‘The market misunderstands us’: Delany pitches growth as Foxtel finds its footing

Foxtel chief executive Patrick Delany is in an upbeat mood and keen to talk about many things at the moment. But one of the few things he won’t be drawn on is renewed market speculation about a sharemarket float of the iconic pay television business he runs.

“It’s the kiss of death for a Foxtel chief executive to aspire to [an IPO],” Delany tells The Sydney Morning Herald and The Age in a wide-ranging interview. “That’s a shareholder decision. But what’s very clear is that the market misunderstands Foxtel.”

Patrick Delany is determined to change the Foxtel narrative

It is difficult to float a business that isn’t growing. So signals from both of those shareholders - News Corp, which owns 65 per cent of Foxtel and Telstra, which owns the remaining 35 per cent - that an IPO could be back on the cards suggest Delany is doing something right.

News Corp chief executive Robert Thomson said earlier this month that Foxtel’s “resurgence” during the coronavirus pandemic had provided the Rupert Murdoch controlled company with “options”, while Telstra’s chief executive Andy Penn said the telco would support an IPO if that’s the path chosen.

Float, sale, merger or otherwise, Delany is determined to point out that Foxtel is no longer floundering. “Whatever the shareholders decide to do, the message needs to get out there that we are back on the front foot and leaning forward again, looking to the future” he says.

Delany took on one of the toughest jobs in Australian media in 2018 when he was appointed chief executive of Foxtel shortly after it was merged with the business he previously ran, Fox Sports.

At the time, Foxtel was struggling. News Corp and Telstra had dropped earlier plans to float the business which was losing subscribers, bloated with costs and riddled with debt. Foxtel was not keeping pace as a stampede of new streaming services led by Netflix that had entered Australia gobbled up subscribers.

“We were really inefficient,” Delany says. “The IQ3 [set-top box] was problematic, if not a failure, and it was the same with [former streaming service] Presto, and that was because everyone was focused on fixing and driving Foxtel.”

These days Delany is not focused on fixing Foxtel. Instead, he’s focused on managing the decline of its legacy product while trying to offset that decline with growth in its low-cost streaming services which are sold under different brand names.

“We started out with David Jones - beautiful building bricks and mortar - and we knocked down half of it.”

Foxtel boss Patrick Delany

Few outside of Foxtel ever really know what is going on inside the company, but one thing is certain - it does not want to be depicted as a traditional pay TV business anymore. With two streaming services launched and a third on the way, plus four other major internal technology projects being worked on, the business is no longer about the set-top box that made it famous decades ago.

No longer the “old” Foxtel

It would be wrong to say Foxtel is fixed or no longer facing challenges. But it is certainly on a stronger footing now than when Delany took the reins three-and-a-half years ago.

Since he started in 2018, Foxtel has slashed jobs, walked away from various sports rights deals, and launched streaming products Kayo Sports and Binge.

Kayo Sports and Binge, have both proven popular with consumers amassing 1.05 million and 733,000 subscribers respectively. It’s an impressive feat as Kayo only launched in November 2018 and Binge in May last year, and Delany says there is little overlap in subscribers between the two.

And crucially, Delany insists subscribers to Kayo and Binge are new customers for Foxtel that did not previously pay for the legacy product. The success of these streaming products even helped Foxtel return to top line growth in the recently ended financial year, with News Corp’s subscription video segment posting a 10 per cent increase in revenue to $US542 million ($741 million).

A third streaming service focused on news is also in the works, which is expected to be called Flash. Industry sources, who spoke on the condition of anonymity because the plans are confidential, said that Foxtel was approaching all media organisations - including the national broadcaster ABC - to be part of the platform.

The Foxtel IQ4 uses satellite to transmit content. But an update later this year will also allow its services to be delivered over the internet.

“We’re not going to do what you think,” Delany says of the third streaming product. “If you’re expecting a streaming service that’s got 20 channels, that’s not what it’s going to be. You should think about...the business model, which is buy at once or create at once and use it many times.

“The best sort of way to look at it is we will do news about what we have done to sport. It’s still being worked up and launch dates are not top of mind.”

The streaming push means Foxtel finally has products that appeal to mainstream Australia, having for years struggled to grow its penetration beyond 30 per cent of households. But the legacy Foxtel product still has problems.

Residential subscribers have fallen by 250,000 year-on-year and the COVID-19 lockdown restrictions have shut pubs and clubs, which are a key revenue driver.

