BACKGROUND PAPER

Pay Television

Service

Parliamentary

Research

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No. 221994

~AItt-!l AUSTRALIA &!lJ>J»~~E<{(t~

Department of the Parliamentary Library

ISSN 1037-2938

Copyright Commonwealth of Australia 1994

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

Published by the Deparunent of the Parliamentary Library, 1994

Dr Kim JacksonSocial Policy Group28 November 1994

ParliamentaryFlesearch Service

Background Paper No.22 1994

Pay Television

Telephone: 06277 2416Facsimile: 06 277 2407

This paper has been prepared for general distribution to Members of the Australian Parliament.Readers outside the Parliament are reminded that this is not an Australian Government document, but a paper preparedby the author and published by .the Parliamentary Research Service to contribute to consideration of the issues bySenators and Members. The views expressed in this Paper are those ofthe author and do not necessarily reflect thoseof 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 4The Satellite Licences 4Other Pay TV Licences 6MDS Licences 7

International Satellite Services . . . . . . . . . . . . . . . . . . . . . . . . . . .. 8

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

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

. Pay TV and Competition Policy 11

Content Regulation 14Australian Content . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14Siphoning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ISProgram Standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Broadband Services and Pay TV 17

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

Policy Issues 25

Bibliography 26

Appendices

Appendix 1

Appendix 2

Table comparing the Regulation of SubscriptionTelevision Services

. The list of events for S.115 of the Broadcasting ServicesAct (the "anti-siphoning list")

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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 analyseor describe the administrative and policy developments that have occurred overthe 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 wasfinally made, the administrative procedures established for the task provedinadequate. However, the lack of any strong or persistent demand fromconsumers for pay TV meant that there was little or no political cost for thesedelays. The push for pay TV has tended to be from the top down rather thanthe bottom up, and the debate has been between competing bureaucratic,commercial and. political interests. Public agitation has tended to be restrictedto the issue of siphoning - the possibility that existing free-to-air sporting

.coverage will shift to pay TV. Although legislative action has averted thisthreat, there· are a number of questions still surrounding the administration ofthe "anti-siphoning" provisions.

Now, with the dawn of broadcast pay TV imminent, there is still muchconfusion over many aspects of the service and the debate shows. no signs ofslackening. On the technical side, it is by no means clear what will be thedominant mode of delivery: satellite, cable, microwave or even the humbletelephone line. The satellite service was given a head start but with each delaythis advantage diminishes. Telecom's cable network is expanding steadilythroughout the nation's suburbs and rival cable rollouts have also beenproposed. The expenditure on these networks will be huge, and it remains amoot point whether the benefits of competition will outweigh the costs ofduplication.

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

With the increasing role of the established media operators, questions ofcompetition policy have come to the fore. These include the possibility ofmarket dominance by the existing broadcasters and the dangers of verticalintegration inherent in Optus and Telecom's involvement in both carriage andcontent. The recent statement by the Minister for Communication and Arts onthe access requirements for the cable networks, and the dramatic response byOptus, 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 oftelecommunications and the development of broadband services.

It now seems that pay TV will be the first cab off the rank on Australia'sinformation superhighway - the optical fibre network that will eventually bringthe full range of broadband services to Australian homes. These are thecommunication services involving video, sound, text and data (either singly orin combination) that can be delivered at high volume through the use ofdigitisation and compression techniques. It is still unclear if the demand forthese services will justify the cost of the superhighway. The commercialprospects for the pathbreaker, pay TV, are not encouraging in the short-to­medium term. The large number of rival services with high-priced andincompatible hardware, the regular announcements of postponed services, therelatively high instalment and subscription charges and a dearth of attractiveand/or new programming will engender confusion and wariness amongstpotential consumers. The new few years should see a shakeout in the industry,particularly amongst those providers relying on satellite and MDS systems. Inthe long term the greater carrying capacity, better quality of transmission andthe telephony revenue provided by cable would appear to give it the advantagein the battle for the pay TV market.

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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

Pay Television iii

Broadband Services: a range of communications services that use still ormoving 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 acable.

Carriers: organisations responsible for the distribution of telecommunicationssignals. Common carriers are those with a responsibility to provide a basicservice to all who wish to use it.

