Michael Sainsbury
May 18, 2016

Google Schmoogle: Telstra takes aim

Telcoland

Google Schmoogle: Telstra takes aim

Andy Penn: Oh what to do about the Foxtel partnership?

'Google Schmoogle' was a phrase famously coined by former Telstra chief executive Sol Trujillo as he batted away concerns that the search engine giant, back in 2005 as a relative adolescent, would gobble up the business of Telstra’s directories business Sensis.

Indeed, Mr Trujillo promised quite the opposite, that Sensis would become Australia’s most formidable internet based advertising company.

“We're outgrowing Google in Australia. We're doing more, we're growing faster and we have more capability, because we're more relevant,” Mr Trujillo said in 2005

Boy, did that come back to bite him on the bum. Sensis remains arguably, Mr Trujillo’s standout failure, suffering a spectacular collapse in value from more than $10 billion or more to its eventual sale price of just $454 million for 70 per cent of the company nine years later.

It was a lesson that seems to have been heeded by his successors

That’s why you are not hearing Andy Penn echo the effective cries of Foxtel management that translated, might say “Netflix, Schmetflix” – promising the world that Foxtel can bat off the ever rising tide of streaming services.

Mr Penn, like every consumer of video in Australia, knows that Foxtel is already facing a mid-term future as a struggling legacy business if the Australian government does not change the egregiously anti-competitive, anti-siphoning rules – the most socialist regime in any Western nation – regarding sport.

It sometimes seems like it is more important for Australians to have access to free sport on TV than free healthcare and education. But I digress.

So, already saddled with a range of problems he must focus on, Mr Penn is determined not to repeat Sol Trujillo’s mistake with the company’s 50 per cent stake in Foxtel, right now Australia’s monopoly pay TV business and valued at an estimated $8 billion. This number is likely already sliding.

Mr Penn wants to sell out, or at least substantially sell down, Foxtel before the markets start to understand how fundamentally troubled the company’s current business model is by way of a stock market float.

If gossip columns in Australia’s legacy newspaper business are correct, that process has been postponed from late 2016 until 2017. The initial public offering has been delayed as Foxtel’s co-owner News, aims at vending in its wildly successful Fox Sports business, one of the biggest of many thorns in the always testy, sometimes almost unworkable relationship between the Foxtel partners. This will at least increase, or prop up, the value of the company.

As the owner of Australia’s biggest internet service provider Mr Penn knows the opportunity that high speed broadband offers. Indeed, Telstra via its broadband offerings that give users the opportunity to take advantage of Netflix – and for the purposes of this piece we use that company as code for all streaming services – and with its Telstra TV business, is both competing with itself, and cannibalizing its share of Foxtel revenues.

The network outages that have plagued the country’s one-time gold plated mobile network for the past few months are disturbing and have dented the network’s three decade reputation as Australia’s best.

The outages have also put an early dent in Mr Penn’s reputation, either fairly or unfairly, the buck for such universal national embarrassment lands squarely on the desk of the big boss.

Foxtel will join the recent sell down of Chinese website Autohome, and show a commitment to trimming non-core businesses and focusing on the future. Foxtel is most definitely the past.

The public response to those outages is also another sign of the hunger that Australians have for ever increasing amounts of bandwidth and video is the greatest consumer of bandwidth.

It’s not just TV shows and movies, its video calling with friends and loved ones – and far more critically for businesses, video conference calls. Talk to anyone in the advertising world and they will tell you that online video advertising, directed to personal preferences, is the latest goldmine. It is more effective than advertising on either free to air or pay TV.

The outages were compounded, InnovationAus.com’s Telstra spies tell us, by countless millions of people all trying to get back onto the network once it was fixed, leading to the hours-long outages that had until now, seemed like a thing of the past.

Telstra’s only real concern in selling either down or out of Foxtel is that Foxtel will then be free to compete with Telstra on broadband services, and may well get an early get out of jail card on the expensive network contract it is tied into on Telstra’s HFC network (now owned by NBN) until 2020.

The company is already bolstering its senior management team in the wake of last year’s departure of CEO Richard Freudenstein, far and away Australia’s most experience pay TV executive. Perhaps he, too, saw the writing on the wall.

All this mean that whatever voters decide on July 2, the Australian media and telecoms landscape will be vastly changed by the time of the subsequent election (barring a hung parliament and the possibility of an immediate return to the polls).

No matter what version of the National Broadband Network that Australia ends up with in the near term, the internet will have firmly established itself as the pre-eminent media platform in the country.

Telstra will have continued its transformation into a converged telecoms, technology and media company, and Foxtel will have to head the same way, albeit from a different starting point if it wants to survive.

Finally, it’s worth mentioning that Foxtel’s profits are propping up Rupert Murdoch’s newspaper company News, a rival Telstra knows it will underestimate at its peril. Unencumbered by Foxtel it will be free to launch an all out internet based media attack on its bitter rival-cum-partner.

Then, of course, there is the thorny matter of how to regulate all of this as the current structures are also being disrupted by the technology that is interrupting the broader sector.

But that’s another story.

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