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Netflix, Foxtel and spinning the pay-TV piracy issue

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Game of Thrones creates a surge in business for Foxtel

Online piracy has gone down because of competition in the pay-TV sector and is not due to the government and industry crackdown. Paul Budde reports.

IT IS INTERESTING to follow up pronouncements from former political and industry leaders. I compared Malcolm Turnbull’s recent suggestion for government intervention in the telecoms manufacturing market with his stand as a Liberal politician who frowned upon such government intervention.

This time – but on a different topic – I am looking at an assessment that Kim Williams, a former CEO of Foxtel, made on the issue of online piracy. He indicated that thanks to government and industry diligence, online piracy has been significantly reduced over the last few years.

Let's go back five to ten years ago — the height of online piracy in the pay-TV industry. At that stage, Foxtel was the dominant player in this market. For customers, in order to get access to the service, they needed to buy a complex package of entertainment services of which often 90% was not what customers wanted. In order to get the interesting part, such as sport and movies, one had to buy packages at $100 or more per month.

Since the arrival of pay-TV in the mid-1990s, I have argued against the business model of Foxtel. I mentioned at that time that based on that model, they would not be able to get much more than 25% market penetration. The company itself indicated that by the year 2000, it would achieve a 75% penetration.

The sad thing was that they had also based their purchase arrangements with the Hollywood studios on these unachievable targets. They had committed $25 billion over ten years for such content. In consequent years, they had to go cap in hand to the content owners and negotiate lower prices for their movies.

At the time I mentioned that, in Europe and  North America, basic pay-TV packages started at around US$15 (AU$21.56) a month. In a heated telephone call, Kim Williams argued with me that this was not a true comparison as the Foxtel package included far more and better content than those basic U.S. and European packages. That might well have been the case, but I argued that not much more than 25% of Australians would be prepared to pay the prices that Foxtel was charging.

Now some 20 years later, Foxtel’s penetration level is still around 25%; it might perhaps have peaked around 30%.

While I certainly never condoned piracy, I have argued over the last two decades that by charging such high amounts the company stimulated – of course unwillingly – some people to move into piracy.

All of this changed with the arrival of Netflix and its $10 per month approximate charge. Surprise, surprise, customers flocked to the service. They now have over 10 million subscribers in Australia!

So the reason that piracy has reduced is mainly because of Netflix’ arrival in the market. Australians are not criminals, but they do want a fair go. When Netflix offered a fair go package, people didn’t need to revert to piracy anymore.

Foxtel remained a reluctant follower of this trend and has, ever since, seen their subscriber numbers going down. It remains the dominant player in the sports market and that is where most of its users are. With Games of Thrones, Foxtel also gets a short-lived surge of demand during the duration of the series, but with the last series now being screened, it will be interesting to see how it will fare after this. The general trend for subscriptions to the service remains downwards.

So I would like to refute Kim’s claim that it has been the government and industry fight against piracy that has seen piracy going down. Instead, it is mainly competition and market forces that provided the right environment for such services and, as a consequence, people started to pay what they saw as a reasonable and affordable price for these services.

Paul Budde is managing director of Paul Budde Communication, an independent telecommunications research and consultancy organisation. You can follow Paul on Twitter @PaulBudde

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