Department of the Parliamentary Library

Parliamentary

~ Research Service AItt-!l AUSTRALIA & !lJ>J»~~E<{(t~

BACKGROUND PAPER

No. 221994 Pay Television

.. 1 .~: .. : .+.:..\ / ' ISSN 1037-2938

Copyright Commonwealth of Australia 1994

Except to the extent ofthe uses permitted under the Copyright Act 1968, no part ofthis publication may be reproduced or transmitted in any form or by any means including information storage and retrieval system, without the prior written consent ofthe Deparunent ofthe Parliamentary Library, other than by Members ofthe Australian Parliament in the course of their official duties.

Published by the Deparunent of the Parliamentary Library, 1994 Dr Kim Jackson Social Policy Group 28 November 1994

Parliamentary Flesearch Service

Background Paper No.22 1994

Pay Television

Telephone: 06277 2416 Facsimile: 06 277 2407 This paper has been prepared for general distribution to Members ofthe Australian Parliament. Readers outside the Parliament are reminded that this is not an Australian Government document, but a paper prepared by the author and published by .the Parliamentary Research Service to contribute to consideration of the issues by Senators and Members. The views expressed in this Paper are those ofthe author and do not necessarily reflect those of the Parliamentary Research Service and are not to be attributed to the Deparbnent of the Parliamentary Library. CONTENTS

Summary i

Abbreviations and Glossary ...... iii

A Brief History ...... I

Means of Delivery ...... 2

Legislative Basis 3

Licensing 4 The Satellite Licences 4 Other Pay TV Licences 6 MDS Licences 7

International Satellite Services ...... 8

The ABC and Pay TV ...... 9

Telecom and Pay TV ...... 9 PMT Consortium ...... 9 Cable Services 10

. Pay TV and Competition Policy 11

Content Regulation 14 Australian Content ...... 14 Siphoning ...... IS Program Standards ...... 17

Broadband Services and Pay TV 17

The Future of Pay TV 21 Major Players 21 Commercial Prospects :...... 22

Policy Issues 25

Bibliography 26

Appendices

Appendix 1 Table comparing the Regulation of Subscription Television Services

Appendix 2 . The list ofevents for S.115 ofthe Broadcasting Services Act (the "anti-siphoning list") I I I I I I I I I I I I I I I I I I I I I I Pay Television

Summary

This paper describes the current· situation regarding pay TV in Australia. Although it contains a brief history of the issue, it does not attempt to analyse or describe the administrative and policy developments that have occurred over the last fifteen years. Instead, it concentrates on events of the last year or so, as well as likely developments in the near future.

The history of pay TV is characterised by delay and difficulty: successive. Governments postponed the service and when the decision to introduce it was finally made, the administrative procedures established for the task proved inadequate. However, the lack of any strong or persistent demand from consumers for pay TV meant that there was little or no political cost for these delays. The push for pay TV has tended to be from the top down rather than the bottom up, and the debate has been between competing bureaucratic, commercial and. political interests. Public agitation has tended to be restricted to the issue of siphoning - the possibility that existing free-to-air sporting .coverage will shift to pay TV. Although legislative action has averted this threat, there· are a number of questions still surrounding the administration of the "anti-siphoning" provisions.

Now, with the dawn of broadcast pay TV imminent, there is still much confusion over many aspects of the service and the debate shows. no signs of slackening. On the technical side, it is by no means clear what will be the dominant mode of delivery: satellite, cable, microwave or even the humble telephone line. The satellite service was given a head start but with each delay this advantage diminishes. Telecom's cable network is expanding steadily throughout the nation's suburbs and rival cable rollouts have also been proposed. The expenditure on these networks will be huge, and it remains a moot point whether the benefits of competition will outweigh the costs of duplication.

The introduction ofpay TV was seen as ail opportunity for new local players in the Australian media and this expectation was fulfilled with the awarding of the satellite licences to Australis and .Continental Century. Yet these companies have required heavy financial backing from US cable operators and more and more the focus of interest is on the hardy perennials of the Australian media and communications scene: Packer, Murdoch, Telecom, Optus, Fairfax and the ABC.

With the increasing role of the established media operators, questions of competition policy have come to the fore. These include the possibility of market dominance by the existing broadcasters and the dangers of vertical integration inherent in Optus and Telecom's involvement in both carriage and content. The recent statement by the Minister for Communication and Arts on the access requirements for the cable networks, and the dramatic response by Optus, have highlighted the importance of these issues. It would appear 11 Pay Television

unlikely that Optus' withdrawal from cable infrastructure will be long-lived, as they would forfeit the inside running on the eve of the deregulation of telecommunications and the development of broadband services.

It now seems that pay TV will be the first cab off the rank on Australia's information superhighway - the optical fibre network that will eventually bring the full range of broadband services to Australian homes. These are the communication services involving video, sound, text and data (either singly or in combination) that can be delivered at high volume through the use of digitisation and compression techniques. It is still unclear if the demand for these services will justify the cost of the superhighway. The commercial prospects for the pathbreaker, pay TV, are not encouraging in the short-to­ medium term. The large number of rival services with high-priced and incompatible hardware, the regular announcements of postponed services, the relatively high instalment and subscription chargesand a dearth of attractive and/or new programming will engender confusion and wariness amongst potential consumers. The new few years should see a shakeout in the industry, particularly amongst those providers relying on satellite and MDS systems. In the long term the greater carrying capacity, better quality of transmission and the telephony revenue provided by cable would appear to give it the advantage in the battle for the pay TV market. I Pay Television iii

Abbreviations

ABA . Australian Broadcasting Authority

ABC Australian Broadcasting Corporation

ADSL Asymmetric Digital Subscriber Line

BSEG Broadcast Services Expert Group

CTS Cable Television Services Pty Ltd

MDS Microwave Distribution System

PMT Packer Murdoch Telecom

SMA Spectrum Management Agency

TPC Trade Practices Commission

Glossary

Broadband Services: a range of communications services that use still or moving video, images, sound, text and data singly or in combination.

Broadcasting services: transmitted services intended for the general public, irrespective of the means of delivery or whether free-to-air or pay TV.

Cable television: television services that are carried to the household by a cable.

Carriers: organisations responsible for the distribution oftelecommunications signals. Common carriers are those with a responsibility to provide a basic service to all who wish to use it.

Digital compression: a process that reduces the amount of data to be stored or transmitted.

Digitisation: the reduction of information to a pattern of Is and Os or on and off signals.

Equalisation: the policy ofproviding three commercial television services to most areas in Australia. IV Pay Television

Information superhighway: optical fibre network capable of delivering broadband services to the household linking together telecommunications, broadcasting and computer services.

Interactivity: the capacity that allows the user of a service to reply to and sometimes control the iQ.formation source.

Microwave distribution system: one-way communication system"using the microwave frequencies.

Multimedia: integrated video, audio, text and graphics in digital form.

Narrowcastingservices: transmitted services whose reception is limited by /~. being targeted at special interest groups, or being provided to limited locations or for a limited period.

Optical fibre: a thin glass fibre used to transmit light and capable ofcarrying large amounts of information.

Radiated television: television services that are broadcast over the air.

Satellite footprint: a geographic area in which reception of a particular satellite signal is possible.

Siphoning: the transfer oftelevision programs from free-to-air stations to pay TV.

Subscription television: television services that require the payment of a subscription (pay TV).

Transponders: a device on a satellite that can recei ve, amplify and transmit signals.

Video-on-demand: a form of pay TV in which the viewer will be able to stipulate a particular program (usually a movie) at a time oftheir own choice. Pay Television 1

A Brief History

The gestation of pay TV has been long and difficult, both in terms of policy and administration. The first inquiry into the subject was instituted in 1980 and completed in 1982. The Australian Broadcasting Tribunal recommended that cable and radiated subscription television services be introduced as soon as practicable. In November 1983 the Government decided that cable services would not proceed because of the cost involved and questions concerning the involvement ofTelecom. However, the Government did not close the door on pay TV and invited expressions of interest in providing radiated subscription televiSion services. In May 1985 the Government lL1Jllounced that television equalisation (the provision of three commercial services to most areas) was to be its highest priority and in September of the following year it declared a moratorium offour years on the introduction ofpay TV. At the same time the Government announced the introduction ofVideo and Audio Entertainment and Information Services (VAEIS). These were pay TV services licensed under the Radiocommunications Act 1983 and delivered to non-domestic receivers (Le. pubs and clubs).