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

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

Equalisation: the policy of providing three commercial television services tomost areas in Australia.

IV Pay Television

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

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

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

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

Narrowcastingservices: transmitted services whose reception is limited bybeing targeted at special interest groups, or being provided to limited locationsor for a limited period.

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

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

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

Siphoning: the transfer of television programs from free-to-air stations to payTV.

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

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

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

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Pay Television 1

A Brief History

The gestation of pay TV has been long and difficult, both in terms of policyand administration. The first inquiry into the subject was instituted in 1980and completed in 1982. The Australian Broadcasting Tribunal recommendedthat cable and radiated subscription television services be introduced as soonas practicable. In November 1983 the Government decided that cable serviceswould not proceed because of the cost involved and questions concerning theinvolvement of Telecom. However, the Government did not close the door onpay TV and invited expressions of interest in providing radiated subscriptionteleviSion services. In May 1985 the Government lL1Jllounced that televisionequalisation (the provision of three commercial services to most areas) was tobe its highest priority and in September of the following year it declared amoratorium of four years on the introduction ofpay TV. At the same time theGovernment announced the introduction ofVideo and Audio Entertainment andInformation Services (VAEIS). These were pay TV services licensed under theRadiocommunications Act 1983 and delivered to non-domestic receivers (Le.pubs and clubs).

In 1989 two major reports dealt with the question ofpay TV. The Departmentof Transport and Communications released Future Directions for PayTeleviSion in Australia. This report contained no recommendations butdiscussed the issues and options involved. The House of RepresentativesStanding Committee on Transport, Communications and Infrastructure reportTo Payor Not to Pay: Pay Television and Other New Broadcasting Servicesrecommended that the Government. announce an immediate in-principledecision to introduce pay TV in Australia. In September 1990 the Government

'0', extended the pay TV moratorium for another year. In 1991 the Governmentannounced that the moratorium would end as of 1 October 1992 and that theinitial service would be delivered by AUSSAT, which was soon to be acquiredby Optus Communications. The latter was to join Telecom in the newcompetitive telecommunications market established by the TelecommunicationsAct 1991.

In 1992 the Government presented the Broadcasting Services Bill toParliament, having released an exposure draft for public comment in Novemberof the previous year. Part 7 of the Bill, which dealt with subscriptiontelevision services, was referred to a Senate Select Committee while the restofthe Bill passed. The Committee recommended (among other things) that theABC be allocated a channel and that the Australian content provisions of theBill be strengthened. The Broadcasting Services (Subscription TelevisionBroadcasting Amendment) Bill, which inserted Part 7 in the Principal Act wasfinally passed on 25 November 1992.

Although the legislative basis for the introduction of pay TV was establishedwith the passage of the Broadcasting Services Act 1992, further delays wereto 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 beused to deliver pay TV services. As a result, in January 1993 the Governmentterminated the MDS licence tendering process (a decision later invalidated bythe Federal Court) and then amended the Broadcasting Services Act 1992 toprevent the use of Mbs licences for pay TV before the satellite service wasin operation. Another source of difficulty lay in the terms of the tenders forthe 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 ofcascading bids as tenderers failed to meet the· deadlines for the requiredpayment of five per cent of their bids. Further amendments to theBroadcasting Services Act 1992 were required to speed up this process. Thetroubles with the MDS and satellite licence tenders were the subject ofinquiries by Professor Dennis Pearce (the Commonwealth Ombudsman) and theSenate Select Committee on Matters Arising from Pay Television TenderingProcesses.

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

• concern over its impact on existing commercial services in a period ofconsiderable financial instability and policy upheaval e.g. overpricedtakeovers, receivership, equalisation of television services, changes toownership regulation and broadcasting legislation;

• the Government's desire to obtain a successful outcome from theprivatisation 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 meetingdemand in the two key areas of live sport and recent movies.

Although the last factor is generally overlooked, it was particularly importantas it established the context for the debate. For successive Governments therewas 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 Australianscould receive the signal from the Optus Satellite with receiving dishesbetween 60 cm and 120 cm in diameter.

