As a pre-emptive strike against the long-speculated launches of Stan and Netflix, Foxtel slashed the price of its basic cable package by half to $25 a month in September 2014.

But with Netflix launching for as low as $8.99 a month and Stan at $10 per month in 2015, both services were less than half the price of a basic Foxtel service – which does not include sport.

Foxtel waded into the SVOD market with a 50-50 venture with Seven West Media called Presto, which was actually in market before Stan or Netflix – but the service failed to gain traction and was shut down in 2016.

According to News Corp's accounts, at the end of the 2013-14 financial year, Foxtel's average revenue per user (ARPU) on its broadcast cable and satellite service was $96 and it had 2.6 million subscribers.

By comparison, News Corp reported earlier in May that Foxtel's ARPU for broadcast subscribers was down to $79, and there are now 2.4 million broadcast and commercial subscribers.

It has however locked in 505,000 paying subscribers for Foxtel Now – the streaming equivalent of broadcast Foxtel - and 209,000 paying customers to sports streaming service Kayo Sports.

However, financial documents state Foxtel Now ARPU is estimated to be 60 per cent to 70 per cent below broadcast Foxtel. Kayo ARPU is hard to determine given the discounts offered to Telstra customers and bundled promotions with News Corp publications.

Foxtel's borrowings sit at around $US1.33 billion ($1.93 billion) in various debt placements and credit facilities with different maturity dates. It is working to seal a $2.5 billion refinance package to help its push into streaming.

In the year to December 31, 2018, Foxtel had a cost base of $2.56 billion – $1.6 billion of which was on programming – 50-50 sport and non-sport. It is also estimating to have between $470 million and $480 million in capital expenditure for the 2018-19 financial year as it goes through the intense period of upgrading set-top boxes.


In 2009, Fairfax had net debt of $1.78 billion and costs of nearly $2.1 billion – a decade ago, many believed the company was in such a bad position it would not survive and could be sold for parts.

At the end of June 2018, Fairfax's final financial year before its merger with Nine, the publisher had net debt of $135.7 million and a cost base of $1.45 billion.

Fairfax didn't get to that point by accident. It involved a lot of pain – tears in hallways as rounds of redundancies hit the publisher and a complete rethink in how the company had always done business. It outsourced sub-editing and closed printing presses, which had cost Fairfax $630 million to build, because they were running at a quarter of capacity as classifieds shifted to SEEK and Carsales and more readers went online.

It also required the large-scale sale of assets. Fairfax offloaded Kiwi online auction house Trade Me in stages after listing the business for about $1.07 billion and holiday accommodation website Stayz for $220 million.

These sales and taking more than $500 million out of the cost base allowed Fairfax to aggressively invest in digital businesses such as Domain and Stan – which was a 50-50 venture with Nine prior to the merger last year – while drastically reducing debt.

Foxtel doesn't have any assets it can sell off in the same way Fairfax did. Its parent company, News Corp, which owns 65 per cent of the pay TV provider, has $US1.65 billion in cash and has already loaned it $300 million. Although News Corp's desire to sink money into Foxtel would likely be limited – when it warned the pay TV provider would require "short-term reinvestment", News Corp shares had their biggest fall in five years and haven't recovered.

Like the former Fairfax publications, for Foxtel content is king. It holds an enviable portfolio of rights – particularly sport – although it has paid billions for them, locking in a huge part of its cost base in the near-to-medium term.

According to Foxtel's 2017-2018 financial accounts, filed with the Australian Securities and Investment Commission, the pay-TV operator had committed $652.5 million to sports rights before production costs in 2018-19.

Over the next four financial years from July 1, it has committed a further $2.3 billion, and beyond that, another $148 million.


News Corp has said there is opportunity to “reduce spend on non-marquee sporting content”, but did not define which sports that related to.

This would, no doubt, make sporting bodies, who have enjoyed ever-rising broadcast deals nervous. But, it makes sense from a business standpoint for Foxtel; it needs to lower is cost base and will review contracts – sport and non-sport – as they expire.

But if Foxtel can't sell assets to reduce debt and its cost base is high and predominantly fixed, it needs to find growth in new areas.

To Foxtel's credit they're making an aggressive push into digital with Kayo Sports and a speculated drama and entertainment streaming service down the line.

But, with sports costs – including production – at about $800 million in the 12 months to December 31, Foxtel needs Kayo to surge to help it break even on sports costs, assuming sport is required to pay for itself.

If we assume 70 per cent of Foxtel's 2.2 million broadcast subscribers, as of December 31, take up the sports package at $29 per month – Foxtel is making roughly $348 per year from a little over 1.5 million subscribers, or around $535.4 million.

Estimate about 50 per cent of Foxtel's advertising revenue is related to sport, $150 million and then add in another sizeable chunk for pubs and clubs which News Corp doesn't break out, so it's hard to lock down.

And we can estimate it receives extra revenue from high-definition and multi-room upgrades.

From this perspective, it's easy to see why Foxtel, which is not growing its broadcast base, would look to launch Kayo even if it accepts sport is a loss-leader.


Add Kayo's 209,000 paying subscribers at $25 per month – minus GST – and making the generous assumption that those customers are all paying $25, even though there have been discounted packages, and stay with the service all year – we get roughly $272.64 per customer per year, or about $56.98 million. Kayo has been aggressively discounted and bundled with News Corp newspapers and is likely loss-making in its start-up phase, having launched in November 2018.

News Corp said its research estimates an addressable market of four million for Kayo – not including existing Foxtel customers. It's a lofty target, but if even half-achieved would be a boon for the pay TV business. The key questions: can Kayo achieve a number anywhere close to two million? Can Foxtel keep its broadcast base stable?

Foxtel Now ARPU is 60 per cent to 70 per cent below the broadcast ARPU of $78 per month. This estimates Foxtel Now ARPU to be between $23.4 per month and $31.2 per month.

The lower end is below the entry-pack price for retail customers and would likely be explained by a large number of 24-month free contracts given to Telstra customers, but Telstra pays Foxtel a smaller wholesale fee.

The calculations also don't take into account churn on streaming products like Foxtel Now or Kayo is much higher than broadcast – it is highly unlikely a customer will actually keep the product for the entire year, and will instead dip in and out when they want, for example only signing up during the NRL season or for the final season of Game of Thrones. This makes revenue estimates less reliable.

Of course, sport doesn't exist in a vacuum and helps drives revenue up across the entire business, helping sell deluxe packages to get broadcast revenue up to $78 per month – if a broadcast subscriber wants sport, it costs roughly $58.

If Foxtel can entice its customers with deluxe content beyond sport, it can help hold ARPU up. However, if a subscriber only wants sport, there is a risk of them cancelling their premium service and picking up Kayo for $25 per month.

The risk facing Foxtel is it is looking to cut its non-sport programming costs, which are $800 million. Those costs can be cut quicker as short contracts expire, but if Foxtel isn't able to secure that content for less and instead gets rid of its altogether - if for example it doesn't retain its HBO deal – those estimated 1.5 million broadcast subscribers with sport, particularly when price increases are being discussed, might further question why they shouldn't just move down to Kayo at $25 per month.

At a basic level, not factoring in any difference in margins, Foxtel would need a little over three Kayo customers for every lost broadcast subscriber.

It's a high-stakes, high-cost balancing act, all in the midst of intense competition. What's clear is Kayo needs to take off the help the pay TV giant to have a sustainable future.