Critical Analysis of the Australian TV Industry Abstract

The TV industry in Australia has been on the rise following the numerous changes that the government has implemented on the regulation of the industry. The first TV broadcast in the country was witnessed in 1952 but today the industry has expanded to accommodate more players and latest innovations. The pay TV sub-sector was introduced in 1995 when Foxtel introduced the services for the first time in the country. Currently, other players in the sub-sector have entered the market, including Austar, Telstra Corporation Ltd, Singtel Optus, and Win Corporation. The other subsector is the traditional free-to-view TV which consists of 9 operators in total. The Australian government had initially strictly controlled its airwaves but changes in the regulation have seen the industry gain competition amongst its players. The Australian Competition and Consumer Commission is the government’s agency charged with the responsibility of regulating the industry. It is costly to start a satellite TV service in the country owing to the sunk costs involved. All the pay TV players in the country do not reach all parts of the country because of the expenses involved in actualizing it.

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Critical Analysis of the Australian TV Industry Introduction

The Australian television industry has been in existence since the early 1950’s and has grown over the years as technological advances and innovations are also being witnessed in the sector. Presently, the industry consists of two types of TV services, the free to air TV stations and pay-TV stations. The Australian government is a key player in the industry, funding two free-to-air TV stations, that is ABC and SBS. The industry is regulated by the Australian Competition and Consumer Commission whose main role and responsibility is to check on the competition between the numerous players that currently exist in the market. This report seeks to carry out an extensive exploration of the industry, providing a description of the market structure, pricing methods employed, as well as analyze the industrial policy and its effects to the market.

The Industry’s Market Structure

The Australian TV industry is a significant contributor to the national economy. According to IBIS World report published in April 2012, the industries total revenue currently stands at $8.5bn. There are two main sectors which together make the industry, that is, the freeto-view TV and the pay or subscription TV. The free-to-air TV sector is comparatively bigger, with its total revenues standing at $5bn while the pay TV sector has total revenue of $3.5bn. The total amount paid by the industry in terms of wages on an annual basis is $762.1m while the profit figures stand at $1.298bn (Sallmann, 2012).

Pay TV

In the pay TV sector, Foxtel is the dominant supplier, especially to the metropolitan subscribers (McMillan 2011). The channel’s market share stands at 60.5 per cent of the total subscribers in the area. Foxtel has also further widened its market outreach by providing its services through Optus and Telstra. One of the main reasons that make Foxtel to be the leader in this industry is the fact that it pioneered the industry in 1995, at a time when pay TV was still new in Australia. The company’s huge market share is literally a barrier to market entry as it makes it hard for any new entrant to join the industry (Research and Markets, 2012). The other pay TV channel, Austar, remains a dominant supplier in areas where Foxtel does not supply its services. Austars’ current market share is 21.1%, almost three times smaller than Foxtel. Other players in the sector are Telstra Corporation Ltd with 5.4% market share, Singtel Optus at 2.2%, and Win Corporation at a paltry 0.2% market share. TransACT also provides subscription TV services although it operates on a subscriber deal with Foxtel and is only available in Canberra and Queanbeyan. Its market share does not exceed 2000 households. Neighborhood Cable also supplies cable services and mainly covers Mildura, Geelong, and Ballarat (Research and Markets, 2009).

Initially, these players owned their channels and competed against each other in the market. However, the recent move by the ACCC to allow players to share their channels reduced the competition to a greater deal. As such, Optus offering has received a remarkable boost as its services are more less the same as those offered by Foxtel. Customers now find it a bit difficult to differentiate between the programming and pricing services offered by the two service providers. Presently though, Foxtel is still the market leader in terms of huge subscriptions from viewers while Austar and Optus follow in second and third positions respectively (Bikfalvi et al, 2011).

