AFL deal underlines Telstra’s changing business model: Bartholomeusz

The AFL, thanks to the interaction between technology and regulation, has got the $1 billion-plus broadcasting rights deal it has been pursuing for the past two years. In the process, it has created an opportunity for pay TV to reignite its audience penetration and given Telstra a strategic asset to help it remain dominant in a post National Broadband Network environment.

The big change in the environment within which the latest negotiations were conducted relative to the last set of rights negotiations five years ago came late, when Stephen Conroy confirmed reforms to the Government’s anti-siphoning regime earlier this year.

Where last time the free-to-air networks had the exclusive rights to negotiate, with Foxtel relegated to the background waiting for the winning networks to offer it their discards on their terms, the changes to the anti-siphoning rules allowed Foxtel to bid in its own right for five games.

Foxtel leveraged that position, which introduced a new and substantial source of negotiating leverage for the AFL, by offering to simulcast the games acquired by the winning network, an offer Seven Network ultimately accepted.

Foxtel, which will show nine games a week live, in high definition and with the action uninterrupted by commercials, is expecting the extra AFL programming and the restoration of a dedicated AFL channel to drive a significant increase in subscriptions. It is in a partnership with Austar and Fox Sports, although the apportionment of costs between them wasn’t disclosed today.

Seven was able to bid for four games in its own right even when its current partner, Ten, withdrew to the sidelines. Seven knew that by using both its primary channel and its other digital channels it could accommodate the extra programming if it failed to on-sell the games it didn’t want to a network competitor.

Seven’s determination to cement its ratings leadership – which traditionally leads to a disproportionate share of industry revenue – and the halo effect of prime sports on other programming, created a strategic imperative for it to acquire rights to some of the key games.

Then, for the first time, Telstra was able to bid for the right to stream live coverage of all nine AFL games onto its wireless and IPTV-enabled devices. With the looming loss of its fixed line dominance its wireless business and its ability to differentiate the internet services and content it offers over the NBN will determine its future. The exclusive ability to stream AFL games live could represent a significant competitive advantage.

Thus, the revisions to the anti-siphoning regime, the advent of digital multi-channelling, the need for pay TV to breathe some life into stagnating penetration rates, Seven’s desire to maintain the lead it has established in free-to-air TV over the current rights period, the rapidly increasing take-up of smart phones and IPTV-enabled devices, and the AFL’s own creating of extra programming by adding two new teams, combined to deliver the AFL what it wanted.

The AFL didn’t just get a $1 billion-plus headline number. It will receive $1.12 billion in cash and another $135 million in ”contra” deals to take the overall value of the package to a remarkable $1.25 billion. The current package, valued at $780 million, had a cash component of only $749 million.

That outcome defied the sceptics who argued that in a post-crisis environment, and one in which the advent of multi-channelling has added substantial capacity to the industry, the broadcasters wouldn’t be able to price their advertising at a level that generated a positive return on a $1 billion outlay or anything approaching it.

The regime change at Ten and its new-found cost consciousness, which saw it relinquish a primary role in the negotiations, shouldn’t have helped the AFL. However, the feud between Seven and Ten after Ten poached Seven’s head of sales, James Warburton, would have made Kerry Stokes and David Leckie even more determined to be in a position to dictate the fate of the free-to-air rights.

Their willingness to share the four games reserved for free-to-air by the anti-siphoning rules with Foxtel – and, on Saturday afternoons, to allow Foxtel to air live a game that will be shown free-to-air on a 90-minute delay – would, however, have reduced the cost of Seven’s contribution to the overall deal.

It is unclear what the deal might imply about the value of rights to the other sporting codes and, in particular, the value of the rights to broadcast NRL games, which Nine particularly covets. Nine’s private equity ownership and debt levels, and Ten’s pursuit of a low-cost model, might make it more difficult for the NRL to generate bidding tension.

Nevertheless, all the codes will be encouraged by the AFL’s success in what are relatively difficult market conditions and, thanks to Stephen Conroy, by the belated emergence of the almost unshackled pay TV operators as the new drivers of the value of broadcasting rights.

This article first appeared on Business Spectator.