CHAPTER THREE
Pay TV in Australia has had a troubled and turbulent history. This chapter discusses some of the main episodes relating to industry structure, government policy and competition between the operators. Table 3.1 provides a brief chronology of events from 1992 to the beginning of 1999.
THE BEGINNING
Australia's first pay TV service began operating in 1995. By international standards this was a late start. Pay TV began in the US in 1948 and in the UK, widely recognised to have a more restrictive and less competitive television sector than Australia, in 1984. The primary reason for this delay was a political lack of will in the face of intense lobbying from the three commercial FTA networks, which regarded pay TV as a competitive threat. After considerable debate, lobbying for and against, and government inquiries in the early 1980s, the broadcasting regulator (ABT, 1982) recommended that pay TV be allowed. The government rejected this in September 1986, placing a moratorium on pay TV for a minimum of four years, subsequently extended to a fifth. (2) Deregulation was finally achieved when on 11 December 1992 Parliament enacted Part 7 of the Broadcasting Services Act 1992 (BSA). (3)
Australis Media was the first to launch pay TV services in Australia in January 1995, with limited coverage of Sydney and Melbourne and a handful of channels. It initially used MDS, a line-of-sight microwave system using a network of ground transmitters. Prior to the liberalisation of pay TV, Australis offered a restricted range of narrowcast foreign language pay TV services (Teleitalia, New World Television and ALB, offering Italian, Chinese, Arabic and Lebanese language programmes) in metropolitan areas, and an international news service to hotels.
Table 3.1: Chronology of Pay TV in Australia
| 1992 | |
| December | Broadcasting Services Act amended permitting pay TV. |
| 1995 | |
| January | Australis launches Galaxy, the first pay TV service in Australia using MDS. Service initially free with installation costing $299. |
| March | Australis, FOXTEL, News and Telstra sign TNC Heads Agreement permitting FOXTEL to distribute Galaxy package. |
| April | Galaxy package expanded to eight channels, for a monthly subscription of $49.95. |
| June | Australis cuts installation charge to $99. |
| August | Austar and ECTV commence broadcasting. |
| September | Optus Vision launches on Optus broadband network, with an installation charge of $29.95 and monthly subscription of $25 for the basic Vision package. |
| October | FOXTEL launches on the Telstra broadband network. Installation Australis announces agreement with News and Telstra to merge |
| November | Australis cuts installation charge to $19.95 and monthly subscription fee to $39.95, matching FOXTEL. |
| 1996 | |
| March | Australis increases installation and monthly subscription charges to $199 and $49.95 respectively. |
| May | ACCC opposes Australis/FOXTEL merger, which is then abandoned. |
| July | Additional five-channel tier (Entertainment Plus) launched by FOXTEL for $9.95 per month. |
| August | Australis and Optus Vision announce agreement on terms of satellite joint venture. News, FOXTEL and Telstra bring legal actions. |
| October | Restructuring of Australis to raise finance. |
| 1997 | |
| January | Optus Vision increases subscription charges on basic packages. |
| March | Financial restructuring of Optus Vision. |
| April | Pay-per-view services launched by FOXTEL (Event TV) and Optus Vision (Main Attraction). |
| May | New South Wales Supreme Court injunction prevents Australis from transferring assets to the satellite joint venture. Australis and Optus Vision subsequently appealed. |
| July | Deregulation of pay TV, ending ten-channel satellite limit and Australis and FOXTEL announce plans to merge. |
| September | FOXTEL increases basic monthly subscription fee to $42.95. |
| October | ACCC begins Federal Court action to block FOXTEL/Australis merger. |
| November | Australis asks for shares to be suspended on Australian Stock Australis sells settop boxes to raise funds. Moody's Investors Service expects Australis to be placed in receivership Australis launches legal action against Telstra and News Corporation, News and Telstra abandon FOXTEL/Australis merger. Parliamentary |
| December | Australis announces US$27 million short-term financing from its US bondholders. |
| 1998 | |
| January | Australis retrenches 80 staff. The Hollywood studios which supply Australis take legal action |
| February | Publishing & Broadcasting Ltd launches legal action against Australis alleging that its US$27million bond issue breached an agreement under which PBL had supported its previous refinancing. |
| March | The federal government proposes to introduce laws giving FTA The federal government announces allocation of free spectrum |
| April | FOXTEL announces it has 300 000 subscribers, making it Australia's Optus Vision restructures its pay TV pricing, reducing the price |