The supply chain for pay TV operators

Rights and content suppliers

Broadcast rights sale and content creation e.g. movie studios, AFL and NRL

Channel suppliers

Aggregating programs into different channels e.g. Fox Sports, Disney, The Movie Network, XYZ

Entertainment

Wholesale pay TV dealers

The on-sale of channels to retail pay TV operators e.g. Foxtel

Retail pay TV operators

The provision of pay TV services to subscribers e.g Foxtel Telstra Optus, Austar, TransACT

Distribution

The distribution of pay TV services to subscribers e.g. hybrid fibre coaxial cable, satellite, broadband wireless

Reception

The reception of pay TV services at the subscriber end e.g. set-top unit and television

Source: Commonwealth of Australia (2003)

Free-to-air TV

In the free-to-air broadcasting sector, players enjoy some degree of protection from competition. There are strict entry regulations into the sector which currently has only provided 3 commercial broadcasting licenses to channels 7, 9, and 10, together with their regional affiliates. In total, the free-to-air TV sector has 9 operators with the market leadership squarely in the grips of channel 7, 9, and 10 (Free TV Australia, 2010). The Australian government owns ABC and SBC TV channels. In the recent past, deregulation of some of the strict rules has been witnessed although other regulations still exist, which also works towards restricting the manner in which free-to-air broadcasters can operate in the industry (Commonwealth of Australia, 2003).

The digitization of free-to-air broadcasting has further increased capacity, a development that could lead to the opening up of new opportunities, as well as new services and greater choice. Much of the changes have resulted in heightened competition between players although a fall in advertizing has been witnessed. The Australian industry can generally be described as concentrated but with the free-to-air broadcasters having limited flexibility to develop strategies that can match consumer demands. Both the pay TV and free-to-air players have been insulated in a bid to eliminate competition (Vered & McConchie, 2011).

Industry Regulation by Competition Authorities

The Australian TV industry is regulated by the Australian Competition and Consumer Commission, abbreviated as ACCC. In its jurisdiction, the Commission has the mandate to ensure that infrastructure is efficiently used by players as they supply telecommunications as well as well as pay TV services (Sallmann 2012). The ACCC permits competing providers to use key existing networks while supplying their services. ACCC believes by regulating access and conduct of the players, they will be creating an enabling environment that promotes healthy competition in the market (Jones & Pusey, 2008).

Although the industry has not witnessed cases or instances where particular players engage in anti-competitive behaviors, there have been concerns that suppliers enjoying substantial market power, such as Foxtel, could easily stifle competition through access regulation by slowing or knowingly delaying negotiations, or by provisioning networks in a manner that may not be conducive to access. These suppliers could also deliberately favor their own service supply at the expense of access seekers (Commonwealth of Australia 2003).

In citing these possibilities, concerned players mention the fact that limited competition will result in underdevelopment of networks and will also delay the introduction of new innovations and services, like the integration of high-speed internet. Efficient service delivery will also be difficult to achieve and the costs are still likely to remain comparatively higher for the consumers (Austar United Communications Limited, 2011).

Cost Structure of the Industry

Access to important content that attracts large viewership is a significant determinant of barrier to entry. Premium content in particular is supplied to operators through exclusive contracts. The industry is currently being served by only two recent-release movie suppliers, Movie Network and PMP. Initially, Optus supplied C7 but it ceased the service and currently only two premium sport suppliers exist, Fox Footy Channel and Fox Sports. Access to this kind of high-quality content is very critical in Australia as it determines whether or not a supplier has the power to attract subscribers, thus deriving huge volumes of pay TV business. The exclusive contracts in the industry can easily create a winner-takes-it-all kind of market in Australia as currently the markets share is highly skewed in favor of a single supplier (Commonwealth of Australia 2003).

All the pay TV operators are aware of the fact that exclusive ownership of premium content could easily drive subscriber numbers higher. In so doing, the bargaining power will eventually be improved and eventually empower the pay TV operator in acquiring economies of scale. Enhanced bargaining power implies the pay TV operators could further afford, on exclusive basis, additional content. For retail operators of the pay TV services, obtaining premium content invariably remains costly although chances are higher that the resultant longer term remuneration could still be high as well. It is possible for particular pay TV operators in the country to strengthen their position while at the same time weakening competitors by subjecting them into an endless vicious circle. This is precisely so when the competitors are unable to obtain premium content, thus weakening their ability to attract substantial numbers of subscribers. The pay TV operators in the market compete on the basis of both the existing content costs as well as the overall number of subscribers (McFarland, 2009).

