While AFL and NRL are both very tribal sports they have extended beyond that. Many fans, even those who don’t have Foxtel, are keen to watch games where their teams are not playing. That’s a positive sign for Kayo’s future.
But it should be remembered Nine, owner of The Australian Financial Review, and Seven, free-to-air rights holders for large amounts of NRL and AFL respectively, serve sports viewer extremely well.
Foxtel undertook months of research before launching Kayo and believes there is a large untapped market of customers that will pay for the service and help it lift its subscriber base, particularly in the younger demographic.
For the first time this summer, cricket fans who wanted to watch every ball and didn’t have pay TV, Foxtel or Kayo were the only options. In essence, cricket was a new market for Foxtel as it had never had the sport (at least in large amounts played on home soil – it previously held the BBL prior to its popularity taking off on Ten) before.
The risk with AFL and NRL is both sports have been core to growing Foxtel’s existing premium subscriber base. Foxtel needs to keep the large majority of its premium subscribers to keep up its profitability – broadcast average revenue per user slipped 3 per cent to $78 in the three months to December 31, compared with the same time a year earlier.
Why is it so important to keep the premium customers on Foxtel and not see them spin down to Kayo? Like most things, it’s the money.
In its aggressive bid to drive household penetration – which has been stuck at about 30 per cent for years – Foxtel became the kingmaker for Australia’s sporting bodies, being at the centre of no less than five record deals since 2015.
Including cash and contra, Foxtel and News Corp (depending on how the contract was structured) are stumping up on average about $105 million for cricket, $216 million for AFL, $184 million for NRL, $18 million for rugby union and $58 million for A-League and Socceroos matches per year. That’s a little under $600 million per year on five sports, not to mention the host of other cheaper sports rights Foxtel holds and production costs, including dedicated cricket, AFL and NRL channels.
Unnervingly, churn for Foxtel’s main product increased in the final three months of 2018, although News Corp boss Robert Thomson attributed this to price increases passed on late last year rather than existing subscribers to Foxtel cutting their services in favour of the cheaper Kayo.
Thomson was adamant Kayo’s subscriber growth thus far has not come from a massive spin-down of existing premium Foxtel customers.
News Corp, which owns 65 per cent of Foxtel – the other 35 per cent is held by Telstra – last year gave 12 months to 18 months to turn around declining revenue and flat subscriber growth at the pay TV business.
News Corp has previously flagged an initial public offering of Foxtel, and Telstra has indicated it would sell down in that event. However, it would be a hard sell to investors on its current trajectory and News Corp knows it will need revenue growth and traction from Kayo to push forward with such an undertaken.
It has privately indicated to analysts and investors it could consider selling down in Foxtel if the business isn’t turned around.
What was surprising about Friday’s Kayo reveal was the fact it actually happened. Many media insiders expected one total subscriber number across Foxtel platforms.
The move could be interpreted as a sign of confidence in Kayo and Foxtel’s future.
Kayo will put significant pressure on near-term earnings for Foxtel, but the risks of not going ahead with the new service are far greater.
Kayo has finally put Foxtel in the streaming fight, after years spent hoping this battle would go away. Only time will tell if it can deliver the knockout blow.