In 1989 two major reports dealt with the question ofpay TV. The Department of Transport and Communications released Future Directions for Pay TeleviSion in Australia. This report contained no recommendations but discussed the issues and options involved. The House of Representatives Standing Committee on Transport, Communications and Infrastructure report To Payor Not to Pay: Pay Television and Other New Broadcasting Services recommended that the Government. announce an immediate in-principle decision to introduce pay TV in Australia. In September 1990 the Government '0', extended the pay TV moratorium for another year. In 1991 the Government announced that the moratorium would end as of 1 October 1992 and that the initial service would be delivered by AUSSAT, which was soon to be acquired by Optus Communications. The latter was to join Telecom in the new competitive telecommunications market established by the Telecommunications Act 1991.

In 1992 the Government presented the Broadcasting Services Bill to Parliament, having released an exposure draft for public comment in November of the previous year. Part 7 of the Bill, which dealt with subscription television services, was referred to a Senate Select Committee while the rest ofthe Bill passed. The Committee recommended (among other things) that the ABC be allocated a channel and that the Australian content provisions of the Bill be strengthened. The Broadcasting Services (Subscription Television Broadcasting Amendment) Bill, which inserted Part 7 in the Principal Act was finally passed on 25 November 1992.

Although the legislative basis for the introduction of pay TV was established with the passage of the Broadcasting Services Act 1992, further delays were to occur as a result of procedural difficulties surrounding the awarding of 2 Pay Television

licences. In 1992 it became apparent that microwave distribution system (MDS) licences obtained under the Radiocommunications Act 1983 could be used to deliver pay TV services. As a result, in January 1993 the Government terminated the MDS licence tendering process (a decision later invalidated by the Federal Court) and then amended the Broadcasting Services Act 1992 to prevent the use of Mbs licences for pay TV before the satellite service was in operation. Another source of difficulty lay in the terms of the tenders for the satellite licences, which required a deposit of only $500 with each bid. This led to a large number of speculative bids and a lengthy process of cascading bids as tenderers failed to meet the· deadlines for the required payment of five per cent of their bids. Further amendments to the Broadcasting Services Act 1992 were required to speed up this process. The troubles with the MDS and satellite licence tenders were the subject of inquiries by Professor Dennis Pearce (the Commonwealth Ombudsman) and the Senate Select Committee on Matters Arising from Pay Television Tendering Processes.

In retrospect, the delays experienced over the intrcduction of pay TV can be attributed to a combination of factors, principally:

• concern over its impact on existing commercial services in a period of considerable financial instability and policy upheaval e.g. overpriced takeovers, receivership, equalisation of television services, changes to ownership regulation and broadcasting legislation;

• the Government's desire to obtain a successful outcome from the privatisation of AUSSAT;

• problems with licence allocation processes;

• the lack of any strong or persistent demand for pay TV from consumers, with the existing broadcasters and the home video industry meeting demand in the two key areas of live sport and recent movies.

Although the last factor is generally overlooked, it was particularly important as it established the context for the debate. For successive Governments there was little or no political cost in postponing action.

Means of Delivery

Pay, or subscription, TV can be delivered in a variety of ways:

• by satellite. It is estimated that approximately 90 per cent of Australians could receive the signal from the Optus Satellite with receiving dishes between 60 cm and 120 cm in diameter. Pay Television 3

• by a microwave distribution system (MDS). MDS are radio­ communication systems that provide for one-way transmission of information (ranging from data to audio and video) from a single transmission point to multi-receiving points. The microwave frequencies used for MDS only provide reliable reception when there is unobstructed radio line of sight between the MDS transmitter and receiver. The use of 'repeaters can extend coverage to obstructed areas. The transmission radius of a 200 watt MDS transmitter is about 30 kilometres. An MDS system can also be used to re-transmit signals received from a satellite. This would mean consumers would'need only a new aerial and decoder (estimated at around $450) instead ofa satellite reception dish and decoder (estimated at around $1 500).

• by cable. Delivery could be through either fibre optic cable or a hybrid of fibre optic and coaxial cable. Telecom is aiming to have a fibre­ optic/coaxial rollout to 1.3 million homes over three years. The first stage began in June 1994 and involves 150 000 homes in Sydney, Melbourne and Brisbane. Cable provides a superior picture for viewers and a greater number of channels. Telecom's cable system can carry 64 channels, and with digital compression this could be increased to 200.

• by telephone line. With further refinements of Asymmetric Digital Subscriber Line (ADSL) technology it may be possible to deliver video signals through the existing telephone network, thus creating another avenue for pay TV. However, ADSL technology is unlikely to be mature before 1997.

, Legislative Basis

The legislative basis for pay TV is the Broadcasting Services Act 1992, as· amended by the Broadcasting Services (Subscription Television Broadcasting) Amendment Act 1992. The Broadcasting Services Act is "technologically neutral". It empowers the Australian Broadcasting Authority (ABA) to award licences for subscription broadcasting services, but licensees may use any combination of means to deliver programming to their audience. However, there are some important exceptions to this neutrality:

• the three satellite licences (A, Band C) have been given a head start. Other satellite licences cannot be issued until July 1997;

• services dependent on an MDS system cannot be licensed until after A, B and C begin, or after December 1994 (whichever is earlier).

There are no start-up restrictions on services using cable as a means of delivery. 4 Pay Television .

. The Act distinguishes between two types of subscription television (pay TV):

• broadcasting services. These provide programs intended to appeal to the general public;

• narrowcasting services. These are services whose reception is limited by being targeted to special interest groups, or being provided to limited locations or for a limited period.

The two types of services are subject to different regulations and licensing systems. These are outlined in the table attached as Appendix 1. Broadcasting licences are awarded for specific services (with the exception of the A, B and C satellite licences, one licence per service). Narrowcasting services operate under "class licences". Class licences are not individually issued, but are a standing authority for any operator to enter the market and provide a service, as long as the operator has access to delivery capacity and abides by the .conditions relevant to the particular category of class licence.

Licensing

The Satellite Licences

Section 93 of the Broadcasting Services Act 1992 provides that three satellite licences will be initially available: .

• Licence A, which allows four services and is subject to strict cross-media ownership restrictions;

• Licence B, which allows four services and has no cross-media restrictions;

• Licence C, which allows two services and may only be allocated to a subsidiary of the Australian Broadcasting Corporation.

In January 1993 the Government called for bids for the satellite Licences A 'and B to be lodged by 28 April 1993. On 30 April the winning bids were announced as follows: .

• $117m for Licence A by UCOM Pty Ltd;

• $212m for LiCence B by Hi Vision.

When the bid price was not paid for either licence by the due date, a process of cascading bids waS set in train until deposits for each licence were fimllly paid on 30 August 1993. For Licence A, UCOM Australia Pty Ltd bid $97m and paid a deposit of $4.85m. However, UCOM was unable to pay the balance of the bid by 17 November, and the Licence cascaded to United Airways Pty Ltd which had bid $77m. United, which soon changed its name Pay Television 5

to UCOM Pay-TV Pty Ltd, paid the required deposit of $3.85m by 6 December. For Licence B, New World Communications Pty Ltd bid $117m and paid a deposit of $5.85m. The amounts paid for the licences was much greater than market expectations. One report stated that the Packer-Murdoch­ Telecom (PMT) bid was as low as $30m (Australian Financial Review, 4 May 1993). Thus, despite the controversy it engendered, the licence allocation procedure did succeed in maximising the return to the Government.

Under the terms of the Broadcasting Services Act 1992, applicants for subscription television broadcasting licences must be subject to a report by the Trade Practices Commission (TPC) with regard to competition in the market, and an investigation by the Australian Broadcasting Authority (ABA) as to the suitability of the applicant. At the time of the bids, UCOM and New World had a common ownership structure. This was not permitted under the Broadcasting Services Act 1992. Since then, UCOM has advised the ABA that it has reached an agreement with Continental Century Pty Ltd to take over the licence. Continental is a subsidiary of the US cable operator Century Communications Corporation. The ownership has been structured so that foreign company interests do not exceed 20 per cent, in accord with the Broadcasting Services Act.