Distribution networks and their high sunk costs

In general, establishing elaborate pay TV services in Australia involves quite a substantial amount of sunk costs, including the deployment of a cable network as well as satellite launching. These sunk costs make the risk of market entry to be very high because they are irrevocably committed. Retail operators of pay TV services could alternatively gain access to distribution networks that already exist, further allowing distribution network owners the opportunity to lower network investment risk by achieving substantial economies of scale. This, in turn, may prove to be very positive in assisting their viability (Worldwide Radio & TV Broadcast Equipment Industry, 2010).

Vertical integration

Foxtel remains the most vertically integrated among all the other players in the pay TV sector. Foxtel Management is directly in charge of the television service supplies on behalf of Testra Media and Sky Cable who are the two equal partners that form Foxtel. Telstra Media is a subsidiary that is wholly owned by Telstra while Sky Cable is owned by News Corporation, and Publishing and Broadcasting Limited, abbreviated as PBL, on a 50-50 basis. Additionally, Foxtel has different other ownership interests along the supply chain of the pay TV industry as a whole. The company jointly owns Main Event Television with both Austar and Optus at 33%. Foxtel also owns XYZ Entertainment, in conjunction with Austar, at the rate of 50% (McFarland, McDonald, & Lindsay, 2008).

Optus Television, on its part, is supplied content by SingTel Optus which is in turn 100 per cent owned by Singapore telecommunications Company, abbreviated as SingTel. Optus also has interests in Main Event Television at 33% and produces both Ovation and MTV channels inhouse.

The other pay TV channel in Australia, Austar, is controlled by two partners CHAMP as well as UnitedGlobalCom. The latter is a broadband communications company that is based in the United States of America. Austar has vested interest in various channel suppliers, among them The Weather Channel, as well as TVSN Limited (Research and Markets, 2008).

Price Discrimination in the Industry

Players in this industry have time and again used price discrimination as a way of obtaining market foothold, especially to ward off the competition by market leaders such as Foxtel in the pay TV sector. Subscriber penetration rates reflect both market offerings by the individual players as well as the level of their structural advancement and development. The pay

TV players have the freedom to supply services at very high prices per lower number of subscribers’ price point in order that they may optimize on revenues.

Bundling

Bundling has the potential of enabling carriers to exploit the benefits that come about as a result of economies of scope. In general, Australian CSPs are utilizing the benefits of bundling to enhance their competitive advantage (Commonwealth of Australia 2003). The carriers or CSPs use the advantage of bundling to discriminate and thus set prices that effectively maximize on profits. The main determinant of price in this regard is whether or not the services have been supplied as a bundle. Apart from service bundles, carriers can use other alternative means, such as geographical locations or the level of consumer loyalty, to discriminate on price (ChanOlmsted & Miao, 2011).

Advertizing

The Australian TV industry extensively uses advertizing as a way of attracting customers and expanding their viewership. Apart from the fact that these TV stations are themselves advertizing platforms, they also seek other advertizing methods in a bid to expand their markets and hence grow as per their planned strategies. In particular, all the players in the Australian TV industry have resorted to different marketing forms which tend to be more responsive than the simple advertisement on electronic and print media. Sponsorships for big events, such as sporting competitions, have of late received significant sponsorship deals from TV companies as a way of targeting large groups of potential viewers to their programs (Commonwealth of Australia 2003).

The extent of advertizing and general marketing also varies highly, depending on the TV sectors involved. In the pay TV sector, advertizing and marketing efforts have not been as pronounced as would have been described of the case in the free-to-watch TV industry sector. The main reason for this variation is the fact that the pay TV sector of the industry relies heavily on their premium content as the marketing tool. Once these operators line up a premium program that is highly marketable, they use their own channels to inform viewers of the impending program lineup and that is enough for them to obtain huge numbers of viewers. However, the free-to-watch TV sector experiences heightened marketing activities particularly as the audience is common across board. Viewers can tune to whichever channel they feel sufficiently satisfies their tastes and therefore the players have to strongly emerge and convince them that they have all it takes (Simply overcomplicated, 2011).