| May | Telstra applies to court to wind up Australis to protect its Australis Australis's bondholders appoint receiver to Australis. News and Telstra terminate the 25-year programme agreement |
| June | FOXTEL purchases from the Australis receiver 50 000 satellite settop boxes in homes served by Australis. Optus agrees to supply programming to Australis franchisees ECTV and Austar. |
| July | Austar pays $50 million for ECTV thereby also raising its stake in pay TV programmer XYZ to 50 per cent, with 50 per cent owned by FOXTEL. |
| November | C&W Optus successfully floats giving CWC a controlling stake. |
| December | PBL purchases 25 per cent stake in FOXTEL, ACCC clears acquisition. |
| 1999 | |
| March | FOXTEL launches its satellite service. |
Under the BSA, MDS licences were issued for all Australian capital cities and most regional centres. Each licence allowed one broadcast or narrowcast channel. Of the 566 licences issued, 136 were owned by Australis, 406 by the regional pay TV operators ECTV and Austar, and 24 by others. However, when MDS threatened to provide a viable alternative to satellite pay TV, the government stopped issuing further licences in order to prevent it undermining Australis's investment in satellite, and Optus's satellite subscription television distribution monopoly (BSA, s 96).
SATELLITE TV
The government's pay TV policy was based on the view that satellite would be the primary means of pay TV delivery in the early years. This was conditioned in part by the existence of AUSSAT, a government-owned satellite system, which provided immediate national coverage. The government's stance was reinforced by several other components of its telecommunications and privatisation programmes. In 1992, the Keating Labor Government created a satellite monopoly owned and operated by Optus. Under the BSA, Optus was given a five-year monopoly (ending 1 July 1997) on domestic subscription television broadcasting by satellite. Optus's satellite monopoly was tied to its purchase of AUSSAT. As well, the government restricted the number of satellite programme licences to three, allowing a total of ten channels until 1 July 1997. One of the licences was allocated to the ABC (which did not use it) while the other two were auctioned to the private sector. (4)
Under the procedure, Licences A and B were auctioned to the highest bidder. Applicants were required to make sealed bids, pay a nominal non-refundable fee of $500, and provide a statement of their plans and proposed ownership and control structure. These bidding arrangements were flawed. The nominal application fee, along with the absence of a requirement that applicants establish that they had adequate financial resources, led to "paper bids" which the applicants did not necessarily intend to honour. As a result, applicants made multiple bids for progressively lower sums in the hope that one of them would eventually be low enough to attract funding.
The outcome was an embarrassing round of rejected bids as applicants failed to come up with the money. UCOM was awarded Licence A with a bid of $177 million, and Hi Vision Licence B at $212 million. Both bidders were unable to raise these sums and withdrew. The government quickly enacted the Broadcasting Services Amendment Act (No. 2) 1993 in May, requiring a 5 per cent non-refundable deposit from successful bidders within three days of approval by the Australian Broadcasting Authority (ABA). The next four highest bids for each licence were voided because the applicants could not find the money. On 1 September, New World Telecommunications was declared the successful bidder for Licence B at $117.001 million and also awarded Licence A which, under the licensing conditions, it could not hold. With New World's decision to take-up Licence B, UCOM was next in line for Licence A with a bid of $97.001 million. It paid a deposit of $4.85 million but, in November, when required to pay the balance, it defaulted, losing the deposit. Licence A was then awarded to, and voided by, UCOM (for failure to raise funds) for a second time, then to Payvision Australia, then to an unidentified bidder, and finally back to UCOM on 4 December 1993.
THE RACE TO CABLE
To the surprise of most, and despite the preferential treatment given to satellite, Australia was cabled at breakneck speed. By May 1998, when they effectively stopped cabling, C&W Optus's and Telstra's broadband cable networks had passed over 2.1 million homes and 2.5 million homes respectively. As the ACCC (1996b, para. 5.21) observed:
At the outset intense competition between the two licensed telecommunications companies, Telstra and Optus Vision had the direct effect of accelerating duplicated broadband cable rollouts to residential homes, with the capability of delivering significantly more pay TV channels to subscribers in a quicker time frame than was originally envisaged when Part 7 of the BS [Broadcasting Services] Act was drafted.
