Exex mull Foxtel/Optus pay TV merger

Deal may be sticky but partners are lining up to sign

SYDNEY — The TV industry is weighing the repercussions of a landmark deal between Australia’s leading pay TV carriers to share programming and cooperate on delivery systems.

The handshake, announced at the beginning of the month, will establish dominant carrier Foxtel as the chief content provider and Singapore Telecom’s Optus as a key service provider, especially via satellite, over which it has a monopoly.

They aim to complete the deal by November — allowing nine months to finalize details and satisfy antitrust concerns of the powerful Australian Competition & Consumer Commission.

“Foxtel and Optus are the two major pay TV operators,” says ACCC chief Alan Fels. “Telstra owns 50% of Foxtel, and both Telstra and Optus are the largest telecommunications providers in Australia; accordingly, the matter will require close scrutiny.”

The government tacitly approved the deal on the grounds that it should boost pay TV penetration in a market where it’s still less than 25% of homes — and customers should get greater choice. Plus streamlining costs will, in theory, free resources ahead of the cablers’ moves to digitization.

The deal came as a surprise to Optus and Foxtel’s myriad of partners, who are now lining up to complete their own negotiations.

Further complicating the situation are the competing interests of Foxtel’s partners, Rupert Murdoch’s News Corp. and Kerry Packer’s Publishing & Broadcasting Ltd., which own 25% each.

For instance, Foxtel carries Fox channels, and hence must negotiate with Fox, whose parent company is News Corp., for delivery via Optus.

Some content, including Disney Channel and World Movies, is common to all carriers; other Optus channels are likely to be wound up.

Foxtel is most interested in Optus’ MovieNetwork movie package — from MGM, Disney, Warners and Roadshow — and sport channel C7, an offshoot of Kerry Stokes’ Seven Network. C7 used to broadcast popular rugby and Oz rules football, but its future is under a cloud after Fox Sports snapped up those rights last year.

Foxtel still needs approval from regional satcaster Austar, its partner in six XYZ channels, to offer those channels for broadcast on Optus. But Austar’s Bruce Meagher said he was, in principle, in favor of anything that increased eyeballs and decreased programming costs.

UnitedGlobalCom’s Austar gets a 50% return on its programming costs, Foxtel gets 65%-75% return, both far above the 35% U.S. benchmark.

Foxtel will take over Optus’ liability for MovieNetwork — worth almost A$600 million ($311 million) — until it expires in 2007. It adds that pact to its deal with the Premium Movie Partnership, owned by Fox, Sony, Universal, Paramount and Liberty Media, which is worth an estimated $385 million until 2007 at current subscriber levels.

With Optus’ 270,000 subscribers, Foxtel’s 785,000, plus the 430,000 regional viewers it reaches via Austar aligned, it is expecting to renegotiate those crippling deals, struck in U.S. dollars before the value of the Oz dollar hit 50¢ in 1999.

To that end, new Foxtel new topper Kim Williams, who has been pivotal to the success of the negotiations, will visit Los Angeles in coming weeks.

But he will find the going tough because, as PMP topper Bob Donoghue told Variety, the contracts are binding and “our response is neutral. It’s always been in our interest to be offered to a wider audience, and now Foxtel has chosen to do that, of course we’re in full favor.”

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