The other successful bidder, New World, has also changed ownership. The new owner is Lenfest Holdings, a company jointly owned by Australis Media Ltd and the US company Lenfest Communications Inc. This deal has also been structured to comply with the foreign ownership provision of the Act. Australis Media is a company established by Mr Steve Cosser and it also

""1 controls the majority of available MDS channels. Australis intends to deliver pay TV through a combination of both satellite and MDS transmission.

On 15 December 1993 the ABA approved the allocation ofLicence B, subject to payment of the remainder of the amount bid. This was paid by Australis­ Lenfest on 18 December 1993. On 28 January 1994 the ABA approved the allocation ofLicence A, subject to payment ofthe remainder ofthe bid. This was paid by UCOM-Continental on 10 February 1994.

The question of foreign ownership may well re-emerge, as it was recently reported that Lenfest and three Hollywood studios could acquire additional equity in Australis as part ofa deal for exclusive Australian rights to the output of the studios (Sydney Morning Herald, 22 November 1994). The ABA is currently conducting an inquiry into the control of the Ten Network, which would appear to have a similar foreign ownership structure to that of Australis Media and Continental Century. In all three cases it would seem that although the foreign economic interest is well in excess of the prescribed 20 per cent, the direct voting power exercised by the foreign owners is within the legal limit. The ABA will have to determine if the economic power of the foreign owners is such that they are able to exercise defacto control· and thus contravene the Broadcasting Services Act 1992. 6 Pay Television

Other Pay TV Licences

By November 1994, the ABA had issued a total of 390 pay TV licences to companies under Section 96 ofthe Act. Multiple licences are sought because the Act requires a separate licence for each service. The ABA takes a service to be a single stream of programming material. Section 96 of the Act empowers the ABA to allocate subscription television licences, on application, with the following conditions:

• licensees must not use satellites as a means of delivery before July 1997;

• licences providing services dependent on an MDS system cannot begin operations before services commence under licences A, B, and C;

• applicants must be subject to a report by the TPC to ensure that the allocation would not result in substantial lessening of competition.

Section 96 licensees, together with the number of licences (in brackets) and their proposed area of operation (if known), are listed below:

• Access Cable Television Ltd(IlO), twenty country centres in NSW.

• Access Cable Television (Northern Rivers) Pty Ltd (4).

• Cable Television Services Pty Ltd (20). CTS. Major metropolitan centres.

• Dergat Pty Ltd (4). Sydney.

• Explorer Channel Pty Ltd (1). Telecom cable network.

• Home Show Cable Australia Pty Ltd (20). Adelaide, then major metropolitan centres.

• Multicom Australia Pty Ltd (35). Major metropolitan centres.

• NRS Group Pty Ltd (13).

• Oberon Broadcasters Pty Ltd (IO).Wollongong, Newcastle and Canberra.

• Pacific Media Telecommunications Pty Ltd (18). Sydney, Melbourne, Brisbane, and Gold Coast.

• Paynet Telecommunications Pty Ltd (8). Cairns and Townsville.

• Premier Cable Australia Pty Ltd (43).

• Private Cable Network Pty Ltd (34), Australia-wide. Pay Television 7

• Rowcom Holdings Pty Ltd (28). Darwin, Cairns, Townsville, Sunshine Coast, Hobart, Launceston.

• Star Vision Pty Ltd (30). A subsidiary ofAustralis Media Ltd. Australia­ wide services.

• Visitor Publishing Group Pty Ltd (2).

• Wright Wel1er Rosenblum Pty Ltd (10), major metropolitan centres.

MDS Licences.

The value of MDS licences has increased greatly with the realisation that they could be used in conjunction with the satellite licences to deliver pay TV services. MDS licences were originally issued under the Radiocommunications Act 1983. By June 1992, when an embargo was placed on the al1ocation ofthe remaining available MDS channels, Australis Media had acquired control 000 of the 34 MDS transmitter licences issues under the old Act. These licences are subject to strict technical restraints and cannot be traded, although licensees may authorise third party users. Changes ofownership and control ofa licence do not affect the holding of the licence.

A new system of licences was introduced by the Radiocommunications Act 1992. These are "spectrum licences" which provide continuing rights ofaccess to defined parts ofthe spectrum in specified geographic areas. Licensees will be able to trade, sub-divide or .lease their licences. Licences are issued for periods of up to 10 years. MDS licensees who wish to provide broadcasting or narrowcasting services (including pay TV) must also obtain licences under the Broadcasting-Services Act 1992 from the ABA.

In July/August 1994 a further 190 MDS licences were auctioned by the Spectrum Management Agency (SMA). The auctions generated $90.6m for the Commonwealth Government. They were allocated across 13 areas - Sydney, Melbourne, Hobart, Adelaide, Perth, Brisbane, Gold Coast, Cairns, Canberra, Newcastle, Wol1ongong, Darwin and Alice Springs. The SMA is currently examining the provision of MDS services to other areas around Australia. Australis Media and its franchisees dominated the MDS licence auctions, buying 179 of the 190 available. US cable operator Continental Cablevision bought licences in Adelaide (2), Perth (2), Brisbane (I), the Gold Coast (2) and Cairns (2). 8 Pay Television

International Satellite Services

Over the next few years a large number of satellites will be launched with "footprints" covering all or part ofAustralia. The US company PanAmSat has already launched PAS 2, part ofa planned global system carrying broadcasting, telephone and data signals. PAS 2 has 24 C-band and 24 Ku-band transponders. C-band signals are widely dispersed but relatively weak and to receive them can require large and expensive dishes (size depends upon location within the footprint). This situation lends itself to the development of subsidiary cable or MDS systems to distribute the signals received by the large dish. High-powered Ku-band beams require a smaller dish. For example, the US satellite pay TV operator Direct TV delivers ISO digitally­ compressed channels to subscribers who require a 45cm dish costing around $yS57 a month, with pay-per-view movies an extra $US3 each. A smart card in the receiver controls and records viewing, then automatically telephones data to a billing station during the night. Because it uses digital compression technology, pictures are sharper than over-the-air broadcasting and sound is similar to CD quality.

The PAS 2 satellite is said to have Ku-band beams directed over Sydney, Melbourne, Brisbane and Perth requiring a 90cm dish. Adelaide, Hobart and Darwin viewers will require a 1.2m dish. PanAmSat is said to have reached agreements to carry programming from Turner Broadcasting, ESPN and Viacom (Financial Review, 14 June 1994). The company has indicated that it may have to change the configuration of its beams if there is insufficient business in Australia. However, there will be no shortage ofsatellite coverage in the immediate future. Within a year a further four international satellite launches are planned that will have the potential to offer television services to Australian consumers: Apstar 2, Asia Sat 2, Palapa C, and JC Sat 3 which will, together, have in excess of 100 transponders. Of course, not all of these will have beams directed at Australia and not all will be devoted to television, but given that data compression techniques allow at least four digital TV channels to be squeezed into the bandwidth required for one analogue channel, it is clear that there will be an oversupply of capacity in the near future.

It is sometimes argued that th~ huge potential for international pay TV will make national regulations controlling the industry redundant. Such a view fails to take into account the nature of the market: satellite television broadcasters can only make money through advertising and/or subscriptions. Pirate satellite broadcasters would attract negligible advertising revenue in Australia because of their minuscule audiences, and it would not be possible to set up a subscription system (requiring set-top units, secure coding etc) without the approval of the host country. In addition, the experience of Murdoch's pan­ Asian satellite service, Star TV, suggests that a significant local input is required if the service is to attract viewers. Pay Television 9

The ABC and Pay TV

On 22 February 1994 the Trade Practices Commission (TPC) reported on an application by the ABC to bundle its services with those ofeither licence A or B. "Bundling" refers to the packaging ofpay TV services together and selling them as a whole or bundle i.e. one must subscribe to all the services or nothing. The TPC denied the application in its current form, but made it clear that this would not prejudice any subsequent ABC application to bundle its services. The TPC considered the ABC application to be premature because the holders of the A and B licences had not yet announced any firm operational plans. The Managing Director of the ABC, David Hill, has since stated that the ABC· will proceed with negotiations with the other satellite services, but will ensure that bundling arrangements comply with the TPC requirements.

