Free-to-airs won’t win this game

THE Ten Network is attempting to reboot one of the more popular TV game shows of the 70s and 80s.

THE Ten Network is attempting to reboot one of the more popular TV game shows of the 70s and 80s to fill its 6pm prime-time schedule. After a number of unsuccessful program selections, the broadcaster is hoping to boost its ratings by reintroducing Family Feud, an American game show that first premiered in 1977 on the Nine Network.

For those of you who haven’t watched the show for a while, perhaps we could play a quick version of the game today. “Can you name three major Australian free-to-air television stations potentially facing technological disruption from online competition?”

At Montgomery Investment Management, we have previously likened the free-to-air TV market as three brusque men locked in a room with no windows playing a perpetual game of cards. Each ratings season represents a hand that is dealt and must be played. Sometimes Seven gets a good hand, but next time it will be Ten and then after that it will be Nine. The order doesn’t matter much and the stakes don’t get any bigger.

The three major players have been playing this game for as long as we can remember, due to the significant barriers to entry of building a national broadcasting network. However, the rise of the internet has allowed online content providers to enter the card game, and it’s likely that they may take a fair amount of the pot in time.

While video content has always been accessible online, it is only in recent years that internet service providers could deliver sufficient capacity to allow streaming. This means that the viewer can watch a video online in real time, rather than downloading the file on to their computer and watching it later. Television networks do not own the majority of content that is broadcasted, which means their business model is under serious threat if comparable competitors can distribute this content more efficiently.

Netflix is one such competitor that can’t be ignored. It’s rumoured that the US-based video streaming provider will be here next year, having already captured in excess of 48 million global members. Netflix allows users to watch an unlimited amount of television series and movies for $US8.99 ($9.60) per month. The content is commercial-free and accessible on any device that is connected to the internet.

Netflix has been able to quickly respond to the changing viewing preferences of consumers. The consumption of video has become very personal, with users demanding the freedom to choose when and how to watch their favourite programs. We feel that the commercial stations have been slow to adapt to this change. How often do families come together these days to watch the same game show?

Australian commercial stations lack the scale to generate their own content with mass appeal, which means there is little they can do to retain customers if they cede control of their core product. In contrast, Netflix is highly profitable and able to produce original content such as House Of Cards and Orange is the New Black. These shows not only entice new members, but encourage them to watch further content from their extensive library.

It seems the only drawcard that could prevent the commercial stations from losing this technological battle is Australia’s love of sport. Free-to-air stations have first refusal to broadcast certain major sporting events. This was to prevent paid-subscription stations from exclusively controlling the content. But even this barrier may not be as defensible as once thought.

This legislation may have made sense when paid-subscription providers could charge premium prices due to minimal competition. But today, a subscription to Netflix is considerably cheaper than even an entry-level Foxtel package.

This disparity should continue to widen as more online players enter the space. Telstra Bigpond, iiNet Fetch and Quickflix are all scrambling for a piece of the online streaming pie, which may eventually result in the repeal of the anti-siphoning laws.

But even if the legislation remains, will the Australian market be able to continue to support three commercial stations on sport alone?

Either way, we feel this is one game that the free-to-air channels will not win.

Roger Montgomery is the founder of Montgomery Investment Management.