Government regulation played a part in fostering the rapid growth of broadband cable. Under the Telecommunications Act 1991 the government liberalised telecommunications initially by establishing a fixed duopoly (Telstra and Optus). As a result, Telstra and Optus enjoyed exclusive rights to build and operate broadband cable networks exempt from planning laws. The key objective of the Telecommunications Act 1991 was "to provide a framework for fostering genuine and sustainable network competition". This was specifically designed to encourage rollout and construction of a fixed broadband infrastructure as the following review by the BTCE (1995, page 23) states:
First, the Government took the view that "had unrestricted competition been introduced immediately, it is likely that the new carriers would have taken longer to provide 'critical mass' of sufficient market share necessary to provide effective competition to AOTC" (Holthuyzen, 1992). A second, short-term aim of the regulatory arrangements was "to assist the second carrier in overcoming the formidable advantages associated with Telecom-OTC's control over the customer base, infrastructure and access to information so that the second carrier would be able to compete from as level a playing field as possible" (Beazley, 1991).
Both Telstra and Optus took advantage of their privileged positions to roll out broadband networks across major cities of Australia. During the 18 months up to 1 July 1997, a cabling race ensued with Telstra reportedly following Optus's cable layers down many of the densely populated streets of Australia's capital cities.
Telstra, with the benefit of long-held easements (a legacy of its public telecommunications carrier status), initially rolled out its broadband network underground. Optus used cheaper "aerial cabling", stringing its wires along the power poles of the local electricity authorities. Since this enabled the network to be constructed faster and more cheaply, Telstra soon followed suit. This produced a public reaction that resulted in the removal of the two operators' exemption from the planning and development laws. However, by this time the bulk of Telstra's and Optus's networks had already been constructed.
The rapid pace of Australia's cabling is evident from comparison with the UK, where the cable industry was deregulated in 1984. In the four years to April 1988, less than 3 per cent of UK television homes (about 600 000 homes) had been passed. Even during a much faster period of growth in the UK, the two years following the Duopoly Review of 1991–92, the share of UK television homes passed rose by only eight percentage points, from 8 per cent to 16 per cent. Two years after launch, Telstra's and Optus's broadband networks passed over 30 per cent of Australian TV homes.
Another remarkable feature is that the two cable systems are "overbuilt" -- a term used when two wire networks are built in the same area offering potential subscribers a choice of different networks -- by 80–85 per cent in the main metropolitan areas. This level of fixed facilities competition does not exist to any significant degree anywhere else in the world. It is, therefore, not surprising that the Bureau of Transport and Communications Economics concluded in its 1995 review that most of the government's short-term objectives for telecommunications had been met (BTCE, 1995).
Figure 3.1: Cable Homes Passed as a Percentage of Total Homes
PROGRAMMING
In the development of pay TV, two programme categories -- movies and sport -- have been crucial in differentiating it from the established terrestrial channels. As a result, there has been a scramble to secure exclusive rights to such programming, often at prices which have proved both high and onerous to the pay TV operators, and generated public and political concern that such programming will be denied to the mass of television viewers. Australian pay TV has been no exception in this regard.
Australis and Optus Vision battled to secure exclusive rights to Hollywood movies. Australis had "output deals" with Sony, Paramount and MCA (Universal) (later joined by Fox); Optus Vision with Disney, Warner and MGM. The competition between the two resulted in programming deals with Hollywood studios which were costly, involving as they did very high Minimum Subscriber Guarantees (MSGs). MSGs gave the studios a guaranteed sum irrespective of the number of subscribers watching their programmes. These burdened the industry with high costs and financial difficulties.