The ABC received a start-up grant of $12.5m for 1993-94 but hereafter it is expected to finance the service on a commercial basis, with no further calls on Budget funding. The ABC is not permitted to redirect free-to-air resources to its pay TV operation. It is seeking financial partnerships with investors to meet the capitalisation costs (an estimated $50m) ofthe service. The ABC has established a subsidiary, Ambridge Pty Ltd, to hold the satellite licence. While the ABC may seek outside equity participation in Ambridge, it is required by the Government to retain a majority holding. It has recently been reported (Australian, 22 October 1994) that the newspaper publisher John Fairfax Holdings may take up a 24 per cent stake in the ABC pay TV franchise.

" The ABC is proposing to provide one 24-hour news/information channel and . one channel with daytime children's prograrmning and drama/documentaries during the night

Telecom and Pay TV

The PMT Consortium

In April 1993 Telecom joined with News Corporation and the three cortnnercial television networks to bid for a satellite pay TV licence. The PMT consortium failed to gain a licence. In February 1994 the consortium issued two Federal Court actions seeking the cancellation of the satellite licences to Australis and Continental Century. The action was generally interpreted as a delaying tactic intended to disrupt Australis' $270m capital raising. The action was abandoned' in April after the Minister for Communications sought an explanation from Telecom.

The PMT consortium did not participate in the MDS auctions but did announce in July that it intended to pursue a multichannel satellite and cable system. 10 Pay Television

On 31 August 1994 it was reported that Telecom's chief Executive, Frank Blount, had doubts about the future of the consortium. Mr Blount is reported to have said that "the real issue is in content, not in infrastructure" and that Telecom had to avoid being marginalised as a carrier. He also stated that if PMT disbanded then Telecom would have to find a new source ofexpertise in the area of content (Sydney Morning Herald, 31 August 1994). On 9 September 1994 it was announced that the PMT consortium would disband.

The failure ofthe consortium avoided a possible TPC inquiry as the Chairman of the TPC, Professor Allan Feis, had indicated that there would be "crucial questions" if the PMT consortium went ahead with any venture.

Cable Services

Controversy has occurred over the allocation of channels on Telecom's cable rollout. Telecom initially sought agreements with operators who wished to obtain channels on the network and in May 1994 Cable Television Services Pty Ltd (CTS) acquired twenty channels. When it became apparent that there would be insufficient channels to meet the demand, Telecom suspended negotiations with other parties to determine the best allocation procedure. According to newspaper reports (The Australian, 16 June 1994) Telecom informed other players that legal action would be counter-productive because there was nothing in either the Telecommunications Act or the Broadcasting Services Act that prevented Telecom from allocating the channels on a "selective, cotnmercial basis".

However, Telecom also appears to have treated its cable network as a basic carriage service (as defined by the Telecommunications Act) although it has been argued that it is not legally obliged to do so. Such services must be made available commercially with a published tariffregime approved by the industry regulator, Austel. On 16 August 1994 Telecom announced that Austel had approved a tariff regime for its cable network. Pay TV subscribers would pay a connection charge of $275 and a $2 per week service fee (in addition to the monthly subscription to the pay TV provider). Service providers on the network would pay a refundable deposit of $O.5m plus $50 000 per channel, plus 50c per channel per home passed when they signed up. Providers would also pay a sliding connection fee and weekly fees. Telecom stated that these charges were designed to deter those who were not genuine service providers, but pay TV operators criticised the charges as too high.

Telstral has established a wholly owned subsidiary, Visionstream, to build and operate the cable TV network. It was recently claimed that work is 20 per cent ahead of schedule, which is to make the network available to 1.1 million homes by December 1996.

Telecom Australia and OTC were formally merged to form the Australian and Overseas Telecommunications Corporation (AOTC) in February 1992, which continued to trade domestically as Telecom. AOTC was renamed Telstra in April 1993. Pay Television 11

On the 11 November 1994 Telecom and News Corporation announced an alliance to deliver pay TV services through the Visionstream network. Under the agreement Telecom will continue to own the network infrastructure while News Corp concentrates on program content. The alliance will utilise all 64 channels as soon as possible, providing a core menu ofservices themselves and leasing the remainder. Telecom also applied to Austel for the withdrawal of the tariff regime previously approved for the Visionstream network, and this was accepted by Austel on 16 November 1994. It is understood that Austel regarded this as a procedural matter, and not as an endorsement of the TelecomlNews Corp pay TV plan.

CTS, the only pay TV operator known to have channels on the Telecom network, is believed to have cash flow problems after failing with a $42m capital raising. It has been reported (Australian Financial Review, 21 October 1994) that Telecom has reached a "preliminary agreement" to acquire undisclosed assets from the CTS group. CTS had claimed· to have signed a deal with Turner Broadcasting to carry CNN International (a 24 hours news service), a cartoon channel, and a classic movies cha:mel from the MGM Library. It had also announced that subscribers would pay about $250-400 for connection plus a weekly fee of around $10. The service was planned to start in July 1994, but was subsequently re-scheduled to begin by the end of the year.

Pay TV and Competition Policy

°l The Trade Practices Commission has indicated that it will closely monitor the activities of both pay TV and telecommunication companies. In particular, it would focus on such matters as access to networks, mergers and acquisitions and consumer protection. Professor Fels has stated that close interest would be paid to any horizontal or vertical alliances between local media groups, telecommunication companies and pay TV operators (Australian Financial Review, 8 September 1994).

Under Section 97 of the'Broadcasting Services Act 1992, the ABA must request the Trade Practices Commission to report on whether the allocation of a pay TV licence would have the effect of"substantially lessening competition in a market".. If the TPC reports that the awarding of the licence would have this effect, then the ABA is not permitted to allocate the licence to the applicant. Because the free-to-air commercial networks and the two carriers (Telecom and Optus) have not yet applied for a licence the TPC has not been required to deal with a number of complex questions. In particular, it has not had to make a final determination as to what constitutes the relevant market.

The first stage of a TPC review process is market definition. Section 4E of the Trade Practic\:s Act defines a market to include "a market for those goods and services and other goods and services that are substitutable for, or 12 Pay Television

otherwise competitive with, the first-mentioned goods and services". Establishing a market boundary involves examining:

• the nature of the product

• the geographic area of supply

• the functional level of supply (e.g. wholesale, retail, distribution).

When this kind ofanalysis is applied to pay TV, then it becomes apparent that there are a multitude of markets delineated by both product and geography. Consider the following list of services and their geographical limits:

• free-to-air TV (broadcast area)

• narrowcast pay TV (target audience and/or restricted broadcast area)

• cable pay TV (size of cable network)

• international satellite pay TV ("footprint" of beam)

• Australian satellite pay TV ("footprint") ,:\fl • MDS pay TV (reception area)

• home video (availability of video rental outlets).

Which of these products could be substituted for another? The TPC has not yet provided a comprehensive response to this question. In one of its reports on the satellite pay TV licences it concluded that the relevant service delivery market included all broadcast pay TV, regardless ofmode oftransmission, and possibly free-to-air TV and video rental. However, it stated that this was not a final conclusion.2 Of course, the service delivery market was but one of a range of markets concerned with pay TV: others were the markets for programming, transmission services, conditional access and billing systems, advertising and reception equipment.

However, it is clear that the range of "substitutability" is fairly narrow: the Full Federal Court has made the point that the notion of substitutability "looks to the market itself, not to the habits of individual consumers".3 Thus while a person might substitute tea for coffee, the two were not substitutes in market terms, Similarly, while a viewer may have a choice between watching free-to-

2 Report by the Trade Practices Commission on the Allocation of Subscription Television Broadcasting Licence B to Hi Vision Limited (16 June 1993), Addendum 2: 13.