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Pay Television 3

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

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

• by telephone line. With further refinements of Asymmetric DigitalSubscriber Line (ADSL) technology it may be possible to deliver videosignals through the existing telephone network, thus creating anotheravenue for pay TV. However, ADSL technology is unlikely to be maturebefore 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 "technologicallyneutral". It empowers the Australian Broadcasting Authority (ABA) to awardlicences for subscription broadcasting services, but licensees may use anycombination 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, Band C begin, or after December 1994 (whichever is earlier).

There are no start-up restrictions on services using cable as a means ofdelivery.

4 Pay Television .

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

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

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

The two types of services are subject to different regulations and licensingsystems. These are outlined in the table attached as Appendix 1. Broadcastinglicences are awarded for specific services (with the exception of the A, B andC satellite licences, one licence per service). Narrowcasting services operateunder "class licences". Class licences are not individually issued, but are astanding 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 satellitelicences will be initially available: .

• Licence A, which allows four services and is subject to strict cross-mediaownership 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 asubsidiary 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 wereannounced 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 processof cascading bids waS set in train until deposits for each licence were fimlllypaid on 30 August 1993. For Licence A, UCOM Australia Pty Ltd bid $97mand paid a deposit of $4.85m. However, UCOM was unable to pay thebalance of the bid by 17 November, and the Licence cascaded to UnitedAirways Pty Ltd which had bid $77m. United, which soon changed its name

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Pay Television 5

to UCOM Pay-TV Pty Ltd, paid the required deposit of $3.85m by6 December. For Licence B, New World Communications Pty Ltd bid $117mand paid a deposit of $5.85m. The amounts paid for the licences was muchgreater than market expectations. One report stated that the Packer-Murdoch­Telecom (PMT) bid was as low as $30m (Australian Financial Review, 4 May1993). Thus, despite the controversy it engendered, the licence allocationprocedure did succeed in maximising the return to the Government.

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

The other successful bidder, New World, has also changed ownership. Thenew owner is Lenfest Holdings, a company jointly owned by Australis MediaLtd and the US company Lenfest Communications Inc. This deal has alsobeen structured to comply with the foreign ownership provision of the Act.Australis Media is a company established by Mr Steve Cosser and it alsocontrols the majority of available MDS channels. Australis intends to deliverpay TV through a combination of both satellite and MDS transmission.

On 15 December 1993 the ABA approved the allocation of Licence B, subjectto payment of the remainder of the amount bid. This was paid by Australis­Lenfest on 18 December 1993. On 28 January 1994 the ABA approved theallocation of Licence A, subject to payment of the remainder of the bid. Thiswas paid by UCOM-Continental on 10 February 1994.

The question of foreign ownership may well re-emerge, as it was recentlyreported that Lenfest and three Hollywood studios could acquire additionalequity in Australis as part of a deal for exclusive Australian rights to the outputof the studios (Sydney Morning Herald, 22 November 1994). The ABA iscurrently conducting an inquiry into the control of the Ten Network, whichwould appear to have a similar foreign ownership structure to that of AustralisMedia and Continental Century. In all three cases it would seem that althoughthe 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 legallimit. The ABA will have to determine if the economic power of the foreignowners is such that they are able to exercise defacto control· and thuscontravene 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 tocompanies under Section 96 of the Act. Multiple licences are sought becausethe Act requires a separate licence for each service. The ABA takes a serviceto be a single stream of programming material. Section 96 of the Actempowers 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 beginoperations before services commence under licences A, B, and C;

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

Section 96 licensees, together with the number of licences (in brackets) andtheir 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 metropolitancentres.

• Dergat Pty Ltd (4). Sydney.

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

• Home Show Cable Australia Pty Ltd (20). Adelaide, then majormetropolitan 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.

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Pay Television 7

Rowcom Holdings Pty Ltd (28). Darwin, Cairns, Townsville, SunshineCoast, Hobart, Launceston.

Star Vision Pty Ltd (30). A subsidiary of Australis Media Ltd. Australia­wide 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 theycould be used in conjunction with the satellite licences to deliver pay TVservices. MDS licences were originally issued under the RadiocommunicationsAct 1983. By June 1992, when an embargo was placed on the al1ocation of theremaining available MDS channels, Australis Media had acquired control 000of the 34 MDS transmitter licences issues under the old Act. These licencesare subject to strict technical restraints and cannot be traded, although licenseesmay authorise third party users. Changes of ownership and control of a licencedo not affect the holding of the licence.