Foxtel also has significant debt. As of June 30, it owed about $914 million to several credit facilities and more than $1 billion to its two shareholders.

It also needs to migrate all of its 200,000 plus cable TV subscribers onto the new set-top box, the IQ5. This process of migration will be expensive, but a reduction in physical infrastructure and absence of contractors needed to install devices will eventually make the company more cost-efficient.

“It allows us to really dramatically reduce cost,” Delany explains. “Rather than giving everyone a disk drive, you can put everything in the cloud. Instead of having to call centres, you can do everything digitally.”

Hollywood headache

Binge’s impressive growth has been fuelled by hit HBO shows available on the platform such as White Lotus and Succession. They were secured in one of the most expensive output deals conducted in recent history Australia which Delany and Foxtel struck with US giant WarnerMedia.

While securing the HBO content was a coup for Delany, it points to a vulnerability his company faces, which is also faced by the other major homegrown subscription TV service, Stan (which is owned by Nine Entertainment, also the owner of this newspaper).

The Hollywood studios that used to license content to intermediaries like Foxtel now often retain their best content exclusively and sell it directly to consumers on their own platforms. It means Foxtel and Stan are not only competing with the studios for subscribers, but with each other for the content that is left.

HBO shows like Succession has helped Binge find subscribers.

Sources familiar with the terms of the deal, who aren’t authorised to speak publicly, said Foxtel’s HBO contract expires at end of 2023.

For his part, Delany is relaxed about the situation.

“Definitely some [players] have gone quite strictly from supplier to competitor like Disney, but that isn’t necessarily the trend right through. Our scale really helps - we pay a lot of content suppliers a lot of money,” Delany says. “It’ll be interesting to see how things resolve with Warner Brothers, whether they push into this market or not.”

Live sports content is also highly competitive. Foxtel recently fought off Stan to strike a new multi-year deal for Formula One racing that will cost it about $40 million a year, according to multiple sources who spoke on the condition of anonymity.

But Foxtel could face the risk of losing content from Disney-controlled US sports behemoth ESPN, which supplies the pay TV platform and Kayo with NBA, NFL and UFC content, in the coming years.

Delany believes two local players can exist against the international streaming giants, but concedes there is a risk the fight for content will put financial pressure on both Foxtel and Stan.

“Very rarely things are binary,” he says. “Some players are being co-exclusive or non-exclusive. There might be cost pressure, but it’s not huge cost pressure because we’re already paying a lot of money.”

“We’re not adding whole lumps of costs onto our P&L - we might be pushed up through competition, but we’ve got the rump of the cost already there. Our issue is we are not monetising it.”

Uncertain future

Foxtel also seems keen to hang on to its position as the “village square of video”, at least for older users who subscribe to its legacy product.

A recent marketing survey seen by The Sydney Morning Herald and The Age asks potential Foxtel viewers about an app that includes a new lifestyle service, a new movies service and the potential to aggregate services such as Paramount+, Disney+ and Stan. The survey also suggests a future with ratings and reviews of programs.

Delany declined to talk about the specifics, but says the traditional Foxtel service has a future where it becomes a place for all services to be accessed, and hints that its own streaming services could eventually be bundled together.

“Netflix is very popular on Foxtel,” he says. “We think Amazon will be popular and there’s a raft of other apps that will come on - they’ll be announced in the next couple of months. If the vision is that all customers are on the same tech stack or customers have the same data, then there’s no reason also why single verticals can’t be bundling and cross promoting without a box.”

Another signal of Foxtel’s intent to publicly list was the departure of chief financial James Marsh earlier this month. His replacement, Stuart Hutton, was the former chief financial officer at ASX-listed manufacturing company Orora and led a de-merger of the business from Amcor in 2013.

News Corp CEO Robert Thomson and Telstra CEO Andy Penn will decide whether Foxtel publicly lists.Credit: AAP and Josh Robenstone

Senior industry sources say News Corp is keen to push ahead with a float for Foxtel, but it is unlikely to occur by the end of this calendar year. Before it can proceed, Delany still has work to do, including cleaning up the company’s corporate structure which involves many legacy entities.

“It will never be complete,” he says of Foxtel’s restructuring. “We started out with David Jones - beautiful building bricks and mortar - and we knocked down half of it. That’s what we did. The next part will be on the other side to re-imagine the way in which we put Foxtel out.”

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