3 Professor A. Fels, "How the Trade Practices Commission Will View Developments in Broadcasting", Paper Delivered to the TIC Conference, Melbourne, 22 March 1993. Pay Television 13

air TV, pay TV or a video, they are not necessarily substitutes for each other in market terms. The video market is essentially concerned with movies; it does not offer the same range ofprograms (current affairs, live sport) that are available on free-to-air and pay TV. It could also be argued that free-to-air and pay TV are different markets: the former sells audiences to advertjsers while the latter sells program services to subscribers. If such a determination was made, then it would allow a much greater role for the existing commercial networks in pay TV.

The other major competition issue concerns the role of the two 'carriers, Telecom and Optus, and the status of their cable networks. Both carriers wished to avoid common carrier status for their pay TV networks, as this would restrict their options in developing their own program services. Although the broadcasting and telecommunications legislation does not prohibit· the involvement of carriers in program services, the existing provisions of the Trade Practices Act could be used to deal with any dangers to competition posed by the vertical integration of content and carriage. According to Professor Fels, the TPC has tended to be less C(inCerneJ about vertical integration than horizontal mergers. However, such vertical links would be of concern if there was a concentrated structure enabling a company to deny essential facilities to downstream competitors. This could well be the situation in the first few years ofpay TV, with some operators unable to obtain a place on the two major cable networks. Alternatively, it could be argued that there is nothing to prevent a competitor constructing its own cable network. Again, the recommendations of the TPC may well hinge on its definition of the pay TV market and whether the various means of delivery are substitutable.

The question ofcommon, or general, carrier status for the Telecom and Optus networks involves broader questions ofpolicy. Ifthe networks were to remain as simple pay TV carriers then there would be little justification in requiring them to be common carriers. However, it is clear that the networks will eventually carry broadband services to the home: the "information superhighway" linking togethertelecommunications, broadcasting and computer services. Under the Telecommunications Act 1991 Telecom and Optus are required to accept the obligations contained in Section 234 (service providers' rights of connection with carriers) and Section 184 (non-discriminatory treatment of service providers by carriers) with regard to general carrier networks.

On ·the 24 November 1994 the Minister for Communication and the Arts announced that he had received a report by Austel on the network proposals . by Telecom and Optus. The report separated the potential services provided by the networks into three streams: telephony, broadband and pay TV. For telephony, Austel was satisfied that the proposals were consistent with Government policy and would not adversely impact on competition. For broadband services, Austel recommended that Optus and Telecom should be bound by the general carrier obligations for open access. The Government has accepted this recommendation. 14 Pay Television

For pay TV, Austel considered that the carriers should be bound by the general carrier obligations except where they had limited network capacity and that this exemption should only be for the initial phase of pay TV services. The Government has deCided that the general carrier obligations will not apply to pay TV services on the cable networks at least until I July 1997. This exception will be reviewed in the lead-up to 1997 and if there is appropriate competition in the delivery of cable pay TV services it will be extended to 1999. After that time there will be open access on the networks. The carriers will continue to be subject to the existing provisions ofthe Trade Practices Act with regard to providing access for pay TV services.

Optus' chiefexecutive, Bob Mansfield, has stated that it will not go ahead with its cable network under the conditions announced by the Minister. Instead, it would seek to become a program provider to the Telecom network. At this stage it is unclear if the Optus move is the result of the decision on open access for broadband services, or the conditions relating to pay TV.

Content Regulation

Australian Content

Under Section 102 of the Broadcasting Services Act 1992, each subscription television broadcasting licence is subject to the condition that, if the licensee provides a service devoted predominantly to drama programs, the licensee will, for each year of operation, ensure that at least 10 per cent of the licensee's program expenditure for that year in relation to that service is spent on new Australian drama programs.

Section 6(1) provides a number ofdefinitions of "Australian drama program". These include a drama program made substantially in Australia with significant Australian content; programs which have certificates under Division 10BA of ,the Income Tax Assessment Act 1936, and programs that qualify as Australian content for free-to-air television.

On 19 May 1994 the ABA issued Guidelines for the implementation ofthe pay TVnew Australian drama licence condition. These define program rights and expenditure, as well as foreshadowing an amendment to 'the Broadcasting Services Act 1992, which will tighten the definition of Australian drama program so that the conditions apply to all drama programs (not just movies) and to all pay TV services. The Minister informed the ABA ofthese proposed amendments in October 1993, but they have not yet been presented to Parliament.

There have been conflicting views on the possible impact of the local content requirement on the Australian production industry. According to a recent report in the Sydney Morning Herald (28 October 1994), there is some scepticism in the industry that much local production revenue will be generated Pay Television 15

because the initial earnings from pay TV will be small ~d total production expenditure modest. This view has received some confirmation from the fact that pay TV operators have not yet signed any deals with the local major production houses. On the other hand, Albert Hadid (who was behind the UCOM satellite licence bids and later sold out to Australis), has announced that he intends to start a film and television production company to capitalise on the likely demand for a new product. Martin Hannes, the executive director ofContinental Cablevision, has stated that pay TV local production expenditure will eventually be comparable to that of the broadcast networks..

If the level of total drama program expenditure remains low, it would always be possible to increase the required percentage of local content expenditure above ten per cent. The.Senate Select Committee of 1992 recommended fifteen per cent; more recently, a figure oftwenty per cent has been suggested.

Siphoning

"Siphoning" refers to the acquisition of programs by pay TV operators that would otherwise have been shown on free-to-air television. Section 115 ofthe Broadcasting Services Act 1992 enables the Minister to list an event or events which should remain available to the general public and to remove an event from the list if he is satisfied that free-to-air broadcasters had the opportunity to acquire the television rights at a fair price, but declined to do so. It is a condition ofpay TV licences that licensees will not acquire broadcasting rights to an event that has been listed under Section 115. This condition does not apply to narrowcasting licences. Notices under Section 115 must be laid

",~ before both Houses of Parliament and are disallowable instruments. In February 1994 the Minister for Communications and the Arts asked the ABA to conduct an investigation into which events should be listed under Section 115 ofthe Act. The ABA reported in May, providing four options for the Minister's consideration:

• a comprehensive list of all events nominated by the free-to-air broadcasters;

• a "short" list;

• a list of major events; and

• a "watch list" and an activating mechanism.

The Minister announced the list ofSection 115 events on 31 May 1994. These comprised (with some additions) those given in Option 3 of the ABA report. He also provided a "watch list" which would allow him to list the events if they were not being covered in an appropriate way. Both lists are attached to this paper as Appendix 2. Only sporting events are on the lists. The Minister 16 PajJ Television

stated that events of cultural importance (for example, Anzac Day) are not listed because they are not subject to exclusive coverage rights.

Pay TV operators criticised the Minister's decision, stating that the list was longer than expected as was the ten year protection period. The Chairman of CTS, Lynton Taylor, stated that the list would inhibit the development of pay TV.

The Minister has also announced that the Broadcasting Services Act will be amended to prevent free-to-air broadcasters buying the rights to events and then not showing them, but these amendments have not yet been presented to Parliament.

In July 1994 the pay TV operator, Australis Media, announced that it had acquired "exclusive" rights to some events listed under Section 115. However the ABA is believed to be satisfied that the agreement between Australis and its US venture partner Prime International (which acquired the rights in question) will comply with the legislation.

According to the Sydney Morning Herald (11 November 1994), Australis Media has challenged the anti-siphoning list by asking the Minister for Communications and the Arts to de-list the Australian-Pakistan cricket test series that was recently completed in Pakistan. The rights to this series are believed to be held by Prime International and were not taken up by free-to-air broadcasters. Australis is apparently interested in acquiring the rights so that it can show highlights on its pay TV service next year. Any Ministerial determination will be ofgreat interest as it may shed light upon the definitions and procedures used under Section 115, especially, on the question of what constitutes a "real opportunity to acquire, on a fair commercial basis, the right to televise the event". In particular, will the test of a fair price take into account the increase in demand for the rights to televise sport caused by the introduction of pay TV, or will it be determined by simple reference to past practice? The latter approach would amount to the imposition of a price ceiling on sporting rights for the benefit of the free-to-air broadcasters.