A new system of licences was introduced by the Radiocommunications Act1992. These are "spectrum licences" which provide continuing rights of accessto defined parts of the spectrum in specified geographic areas. Licensees willbe able to trade, sub-divide or .lease their licences. Licences are issued forperiods of up to 10 years. MDS licensees who wish to provide broadcastingor narrowcasting services (including pay TV) must also obtain licences underthe Broadcasting-Services Act 1992 from the ABA.

In July/August 1994 a further 190 MDS licences were auctioned by theSpectrum Management Agency (SMA). The auctions generated $90.6m for theCommonwealth 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 currentlyexamining 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 Cablevisionbought licences in Adelaide (2), Perth (2), Brisbane (I), the Gold Coast (2) andCairns (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 of Australia. The US company PanAmSat hasalready launched PAS 2, part of a planned global system carrying broadcasting,telephone and data signals. PAS 2 has 24 C-band and 24 Ku-bandtransponders. C-band signals are widely dispersed but relatively weak and toreceive them can require large and expensive dishes (size depends uponlocation within the footprint). This situation lends itself to the developmentof subsidiary cable or MDS systems to distribute the signals received by thelarge dish. High-powered Ku-band beams require a smaller dish. Forexample, the US satellite pay TV operator Direct TV delivers ISO digitally­compressed channels to subscribers who require a 45cm dish costing around$yS57 a month, with pay-per-view movies an extra $US3 each. A smart cardin the receiver controls and records viewing, then automatically telephones datato a billing station during the night. Because it uses digital compressiontechnology, pictures are sharper than over-the-air broadcasting and sound issimilar 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 andDarwin viewers will require a 1.2m dish. PanAmSat is said to have reachedagreements to carry programming from Turner Broadcasting, ESPN andViacom (Financial Review, 14 June 1994). The company has indicated thatit may have to change the configuration of its beams if there is insufficientbusiness in Australia. However, there will be no shortage of satellite coveragein the immediate future. Within a year a further four international satellitelaunches are planned that will have the potential to offer television services toAustralian 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 willhave beams directed at Australia and not all will be devoted to television, butgiven that data compression techniques allow at least four digital TV channelsto be squeezed into the bandwidth required for one analogue channel, it is clearthat there will be an oversupply of capacity in the near future.

It is sometimes argued that th~ huge potential for international pay TV willmake national regulations controlling the industry redundant. Such a view failsto take into account the nature of the market: satellite television broadcasterscan only make money through advertising and/or subscriptions. Pirate satellitebroadcasters would attract negligible advertising revenue in Australia becauseof their minuscule audiences, and it would not be possible to set up asubscription system (requiring set-top units, secure coding etc) without theapproval of the host country. In addition, the experience of Murdoch's pan­Asian satellite service, Star TV, suggests that a significant local input isrequired 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 anapplication by the ABC to bundle its services with those of either licence A orB. "Bundling" refers to the packaging of pay TV services together and sellingthem as a whole or bundle i.e. one must subscribe to all the services ornothing. The TPC denied the application in its current form, but made it clearthat this would not prejudice any subsequent ABC application to bundle itsservices. The TPC considered the ABC application to be premature becausethe holders of the A and B licences had not yet announced any firmoperational plans. The Managing Director of the ABC, David Hill, has sincestated that the ABC· will proceed with negotiations with the other satelliteservices, but will ensure that bundling arrangements comply with the TPCrequirements.

The ABC received a start-up grant of $12.5m for 1993-94 but hereafter it isexpected to finance the service on a commercial basis, with no further calls onBudget funding. The ABC is not permitted to redirect free-to-air resources toits pay TV operation. It is seeking financial partnerships with investors tomeet the capitalisation costs (an estimated $50m) of the service. The ABC hasestablished a subsidiary, Ambridge Pty Ltd, to hold the satellite licence. Whilethe ABC may seek outside equity participation in Ambridge, it is required bythe Government to retain a majority holding. It has recently been reported(Australian, 22 October 1994) that the newspaper publisher John FairfaxHoldings 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/documentariesduring the night

Telecom and Pay TV

The PMT Consortium

In April 1993 Telecom joined with News Corporation and the threecortnnercial television networks to bid for a satellite pay TV licence. ThePMT consortium failed to gain a licence. In February 1994 the consortiumissued two Federal Court actions seeking the cancellation of the satellitelicences to Australis and Continental Century. The action was generallyinterpreted as a delaying tactic intended to disrupt Australis' $270m capitalraising. The action was abandoned' in April after the Minister forCommunications sought an explanation from Telecom.

