Tension and paranoia as Foxtel confronts the Netflix threat

Corporate mergers are almost always motivated, at least to some degree, by the potential for "synergies" - management-speak for cost savings driven by cuts to jobs and duplicate expenses.

The most significant and interesting corporate merger in Australia at the moment is being driven by much bigger forces - including the onslaught of internet giants such as Netflix and Amazon.

Yet there is still a belief that, when this deal is completed in the next few months, at least one job will fall victim to "synergies": that of either Foxtel chief executive Peter Tonagh or his counterpart at Fox Sports Australia, Patrick Delany.

The most significant and interesting corporate merger in Australia at the moment is being driven by much bigger forces - including the onslaught of internet giants like Netflix and Amazon.Credit: Louise Kennerley

Foxtel's owners, Telstra and News Corp, are in the process of merging Fox Sports Australia (the sports channel entirely owned by News Corp) into Foxtel ( a 50/50 joint venture between the two companies).

On the surface, the process of Australia's dominant (yet flailing) pay TV provider absorbing the supplier of its most important channels looks like it's all smooth sailing.

The price has been agreed  (Telstra is effectively exchanging 15 per cent of Foxtel for 35 per cent of Fox Sports). The competition czar has given its blessing. Now, it's just the nuts and bolts being worked out before the deal is actually finalised.

But as with any corporate negotiation, particularly one involving Telstra and News, the reality is far more complex.

Australia's biggest telco and most powerful media company have always had a somewhat uneasy relationship when it comes to their pay TV joint venture. The relationship strengthened under David Thodey's stewardship of Telstra, but is said to have decayed under Andy Penn.

In a sign of this uneasiness, a dispute over carriage fees for the Sky News channel flared up just before Christmas (it was quickly resolved).

Yet the real tensions in this process, according to company sources, are not at the Foxtel shareholder level, but rather in the News Corp camp, and between executives from Foxtel and Fox Sports.

"The night of the long knives" was how one source described the mood among those involved.  Everyone is looking over their shoulders, trying to position themselves for survival.

Whether Tonagh, who has presided over a difficult period for Foxtel - it lost subscribers on an annual basis for the first time last financial year - or Delany, who has been in charge of Fox Sports for even longer, or someone else altogether prevails remains to be seen.

Siobhan McKenna, the close lieutenant of Lachlan Murdoch, who now runs News Corp's Australian broadcast assets, and who returns from holidays this week, is said to have a key bearing on the CEO decision.

As interesting as internal company politics and paranoia are though, the broader strategic backdrop against which the Foxtel-Fox Sports merger is taking place is arguably even more fascinating.

One of the factors behind the merger is to better position Foxtel against streaming giants, some of whom (Facebook and Amazon) have signalled a willingness to go after sports rights.

For its part, Netflix has said it has no interest in live sport, and it doesn't seem to matter. Last week, Netflix's market value burst through the $US100 billion mark, as Wall Street, yet again, enthusiastically applauded its latest results.

Netflix does not disclose its Australian subscriber numbers. But according to Roy Morgan (whose figures have admittedly been questioned in the industry) it had about 2.9 million of them last year.

That places it pretty much in line with Foxtel,  which in November had "more than 2.8 million subscribers" according to quarterly results from News Corp.

Of course, Foxtel subscribers, which on average cough up $86 per month for the service, are much more valuable than Netflix ones (who pay as little as $10 a month for access).

But that's kind of the point.

The failure of incumbent pay TV providers to deal with a cheaper internet substitute is precisely why they are feeling so much pain at the moment.

Some industry executives have given up on trying to defeat Netflix, and describe it as a race for second place.

In the US, News Corp's ultimate owner Rupert Murdoch has decided to not even bother fighting a losing battle.

Late last year, he agreed to sell his film studios and other entertainment assets (but not the Fox News or Fox Sports channels in the US) to Disney for $US80 billion.

That blockbuster deal has completely overshadowed News's corporate activity in Australia. It injected a level of paralysis into it and Foxtel's decision making, according to media industry sources.

This comes as manoeuvring in negotiations over cricket broadcast rights, which expire this year, begins.

The Fox deal positions Disney (which also owns ESPN, the dominant yet flailing sports channel in the US) to be the dominant global challenger to Netflix, in the world's biggest economy and elsewhere.

Australia, with its different laws and market structure, is often a different story, and Foxtel will be determined to keep it that way.

Absorbing Fox Sports could be the pay TV giant's last shot at thwarting Netflix, or to at least cement its status as "best of the rest".

The question is who will be running the show.