Recent reports of a rugby "superIeague" competition organised by News Corp for pay TV have resulted in speculation that the anti-siphoning list may be circumvented. However, the Minister has stated that in his view the best rugby league (in whatever competition) should remain on free-to-air TV and that this principle should apply to all major sporting events on the list (House of Representatives, Questions without Notice, 17 November 1994). However, another possible problem with the administration of the list concerns the question of timing. The Act states that licensees "will not acquire the right to broadcast an event" that has been listed (Schedule 2, section 10 (1)[e]). Thus, if a licensee acquires the rights to a new event (such as the "superIeague") before it is listed, then there would appear to be nothing in the Act to prevent them keeping the rights and broadcasting the event. Pay Television 17

It is probable that the most intense pressure to reduce the list will come in several years time when pay TV operators are struggling to cover their large capital outlays because of small audiences. This could bring a change in attitude from those commercial TV networks that currently hold sporting rights but who also have fin.ancial interests in pay TV.

Program Standards

The Act also requires pay-TV operators to develop, in consultation with the ABA, codes of practice that may relate to:

• broadcast of material in accordance with community standards;

• protection of children from harmful material;

• classification of programs;

• accuracy and fairness in news;

• handling of complaints;

• methods of billing, fault repair, privacy and credit management.

Pay TV operators must also refrain from broadcasting advertisements before 1 July 1997.

Broadband Services and Pay TV

Any piece of information can be represented by a series of ones and zeros ("digitisation") and then sent by satellite, optical fibre or co-axial cable, microwave link (MDS) or conventional telephone lines (ADSL). With compression techniques, simultaneous transmission ofmany services at a faster rate becomes possible. Broadband services are those which allow the combination and transmission of such "multimedia" packages (that is, those involving the convnergence of text, data, graphics, sound and vision).

In December 1993 the Government established the Broadband Services Expert Group (BSEG) to report on the technical, economic and commercial preconditions for the delivery of broadband services throughout Australia. Its Interim Report Networking Australia's Future, was presented in July. The Report noted that the Australian telecommunications network was relatively advanced, with 1.8 million kilometres of optical fibre and 57 per cent of lines digital. However, while 50 per cent ofhomes are within 700m ofoptical fibre, the absence of a cable television industry means we lack the infrastructure linking homes to the network. The BSEG Report notes that the absence of an existing, but obsolete, network provides an opportunity to develop a broadband 18 Pay Television

network which will facilitate two-way and interactive services to the home. These could include:

• video-on-demand

• home shopping and banking

• interactive multimedia (including video games)

• on-line information services

• video mail and video phones

• security services and utility meter reading

• working from home via computer networks

However, for most Australian residential customers, the first service available will be pay TV. Telstra's chief executive, Frank Blount, has been quoted as saying: "I don't think pay TV is the killer application. It is the one that has the most ready market now of some size and therefore will help pay for the infrastructure to enter the broad-band interactive multi-media markets of the future" (Sydney Morning Herald, 18 November 1994).

The BSEG report notes that Australia, unlike some other countries, does not have regulations prohibiting telecommunication carriers from participating in the delivery of video material. This could permit economies of scope, with telephone and video sharing capital and operational costs. It is apparent that both Telstra and Optus are moving to capitalise on this situation. Telstra's Visionstream network has already passed 50000 homes, with a rollout target of Urn homes by December 1996 and 4m homes by 1999. The network has a 64 channels of analogue bandwidth, but will be upgradeable through digitisation and switching. The network will consist of optical fibre cable to the neighbourhood hubs, with coaxial linking the J,mbs to homes. Each hub will serve about 1000 homes. It is Telstra's intention that optical fibre will expand to the kerb within five years, with each line servicing 10-20 homes. This will enable the introduction of interactive services such as video on demand. Visionstream's Managing Director, Bob de Boer, believes 80 per cent of urban homes will be passed by the network by the end of the decade.

On 21 September 1994, Optus Communications announced its plans for a broadband services network that would pass half ofAustralia's 5.5m homes by the end of 1998. The cable would be mostly on aerial powerlines, and would provide telephony, pay TV, FM radio and interactive multimedia services. The consortium developing the network, to be called Optus Vision, consists of the Seven Network (15 per cent), Nine Network (20 per cent), Continental Cablevision Inc. (30 per cent) and Optus itself (35 per cent). Optus has indicated that it might review the project if regulations class the network as a Pay Television 19

common carrier and require that it be open to all corners from the outset. Optus considers that it should be able to use all existing capacity on the network itself until digitisation enlarges the number of channels available. It considers that only this way with sufficient revenue be generated to justify the investment in the network. On the 24 November 1994 the consortium announced that it would not proceed with its cable network under the conditions announced by the Minister for Communications and the Arts. However, it would seem unlikely that Optus will withdraw from cable infrastructure development indefinitely or it would soon be marginalised in the . Australian market for telecommunications and braodband services. Particularly as the deregulation of telecommunications (including local call networks) in 1997 could also lead to cabling by other operators. For example, the pay TV licensee Rowcom Holdings,· in partnership with US operator Cox Cable Communications, has announced plans for a $500m network in south-eastern Queensland.

Some concern has been expressed over the possibility ofduplication ofservices by cable operators. For example, there appear to be three separate cable networks planned for south-east Queensland before many other regions obtain a single service. It had been reported (Sydney Morning Herald, 22 August 1994) that the Minister for Communications, Mr Lee, had warned cable operators that he would take action ifthey duplicated networks in high-income areas before cabling up lower income areas. However, Mr Lee has also stated that he considers that a regulatory model involving local cable monopolies . would be "greatly flawed", and that he would not support it for Australia. , (The Australian, 4 August 1994). More recently, the Minister has been ',reported (Sydney Morning Herald, 15 November 1994) as stating that ',-:duplication is an expected consequence ofcompetition. It might be argued that this raises the question: will the efficiency gains of competition outweigh the costs of duplication? The additional cost of duplicating coaxiaVfibre optic cable to the curb in urban areas throughout Australia could be as high as $16 billion. Costs to the carriers of this magnitude could result in increases in telephony and other communication charges, which would have a flow-on effect throughout the whole economy. While the case for the long term economic benefits of the "information superhighway" may be persuasive, the arguments for a "dual superhighway" could be seen as less convincing. The opportunity cost of capital expenditure on this scale (ifmisdirected), in a time ofkeen competition for infrastructure investment, would be another factor for consideration.

The Minister dealt with some of these questions on the 24 November 1994 when he outlined the Government's decisions on the·status ofthe Telecom and Optus cable networks. He drew attention to the benefits that have occurred since the introduction of competition and the duplication of infrastructure in telecommunications. He concluded that duplication had cut prices, increased investment, improved customer service and given customers a wider choice of products and services. He again explicitly rejected splitting the country into 20 Pay Television

regional cable monopolies and noted that such monopolies were breaking down in the US and UK.

The equity of a universal fibre-optic cable rollout has also been questioned. Ifthe massive cost ofthis development is to be spread over all customers, then in effect it becomes a subsidised service for the "information rich" affluent households who wish to utilise all the products it provides (e.g. interactivity, video-on-demand etc). Those who can only afford (or want) a basic cable service for pay TV and network carriage still have to bear the high cost of fibre-optic when they may only need basic coaxial cable.

According to estimates prepared by the. Bureau of Transport and Communications Economics the costs of a hybrid fibre-optic coaxial cable rollout would be as follows:

• analogue distributive service to all areas (1995-2000) $25 billion

• upgrade to a digital interactive service (1998-2002) $5.4 billion

• upgrade to limited communicative service (by 2005) $I1 billion

Thus the total cost of a limited communicative service to all Australian households by the year 2005 would be in excess of$40 billion. Such a service would be "limited" in that it would not have the full capacity of the "information superhighway" - a broadband network offibre-optic cable to each household. By a very conservative estimate, such a network would cost around $70 billion.

The distribution of the cost of the network also involves other questions: it is estimated that of the $40 billion cost referred to above, almost sixty pet cent would be needed to service rural and remote areas, which represent about thirty per cent ofthe total number or households. It would thus seem likely that only sizeable rural communities and hardly any remote households would be provided with cable unless the rollout were heavily subsidised, either by urban customers or directly by Govermnent.