As the third entrant, FOXTEL did not have access to movies from the major Hollywood studios (other than Fox). This placed it not only at a disadvantage, but potentially blocked its entry to pay TV. Under the Telstra News (TNC) Heads Agreement, approved by the ACCC, Australis agreed to supply FOXTEL with part of the Galaxy package consisting of four channels, including movies and sports. The ACCC acknowledged that without this programme arrangement it was highly unlikely that FOXTEL would have commenced a pay TV service (Fels, 1996). However, this was achieved at a high cost to FOXTEL shareholders: a reported $4.5 billion guarantee over 25 years.
Sport is seen as important in attracting subscribers to pay TV. It has also proved to be a battleground. In the latter part of 1994 it was rumoured that News Limited was to establish a new rugby league competition -- the Super League -- to replace the national competition managed by the Australian Rugby League (ARL). The idea was to create an elite competition of ten or so teams, consisting of the "cream" of rugby league players. In response, the ARL offered 20 clubs admission to the national competition for five seasons, on the condition that each club agreed to participate for those seasons, and not in any other competition unless conducted or approved by the ARL. Each club signed a Commitment Agreement to this effect.
Inevitably, the dispute ended up in the courts, with numerous actions brought by the ARL based on breaches of player contracts and of club contracts, and by News Limited based on breaches of the provisions of the Australian Trade Practices Act. The ARL successfully gained an injunction stopping the Super League, but this was overturned on appeal. The two leagues ran in parallel for a year in the face of mounting costs and dwindling public appeal, and have now merged to form the National Rugby League.
THE BATTLE WITH FTA TELEVISION
Pay TV operators have had running battles with the FTA networks. The BSA applies different levels of regulatory control according to degree of influence. In practice this means that the more influential a medium is, the more regulation it tends to attract. Hence, FTA, the most influential sector, should attract the "most regulation". In practice, the FTA networks have gained many privileges in addition to the delay of pay TV. These include:
- a ban on advertising on pay TV until 1 July 1997 followed by limitations on the amount of advertising time;
- a ban on R-rated material on pay TV despite research by the ABA which indicates that a majority of those polled believed that R-rated material should be available, with appropriate restrictions; and
- anti-siphoning rules designed to ensure that major sports would not move from FTA to pay TV exclusively.
In addition, in 1998 the federal government announced that no additional commercial FTA licences would be issued before 2008, and that the existing three FTA networks would receive valuable spectrum for digital terrestrial television free of charge. These two decisions caused considerable controversy within and outside government, being seen as an excessively generous gift to the highly profitable FTA commercial networks (Shanahan, 1998). The government justified the decision in terms of the expense that these networks would incur in moving from the present analog to digital transmission estimated at between $500 million and $700 million (Fairfax, 1998). The Australian government has also arbitrarily decided to mandate the introduction of High Definition Television despite the lack of clear evidence, from either Australia or the experience of other countries, that this is commercially viable and desired by consumers.
PAY TV FINANCES
The plight of the pay TV sector can be readily seen from its financial position. All three current pay TV operators and two which no longer exist (Australis and ECTV) sustained substantial losses, and had done so since commencing transmission. Figures 3.2 and 3.3 show that net losses grew with each year of operation, amounting to over $2.2 billion (at June 1998) in pay TV alone, quite apart from the investment in broadband networks. Telstra's network is estimated to have cost around $3 billion while Optus is reported to have invested $2 billion building its broadband network. Australis's losses were so large that at 30 June 1997 its balance sheet showed negative net assets of $40 million. Australis went into receivership in May 1998, owing its US bondholders about $700 million.
Figure 3.2: Annual Losses after Tax Since Inception of Pay TV, 1994–98
Source: Company annual reports
Figure 3.3: Accumulated Losses at 30 June 1998
* The 1997 figure includes an abnormal write-off of $415m disclosed in C&W Optus Prospectus in September 1998, and the 1998 figure is estimated as an improvement over prior year.
Source: Company annual reports
ENDNOTES
2. See discussions in DTC (1989) and HR (1989).
3. Broadcasting Services (Subscription Television Broadcasting) Amendment Act, which inserted Part 7 into the Broadcasting Services Act 1992.
4. The procedure was laid down in the Broadcasting Services (Subscription Television Broadcasting Licences A and B Price-based Allocation System) Determination, 19 January 1993. Applications were invited on 22 January 1993, closed on 24 March and the results announced on 20 April.
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