Consumer Rationality

In general, most Australian TV viewers are largely rational. There are numerous factors which the consumers put into consideration before choosing on their best TV service provider: Popularity

Foxtel has for years maintained its leadership position as the most preferred pay TV service provider in the whole of Australia. Having pioneered the pay TV market in Australia, consumers continue to prefer Foxtel over the other late entrants, a fact that has enabled the firm to expand its services immensely. With the market growth witnessed, Foxtel has also managed to raise the necessary revenues that afford it the opportunity to acquire latest premium content releases. These contents are expensive and some other operators are not able to raise the needed funds to acquire the content (Commonwealth of Australia 2003).

Interactivity of service to end users

Some operators have acquired latest technology that allows them to offer their viewers some interactive services. For instance, TV viewers can now switch between channels that screen related programs from the comfort of their couches with their remote control gadgets in hand. These innovations also enable the viewers to switch between different camera angles particularly while watching a sporting event. It is this piece of skill and technology, which also allows viewers to use other complex applications like on-line gaming, which viewers consider when looking for service providers.

Service penetration

The Australian TV operators, particularly those in the pay TV sector, do not have their services spread across the entire country. These operators have concentrated their services in areas where they are assured of huge markets. Foxtel has particularly zoned off most cities and other urban centers where it is assured of market from the residents. Austar has also engaged in securing specific markets, particularly those it deems to have been neglected by Foxtel, its biggest competitor, as it explores on the possibility of maximizing on performance. Consumers seeking to acquire a TV service therefore have an easier task of selecting only those services that they can be assured of access to. Some of the free-to-air service providers, particularly those that are regionally based, only cover a small section as they target specific audiences (Meadows, 2009).

Price

Most customers consider their financial capabilities in comparison to the total costs they are likely to incur on a monthly basis before they conclude on the kind of operator they wish to acquire services from. This explains the general pattern of ownership of pay TV services which is more prevalent or dominant within cities and urban centers. Most residents of these locations are employed in the industries and other service sectors where they earn salaries. Free-to-view

TV is still dominant in Australia in comparison to the pay TV sector mainly because a majority of viewers consider the overall costs before committing themselves to buy.

Broadcast content

Most of the TV programs that are aired in Australia have a lot of their content from outside countries. Thus, a majority of Australians seem to have resorted to external content viewership more than they do to their homegrown programs. The premium content that is aired by pay TV operators often originates from these foreign countries but also attracts very large viewership. Most consumers are likely to shun service providers that concentrate more on local programming and content. The free-to-air TV sector is also filled with foreign content although it is relatively smaller as compared to the pay TV sector (Taking TV into 2012, 2011).

Strategies Employed by Firms to Maximize on Rationality of Consumers

Most pay TV service providers are exploring on different channel combinations that could possibly result in banquets that are cheaper for their viewers. They attempt to group together few channels that are popular with others that are less popular but reduce the overall monthly charges. This is meant to convince viewers towards acquiring their service plans and thus gain access to pay TV service.

The zoning strategy employed by TV operators mainly seeks to enhance their competitive position and advantage over other rival players but also targets market optimization. In sealing off areas considered to be highly lucrative in terms of viability, the pay TV operators are denying the viewers alternatives and instead are forcing them to exclusively acquire their services. For such viewers, the cost of changing suppliers is too expensive as they have to shift from their residential locations and move to areas with full coverage.

All the TV operators in Australia, including the two free-to-view operators are constantly seeking popular content that will manage to lock in their viewers. These contents are mostly acquired from suppliers who in turn source them from foreign countries. To further underline on the importance of this aspect, most of the TV operators have vested interest in the main content suppliers in the country (Changing channels, 2011).

Market Information Structure

TV viewers can easily observe the connection that exists in the market between the price they pay and the quality of service they obtain in exchange. The premium content is obtained by pay TV operators at a relatively higher price from the suppliers and is also sold to subscribers at a fee. Foxtel’s subscriber rates are higher in the market as compared to Austra’s and the other pay TV operators but the company’s quality in terms of content aired is highly competitive (Commonwealth of Australia, 2003).

Other pay TV service providers have attempted to attract customers by reducing their prices considerably but have done little to sway the market patterns. The market share in Australia still remains in favor of Foxtel despite their relatively expensive pricing.

