• Real average annual revenue growth of 13% between 1995 - 2005
• Liberalization of telecoms and recategorization of cable opens up investment opportunities
• Well-developed free TV will still see strong growth in advertising

Long-term potential will be realized slowly

While a small nation in terms of population, Australia represents a valuable market for pay TV, one that can be exploited today. In fact, the pay-TV industry has mushroomed over the past three years, with a host of cable, MMDS and satellite players competing with a relatively wide choice of terrestrial TV channels. We expect that the Australian television market will grow from an estimated commercial revenue level of A$2.1 billion (US$1.5 billion) in 1995 to A$5.1 billion (US$3.9 billion) in 2005. The weakness of the country’s pay-TV industry has already led to a second attempt at consolidation, a process we expect will be complete in the first half of 1998. The Australian market will probably be an early laboratory for understanding the effects ancillary revenue streams from telephony and Internet service will have on the economics of television in the era of convergence.

(A$ Bils)

(A$ Bils)

(A$ Bils)

Real CAGR (%)

Real CAGR (%)

Real CAGR (%)

Television Industry Commercial

2.07

3.22

4.93

6.6

7.4

7.0

(%)

(%)

(%)

CAGR (%)

CAGR (%)

CAGR (%)

Telephone VOD

0

1

7

NM

59

NM

Australia Commercial Revenue

100

100

100

9

9

9

(%)

(%)

(%)

CAGR (%)

CAGR (%)

CAGR (%)

Viewing Fees

0

1

4

NM

53

NM

Australia Commercial Revenue

100

100

100

9

9

9

Micro & Macro Outlook

Relative wealth and wide accessibility of advertising are appealing

It is the relative wealth of the country and the wide accessibility of advertising to consumers that makes Australia a key target market for television operators. Australia’s 6 million television households equates to about A$326 billion (US$246 billion) in private consumption in 1997. We expect that the level of consumption will rise at a 5.0% nominal CAGR over the 1995-2005 period. This should spur growth in television advertising revenue from the 1995 level of A$2.0 billion (US$1.5 billion) to A$3.4 billion (US$2.7 billion) in 2005, or a 10-year CAGR of 5.4% (6.25%).

Viewing time is close to North American averages

Television viewing in Australia is already at North American levels and is unlikely to grow further in terms of average viewing minutes per week. In this sense, the market is saturated and multi-service operators will have to take share away from terrestrials. Australian population growth has slowed and will remain slow through 2005 while television penetration is as near to universal as possible, removing a key growth component from the television-accessible earnings equation.

Current Services

Free TV choice is wide and expanding

The Australian market has long been well served by terrestrial operators, which have been able to rebuild themselves financially over the past decade. Of the five terrestrial national networks, three are commercial (Network Ten, Nine Network and Seven Network). Each has affiliate stations in all the state capitals and can supply a rough average of 2,000 advertising minutes per week. Australia’s public broadcaster, the Australian Broadcasting Corporation (ABC), is under increasing financial pressure as the government reduces its support and continues to deny access to advertising sales. Further cuts in subsidies are likely, with the ABC’s international satellite service likely to face privatisation. Special Broadcasting Service Corporation, which serves Australia’s increasing population whose first language is not English, is also likely to face cuts in government subsidies, even though it can air up to about 700 ad minutes per week.

Pay TV has advanced quickly, though not profitability

Australia’s pay-TV industry has advanced well into the melee stage with various operators, using various technologies, jostling to become the anchor service provider to a small, but growing, market. Australis Media Galaxy Service was first on the scene in January 1995, offering DTH and MMDS services. Galaxy claimed 110,000 subscribers as of the summer of 1997 including about 9,000 subscribers reached through the MMDS distribution of Austar (formerly CETV) and East Coast Television. Optus Vision, whose ultimate principal shareholders are Continental Cablevision and Cable & Wireless, launched cable services in September 1995 and in July 1997 was estimated to have 180,000 subscribers after passing 2.3 million homes. Foxtel, a joint venture between Rupert Murdoch’s News Corp and telecommunications company Telstra, launched cable services a month later and in July 1997 claimed 215,000 subscribers and a backlog of 20,000 after passing 21. million homes.

Competition

Competition in pay-TV influenced by aggressive market share assumptions

With various exclusivity clauses expiring in 1997, competition between pay-TV operators has intensified as all attempt to pass the bulk of Australian television households and become the anchor provider. While the industry holds out the possibility of significant revenue growth over time, the likelihood that all the current operators will survive long enough to thrive appears unlikely, as does the possibility that a new player will enter the scene before the economics of the underlying technology changes radically. Consolidation, which has been attempted by some of the players, has so far been rejected by the authorities governing competition. However, with Australis on the verge of receivership, it is likely that one of the two cable operators will come to dominate the pay-TV scene.

Convergence

Convergence is largely being pursued by telcos

Both Foxtel, through shareholder Telstra, and Optus Vision, in tandem with principal shareholder Optus Communications, have laid down hybrid fiber-coaxial networks. Optus Communications has been providing cable telephony since July 1996 at a price lower than Foxtel, co-owner Telstra. However, there is a subtle difference: Telstra is not looking to draw telephony business. Instead, Telstra is focusing on at least, "telephony defense," or at most, the provision of pay-per-view and video-on-demand using a combination of HFC and ASDL technology as well as cable television.

Incumbent telco has more to lose than gain from cable

Telstra ostensibly provides a strategic advantage to Foxtel due to its existing telecommunications customer base that reinforces Foxtel’s initial programming advantage. But the cross-subsidisation gains should be less than those that may accrue to Optus: Telstra is launching from a large, but mature telephony revenue stream (in which share expansion is increasingly difficult), to enter into a small (but growing) television revenue stream. While Optus is cross-subsidising a small (but growing through share expansion) telephony and a small (but growing) television stream to promote growth in the both of them.

Complicating the matter is the eventual introduction of digital terrestrial television. We expect DTT to be introduced on an experimental basis in 1999 with commercial rollout in 2000. This is likely to mean that viewers will face an increased choice among free television services. Pay-TV service providers will probably have to focus even more tightly on the old formula - movies, sport, news and sex. Infrastructure providers will have greater latitude to promote a wide range of multimedia services. We think this is what Telstra is banking on.

Internet is likely to be an important revenue stream relatively soon

Australia is one of the few markets in the region where the provision of Internet-related services is likely to generate significant revenues by 2000. However, it is not likely to alter the economics of pay-TV competition significantly since Foxtel, as a pay-TV marketing vehicle, does not currently have an incentive to promote these services. It is not the originator of these services and thus not a claimant on revenue. Ordinarily, any additional revenue stream to a multi-service provider would help finance the penetration of its main service. But in this case, only Telstra benefits through reductions in its break-even period for its investment in a broadband network. Of course, Foxtel’s firm microeconomics might be served by lowering Telstra’s broadband break-even, if that were to make Telstra more inclined to contribute additional funds to Foxtel. We do not think that Telstra’s ability to contribute finance toward Foxtel was ever insufficient.