Most of the discussion and excitement surrounding broadband services has centred on technical and hardware developments. Yet, as the BSEG Report noted, "the content of communication services is a fundamentally more important issue than the means of delivering them".4 It is content, rather than hardware, that will determine the financial success of broadband services, including pay TV. There is little or no evidence of significant consumer demand for some ofthe proposed services - video-on-demand, home shopping and banking, interactive TV and video games. In the US initial excitement over the "information superhighway" together with the merger of

4 NetworkingAustralia's Future. The Interim Report ofthe Broadband Services Expert Group (July 1994): 12. Pay Television 21

telecommunication and entertainment corporations, has dimmed appreciably with the failure of market tests of interactive television and technical difficulties with multi-media products. However, as one commentator has noted:

If the fir;t offerings of the grand information highway fan short' of inspirational, take comfort that most media need years - sometimes decades - to begin fulfilling their potential. And the telecommunications industries that are delivering the bevy of new services are in this for the long haul. S .

The Future of Pay TV

Major Players

Despite the large numbers of licences issued it is apparent that only those operators with access to both capital and programming will survive. This will generally take the form of an alliance with either US cable companies or telecommunication carriers.

On this basis the major players would appear to be as follows:

• Optus Communications: the carrier has joined with US company, Continental Cablevision Inc, and the Seven and Nine Networks, to establish the Optus Vision network. Optus is believed to have ',programming deals with ESPN Inc (a major sports program service in the iUS), Warner Bros:, Disney and MGM as well as having access to the resources of the two television networks. The consortium has recently stated that it will not proceed with its cable network but would instead become a program provider to the Telecom cable 'system.

• TelecomlNews Corporation: the recently announced alliance will provide the strongest challenge to the Optus Consortium and Australis, with the Visionstream network already underway and News Corporation's US and UK programming connections. Details of customer charges and program content have not yet been announced.

• Australis Media: has satellite and MDS licences which will make it available to 5.5 million homes as well as the backing of the US operator, TeleCommunication Inc (TCl). TCI owns 50 per cent or' Australis' partner Lenfest. Australis is planning to launch its service next year, and is reported to have signed major programming deals with Universal, Paramount, Columbia Tri Star and Prime International. Australis' service (to be knoWn as Galaxy) will cost $300-$400 for connection and around $10 per week. It will provide two movie channels, channels for music,

5 Herb Brady, "Information Highway: the Home Front", Technology Review, (AuglSept, 1993): 30-40, 22 Pay Television

sport, nature programs, news and cartoons. Australis has 200 000 set top boxes on order from US company, General Instruments, and has signed a contract with IBM Australia to install and manage its subscriber system.

• R,owcom Holdings: holds cable licences and has US cable rV operator Cox Cable Communications as a partner. Plans to cable 700 000 homes in south eastern Queensland, with service available by April/May 1995. Rowcom's chief executive, Dick Rowe, has stated that in addition to the usual movie, news and sports channels (providing predominantly overseas material) Rowcom will commission local programming. Cox Cable is an investor in UK Gold which provides programming from such sources as the BBC and Thames Television.

• Continental Century: holds the satellite A licence, and has the backing of US cable operator Century Communications. Continental has stated that its service will be available by Christmas; it will cost about $45 a month plus around $500 for installing a satellite dish and decoding system. Continental is working with Australis to co-ordinate hardware installation and billing systems, but its programming and marketing will be independent.

Commercial Prospects

The plethora of planned services, together with regular announcements of postponements, will not create an environment conducive to commercial success in the short term. Consumers are likely to be confused and/or wary. Up-front installation costs of $300-$400 will reinforce consumer caution, particularly when customers discover the lack of compatibility between satellite, MDS and cable equipment. These difficulties may recede with the spread of cable and the development of franchises and the rationalisation of billing systems, although the process will be a slow one.

Experience from overseas is not particularly encouraging. While operators often refer to the US, where pay TV is well established, a more appropriate comparison is with New Zealand and the United Kingdom. In the US, cable services and pay TV developed in tandem with free-to-air network TV, and around 60 per cent of homes have access to cable (which carry both pay TV and the networks). In Australia, as in New Zealand and the UK, pay TV is starting from scratch in competition with longstanding free-to-air services and an established home video industry.

In the UK the two satellite operators were forced to merge and initial losses were high. It was not until BSkyB acquired exclusive rights to live football that the system began to break even. Such exclusive deals will not be permitted in Australia. Heavy discounting and give-aways ofsatellite reception equipment was also a feature ofthe UK experience. After four years, 12.4 per cent ofUK television households owned satellite receivers and a further 2.8 per cent subscribed to cable. In New Zealand the take up ofpay TV services has Pay Television 23

been slow. There is a dearth of local programming in news and movies, with sport providing the main attraction.

If 15 per cent of Australian households were to subscribe to pay TV at a rate of $10 per week, then the annual expenditure would be around $460m. As a point of comparison, expenditure in 1993-94 on other cultural goods and services was as follows: 6

• video tape hire $653m

• cinema admission $304m

• books $1190m

• . newspapers $81Om

• magazines and comics $592m

• live theatre admission $397m

• records and CDs $755m (1992-93).

In 1992-93 the television revenues of the commercial networks were $2036m while those ofthe public broadcasters (ABC and SBS) were $754m. In 1991­ 92 ;radio station advertising revenues were $425m.

:~~:' Thllre .is no evidence to suggest that the introduction of new recreational services leads to a real increase in household expenditure on such services. In fact, the proportion of discretionary household income devoted to communications and recreation services and equipment has varied only marginally over time. However, significant falls in prices have allowed households to purchase an increasing number of these items within a given level of spending. This suggests that pay TV operators will have to compete with . existing services for . revenue, rather than attract new recreational expenditure. In this competition they will face not only established services such as free-to-air TV, home video and cinema, but also emerging multi-media and personal computer products. 7

6 Bureau of Transport and Communications Economics, Communications Futures Project. Work in Progress Paper No. 3. New Forms andNew Media: Commercial andCultural Policy Implications (1994): 4-5.

7 Bureau of Transport and Communications Economics, Communications Futures Projects. Work in Progress Paper No..I. Emerging Communications Services ~ An Analytical Framework (1994): 49. 24 Pay Television

In the long term, cable would appear to have an advantage over MDS and satellite because of:

• better quality transmission

• greater carrying capacity (especially with digital transmission)

• possible expansion of services to telephony, interactive TV, computer networks

• long-term rollout plans which will eventually see all major population centres covered.

In the short term, MDS and satellite possess the following advantages:

• they do not require a cost!y infrastructure

• together, they can provide national coverage quickly

• they will be the first to provide services.

If the satellite licensees have difficulty in attracting viewers under the current arrangements they do have a number of options. The satellite service could be upgraded to provide a greater number of channels and improved reception. Another option would be to obtain channels on the cable networks. Australis Media's exclusive programming deal with three of the Hollywood studios would put it in a good position to negotiate access with Telecom and Optus.

The contents of the proposed services in Australia remain a problem. The most popular programs on pay TV are sports and movies. Anti-siphoning regulations have severely restricted sport programming and the Hollywood production houses will be able to exploit the competition between the Australian providers to extract high prices for their programs. With a small subscriber base, the pay TV operators will be struggling to cover these costs. Competition from the home video industry (which may have an earlier "window" on new movies than pay TV) will also be hard. The Australian Video Retailers Association has recently announced a $I.5m promotion campaign.

Other program offerings on pay TV - news, cartoons, TV re-runs, music - are also readily available on free-to-air. Pay TV will certainly provide more of these programs, but there is little indication of a big demand for such shows. Most of the programming for pay TV will be imported while surveys continually indicate a preference for local product (as do the ratings on commercial TV). Pay Television 25

In view ofall these factors, it wou~d seem likely that the first five years of the pay TV industry will be extremely volatile, with significant losses by participants and a consequent rationalisation of activities.

Policy Issues

While the commercial prospects for pay TV may remain unclear for some years, there are a number ofpolicy issues that may need to be addressed in the more immediate future. In summary, these are:

• the nature and extent of the foreshadowed amendments to the Broadcasting Services Act concerning local content and siphorung;

• the procedures and the level of public accountability concerning the administration of the anti-siphoning list;

• the balance between competitive efficiency and the C0sts of duplicating cable networks;

• the equity of the distribution of the cost of the cable rollout.