In attempting to efficiently solve asymmetrical problems, such as those related to pricing decisions; firms often try to provide to their customers with quality products that can effectively match their asking prices. Customers often search for better qualities which they can actually relate to the total cost that they spend on acquiring products or services. By providing quality standards that actually match their expectations, marketers succeed in solving asymmetrical problems. Marketers can also solve this issue perfectly well by providing their customers with after sale services. Consumers who encounter problems with a service or product they acquired from a marketer are less likely to return to the same marketer for another business experience.

Such consumers feel cheated and would never understand the connection between the service, and product they had intended to acquire with the price they paid. However, a free after-sale service is likely to redeem their lost trust and assure them of the justification in whatever they paid with what they acquired in exchange (Commonwealth of Australia, 2003).

The Multi-sided Nature of the Market

The Australian TV industry is highly multi-sided as it comprises of service suppliers whose markets include operators in the same market who also are competitors. In this particular network, the users, who are both the pay TV and free-to-view TV operators, are homogeneous as they all perform the same function. Main Event Television as well as XYZ Entertainment is the main content suppliers to the TV operators that serve the Australian market (McMillan, 2011).

The market is likely to experience direct network effects particularly if alterations were experienced in either networks.

Price changes executed by players are likely to result in significant changes in terms of quantity supplied or acquired. The pay TV channels are likely to attract more subscribers if they reduced their monthly subscription fees. Equally, XYZ Entertainment and Main Event Television, both of them the major suppliers of premium content to the TV operators are likely to cause a reduction or increase in subscriber rates if they altered their prices on the either side (Commonwealth of Australia 2003).

Industrial Policy and its Effects on the Market

The Australian government has subsequently relaxed what were previously very tough industry rules that governed its TV industry. Market forces today play out fairly to shape up the industry although the degree of government involvement still needs to go down and allow a free market per se. As innovations in information technology continue to provide huge potential for growth and enhancement of the industry, interested players still find out that they are curtailed from executing an early exploration and exploitation of the market by the regulation rules imposed by the ACCC. Both the free-to-air and pay TV sectors are currently highly dynamic owing to the dynamic nature as well of market innovations and advancements being witnessed (Commonwealth of Australia 2003).

The entry of the internet TV into the market has already began shifting market trends and performances. Advertizing market has reduced as more advertisers seek media with very wide coverage. Markets are known to improve on their general quality and overall performance the moment entry barriers have been removed. As more players enter the fray, they try to woo and appeal more to customers by producing products or services that particularly match their wishes and demand.

The trade restrictions in the Australian TV industry also prohibit the free-to-air TV operators from multi-channeling (Commonwealth of Australia 2003). Effectively, this means that diversity among the players has been curtailed and therefore they are forced to focus their attention in only one area of operation. In essence, the free-to-air TV sector in Australia is growing at very slow rates. Restricting the number of channels which operators can own simply translates to imposing restrictions on innovation and growth. Additionally, the ACCC has enacted provisions which bar siphoning (Sallmann 2012), thereby implying that only particular sporting events can be aired by particular free-to-air TV operators. Because the content of pay TV is often sold in terms of bundles of channels, and the content of premium pay TV acquired exclusively, there is a possibility that inaccessibility to premium content could limit competition in pay TV service supply (Kaufman 2011).

Conclusion

The TV industry in Australia is basically divided into two, the pay TV sector and the free-to-view TV sector. The government regulates the industry through the Australian Competition and Consumer Commission which generally ensures a level playing ground exists in the market. The free-to-view TV sector is highly competitive although the entry of internet TV into the fray has reduced advertisements which generate huge revenue amounts. The pay TV sector comprises of several players, including Foxtel, Austar, Telstra Corporation Ltd, Singtel Optus, and Win Corporation. Other small players include TransACT and Neighborhood Cable. Foxstel has the highest market penetration levels followed by Austra and Optus in the second and third positions respectively. Pricing strategy remains one of the main strategies that players use to acquire additional customers but quality has been very fundamental in determining the success of this strategy. The consumers are perfectly rational as they look for operators with the right combination of service that they are seeking.

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