The PMT consortium did not participate in the MDS auctions but did announcein 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, FrankBlount, had doubts about the future of the consortium. Mr Blount is reportedto have said that "the real issue is in content, not in infrastructure" and thatTelecom had to avoid being marginalised as a carrier. He also stated that ifPMT disbanded then Telecom would have to find a new source of expertise inthe area of content (Sydney Morning Herald, 31 August 1994). On 9September 1994 it was announced that the PMT consortium would disband.

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

Cable Services

Controversy has occurred over the allocation of channels on Telecom's cablerollout. Telecom initially sought agreements with operators who wished toobtain channels on the network and in May 1994 Cable Television Services PtyLtd (CTS) acquired twenty channels. When it became apparent that therewould be insufficient channels to meet the demand, Telecom suspendednegotiations with other parties to determine the best allocation procedure.According to newspaper reports (The Australian, 16 June 1994) Telecominformed other players that legal action would be counter-productive becausethere was nothing in either the Telecommunications Act or the BroadcastingServices 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 basiccarriage service (as defined by the Telecommunications Act) although it hasbeen argued that it is not legally obliged to do so. Such services must be madeavailable commercially with a published tariff regime approved by the industryregulator, Austel. On 16 August 1994 Telecom announced that Austel hadapproved a tariff regime for its cable network. Pay TV subscribers would paya connection charge of $275 and a $2 per week service fee (in addition to themonthly subscription to the pay TV provider). Service providers on thenetwork 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 wouldalso pay a sliding connection fee and weekly fees. Telecom stated that thesecharges 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 andoperate the cable TV network. It was recently claimed that work is 20 percent ahead of schedule, which is to make the network available to 1.1 millionhomes by December 1996.

Telecom Australia and OTC were formally merged to form the Australian and OverseasTelecommunications Corporation (AOTC) in February 1992, which continued to tradedomestically as Telecom. AOTC was renamed Telstra in April 1993.

Pay Television 11

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

CTS, the only pay TV operator known to have channels on the Telecomnetwork, is believed to have cash flow problems after failing with a $42mcapital raising. It has been reported (Australian Financial Review, 21 October1994) that Telecom has reached a "preliminary agreement" to acquireundisclosed assets from the CTS group. CTS had claimed· to have signed adeal with Turner Broadcasting to carry CNN International (a 24 hours newsservice), a cartoon channel, and a classic movies cha:mel from the MGMLibrary. It had also announced that subscribers would pay about $250-400 forconnection plus a weekly fee of around $10. The service was planned to startin July 1994, but was subsequently re-scheduled to begin by the end of theyear.

Pay TV and Competition Policy

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

Under Section 97 of the' Broadcasting Services Act 1992, the ABA mustrequest the Trade Practices Commission to report on whether the allocation ofa pay TV licence would have the effect of "substantially lessening competitionin a market".. If the TPC reports that the awarding of the licence would havethis effect, then the ABA is not permitted to allocate the licence to theapplicant. 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 beenrequired to deal with a number of complex questions. In particular, it has nothad 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 ofthe Trade Practic\:s Act defines a market to include "a market for those goodsand 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 of analysis is applied to pay TV, then it becomes apparent thatthere 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 notyet provided a comprehensive response to this question. In one of its reportson the satellite pay TV licences it concluded that the relevant service deliverymarket included all broadcast pay TV, regardless of mode of transmission, andpossibly free-to-air TV and video rental. However, it stated that this was nota final conclusion.2 Of course, the service delivery market was but one of arange of markets concerned with pay TV: others were the markets forprogramming, transmission services, conditional access and billing systems,advertising and reception equipment.