• the degree of participation and collaboration by the free-to-air networks that will be permitted in the pay TV market;

• " the level of vertical integration by Optus and Telecom that will be 'c, permitted;

• the possible need to modify current· provisions relating to foreign ownership to prevent de facto control being exercised by overseas interests. The current ABA inquiry into the control of the Ten Network may have implications for the ownership structures for Australis and Continental Century.

, 26 Pay Television

Bibliography

ABA Update. Newsletter of the Australian Broadcasting Authority. No. 1 (November 1992) - No. 24 (October 1994).

Australian Broadcasting Authority, Guide to Subscription Television Broadcasting Services (March 1993).

Australian Broadcasting Authority, Guidelines for the implementation ofthe pay TV "New Australian Drama" Licence Condition (19 May 1994).

Australian Broadcasting Authority, Pay TV "Siphoning" Investigation. Report to the Minister for Communications and the Arts (13 May 1994).

Australian Broadcasting Tribunal, Cable and subscription television services for Australia (5 vo1s, Canberra 1982).

Bureau of Transport and Communications Economics. Communications Futures Project. Work in Progress Papers.

No. 1, Emerging Communications Services - an Analytical Framework (1994).

No. 2, Delivery Technologies in the New Communications World (1994).

No. 3, New Forms and New Media: Commercial and Cultural Policy Implications (1994).

No. 4, Costing New Residential Communications Networks (1994).

Department of Transport and Communications, Future Directions for Pay Television in Australia (2 vo1s, Canberra 1989).

Fels, Prof. A, How the Trade Practices Commission Will View Developments in Broadcasting, Paper Delivered to the TTC Conference, Melbourne, 22 March 1993.

Independent Inquiry into the Circumstances Surrounding the Non-requirement ofa Deposit for Satellite Pay-TV Licences, and Related Matters. Report by Professor Dennis Pearce to the Secretary of the Department of Transport and Communications (May 1993).

Inquiry into CertainAspects ofthe MDS Tendering Process 1992-93. Report by Professor Dennis Pearce to the Secretary of the Department of Transport and Communications (2 vols, May 1993).

Molloy, S. & Burgan, B., The Economics ofFilm and Television in Australia (Australian Film Commission, 1993). Pay Television 27

Networking Australia's Future. The Interim Report ofthe Broadband Services Expert Group (July 1994).

Notification by the Australian Broadcasting Authority to New World Telecommunications Pty Ltd in Relation to the Allocation of Satellite Subscription Television Broadcasting (Pay TV) Licence B (15 December 1993).

Notification by the Australian Broadcasting Authority to UCOM Pay-TV Pty Ltd in Relation to the Allocation of Satellite Subscription Teievision Broadcasting (pay TV) Licence A (28 January 1994).

"Pay TV Chronology - An Update", Communications Update (May 1993).

"Pay TV: A Chronology", Communications Update (October 1992).

Report by the Trade Practices Commission on the Allocation ofNon-Satellite Subscription Television Broadcasting Licences for the Delivery of Multiple Subscription Television Broadcasting Services via MDS t1 Star Vision Pty Limited (Canberra,S September 1994).

Report by the Trade Practices Commission on the Allocation ofSubscription Television Broadcasting Licence A to UCOMAustralia Pty Limited (Canberra, 15 October 1993). .

Report by the Trade Practices Commission on the Allocation ofSubscription Television Broadcasting Licence B to Hi Vision Limited (Canberra, 16 June 1993).

Senate Select Committee on Matters Arising from Pay Television Tendering Processes. First Report (September 1993). Second Report (December 1993).

To Payor Not to Pay? Pay Television and Other New Broadcasting-Related Services. Report from the House of Representatives Standing Committee on Transport, Communications and Infrastructure (November 1989).

Trade Practices Commission, Draft Detennination. Applications for Authorisation by the Australian Broadcasting Corporation in relation to proposed arrangements for the supply of satellite subscription television broadcasting services (21 February 1994).

Appendix 1

REGULATION OF SUBSCRIPTION TELEVISION SERVICES

SUBSCRIPTION BROADCASTING SUBSCRIPTION NARROWCASTING

Satellite Non-Satellite Satellite Non-Satellite

Examples Optus satellite Cable (felecom, Optus) Optus Cable (Telecom; Optus) Other satellite Optical fibre Other Optical fibre (after July 1997) Fibre/coaxial combination Fibre/copper combination ADSL (phone line video) ADSL (telephone line video) MDS MDS

Ownership Yes: for licence A No No No Restrictions (cross media)

Foreign 20% individual 20% individual No limit No limit Ownership 35% total 35% total Limits

Licensing ABA allocates a service licence ABA allocates a service Class licence Class licence Mechanism licence

Allocation Price-based (detennined by On application to ABA None (there is None (there is no service System Minister) no serv ,;e licence) (service licence) licence)

Capacity Lie A: up to 4 services One licence per service ~ No No limit No limit Lic B: up to 4 services limit to number of services Lic C: (ABC) up to 2 services

TPC ABA must request TPC report re: ABA must request TPC report No No involvement s.50 & 5.88 Trade Practices Act re: s.50 and s.88 Trade before allocating licence Practices Act before allocating licence

Program ABA has not determined any ABA has not detennined any Some existing Some existing ABT standards Standards ABT'standards apply apply

Special 1. 10% of program expenditure 10% of program expenditure No No Licence on Aust. drama on Aust. drama Conditions 2. No advertising until July '97 No advertising until July '97 (part 7 3. Rental availability of reception Rental availability of reception NIA NIA Broadcasting equipment equipment Services Act) 4. NIA Termination of rental agreement with I month's notice NIA NIA 5. Adequately involve Aust NIA industry (Lic A, B & C only) 6. Accessibility of domestic NIA NIA reception equipment NIA 7. Fair price access to subscriber management system NIA NIA NIA 8a. Transmission system in accordance with digital NIA NfA transmission standard NIA 8b. Lic A & B will commence within 6 months of notifying NIA NIA digital transmission system NIA standard NIA NIA

Appendix 2

The List of Events for S.115 of the Broadcasting Services Act 1992 (the "anti-siphoning list")

The Melbourne Cup 1994 to 2004 inclusive

AFL 1994 to 2004 inclusive AFL Final Series AFL State of Origin Matches of the AFL premiership competition

Australian Rugby League 1994 to 2004 inclusive Rugby League Final Series Rugby League State of Origin Matches from the premiership competition International "test" matches involving the senior Australian representative team, played in Australia or overseas

Rugby Union 1994 to 2004 inclusive International "test" matches involving the senior Australian representative team, played in Australia or overseas World Cup Hong Kong Sevens

Australian Cricket Board 1994 to 2004 inclusive Test Cricket involving the senior Australian representative team, played in Australia or overseas World Series one day cricket World Cup one day cricket .One day internationals involving the senior Australian representative team, played in Australia or overseas

Soccer 1994 to 2004 inclusive NSL finals English FA Cup final World Cup

Tennis 1994 to 2004 inclusive Australian Open Wimbledon Open French Open Us Open Mens Hardcourt Championship - Adelaide Womens Hardcourt Championship - Brisbane NSW Open Davis Cup when an Australian representative team is involved

Netball 1994 to 2004 inclusive International matches involving the senior Australian representative team, played in Australia or overseas Basketball 1994 to 2004 inclusive NBL Final Series

Golf 1994 to 2004 inclusive Australian Masters Australian Open US Masters US Open US PGA British Open

Motor Sport 1994 to 2004 inclusive Formula One Grands Prix 500cc Motorcycle Grands Prix Australian Touring Car Championship (Bathurst 1000) Australian Indy Car Race

Watch List

Each event of the Olympic Games, Atlanta 1996, including the opening and closing ceremonies.

Each event ofthe Winter Olympic Games, Nagano 1998, including the opening and closing ceremonies.

Each event of the Commonwealth Games, Kuala Lumpur 1998, including the opening and closing ceremonies.

Each event of the Olympic Games, Sydney 2000, including the opening and closing ceremonies.

Each event of the Winter Olympic Games, 2002, including the opening and closing ceremonies.

Each event of the Commonwealth Games, 2002, including the opening and closing ceremonies.

Each event of the Olympic Oames, 2004, including the opening and closing ceremonies.