extend its tendrils into a whole range of new areas. This could easily expand to include IP-based telecommunications services, turning the network into a more full-service communications operator.

Seven's endgame, however, may lie even further afield: a shift towards IP broadcasting will be aided by the eventual introduction of the NBN, which — whenever it actually manages to put some fibre in the ground— will present radical new options for Foxtel, whose growth has so far been constrained by the physical limits of its hybrid fibre-coax (HFC) network.

This network offers far more growth potential than Foxtel's second-tier satellite coverage, as illustrated by Telstra's already-announced plans to boost the HFC network to 100Mbps by year's end. Complemented by Seven's respective strengths and united in their access to a whole new range of customers via wireless, HFC and FTTH, the companies could mount a solid, far-reaching and unprecedented market assault based on combinations of pay TV, IPTV content, and telecommunications services.

Seven might not be eating Telstra's lunch just yet, but playing its cards right in relation to pay TV might just yet see that change over time. It may all start with CMG, but where it ends is anybody's guess.

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