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

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

3 Professor A. Fels, "How the Trade Practices Commission Will View Developments inBroadcasting", 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 otherin market terms. The video market is essentially concerned with movies; itdoes not offer the same range of programs (current affairs, live sport) that areavailable on free-to-air and pay TV. It could also be argued that free-to-airand pay TV are different markets: the former sells audiences to advertjserswhile the latter sells program services to subscribers. If such a determinationwas made, then it would allow a much greater role for the existing commercialnetworks 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 carrierswished to avoid common carrier status for their pay TV networks, as thiswould 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 theTrade Practices Act could be used to deal with any dangers to competitionposed by the vertical integration of content and carriage. According toProfessor Fels, the TPC has tended to be less C(inCerneJ about verticalintegration than horizontal mergers. However, such vertical links would be ofconcern if there was a concentrated structure enabling a company to denyessential facilities to downstream competitors. This could well be the situationin the first few years of pay TV, with some operators unable to obtain a placeon the two major cable networks. Alternatively, it could be argued that thereis nothing to prevent a competitor constructing its own cable network. Again,the recommendations of the TPC may well hinge on its definition of the payTV market and whether the various means of delivery are substitutable.

The question of common, or general, carrier status for the Telecom and Optusnetworks involves broader questions of policy. If the networks were to remainas simple pay TV carriers then there would be little justification in requiringthem to be common carriers. However, it is clear that the networks willeventually carry broadband services to the home: the "informationsuperhighway" linking together telecommunications, broadcasting and computerservices. Under the Telecommunications Act 1991 Telecom and Optus arerequired to accept the obligations contained in Section 234 (service providers'rights of connection with carriers) and Section 184 (non-discriminatorytreatment of service providers by carriers) with regard to general carriernetworks.

On ·the 24 November 1994 the Minister for Communication and the Artsannounced that he had received a report by Austel on the network proposals

. by Telecom and Optus. The report separated the potential services providedby the networks into three streams: telephony, broadband and pay TV. Fortelephony, Austel was satisfied that the proposals were consistent withGovernment policy and would not adversely impact on competition. Forbroadband services, Austel recommended that Optus and Telecom should bebound by the general carrier obligations for open access. The Government hasaccepted this recommendation.

14 Pay Television

For pay TV, Austel considered that the carriers should be bound by the generalcarrier obligations except where they had limited network capacity and that thisexemption should only be for the initial phase of pay TV services. TheGovernment has deCided that the general carrier obligations will not apply topay TV services on the cable networks at least until I July 1997. Thisexception will be reviewed in the lead-up to 1997 and if there is appropriatecompetition in the delivery of cable pay TV services it will be extended to1999. After that time there will be open access on the networks. The carrierswill continue to be subject to the existing provisions of the Trade Practices Actwith regard to providing access for pay TV services.

Optus' chief executive, Bob Mansfield, has stated that it will not go ahead withits cable network under the conditions announced by the Minister. Instead, itwould seek to become a program provider to the Telecom network. At thisstage it is unclear if the Optus move is the result of the decision on openaccess for broadband services, or the conditions relating to pay TV.

Content Regulation

Australian Content

Under Section 102 of the Broadcasting Services Act 1992, each subscriptiontelevision broadcasting licence is subject to the condition that, if the licenseeprovides 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'sprogram expenditure for that year in relation to that service is spent on newAustralian drama programs.

Section 6(1) provides a number of definitions of "Australian drama program".These include a drama program made substantially in Australia with significantAustralian content; programs which have certificates under Division 10BA of

,the Income Tax Assessment Act 1936, and programs that qualify as Australiancontent for free-to-air television.

On 19 May 1994 the ABA issued Guidelines for the implementation ofthe payTV new Australian drama licence condition. These define program rights andexpenditure, as well as foreshadowing an amendment to 'the BroadcastingServices Act 1992, which will tighten the definition of Australian dramaprogram so that the conditions apply to all drama programs (not just movies)and to all pay TV services. The Minister informed the ABA of these proposedamendments in October 1993, but they have not yet been presented toParliament.

There have been conflicting views on the possible impact of the local contentrequirement on the Australian production industry. According to a recentreport in the Sydney Morning Herald (28 October 1994), there is somescepticism 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 productionexpenditure modest. This view has received some confirmation from the factthat pay TV operators have not yet signed any deals with the local majorproduction houses. On the other hand, Albert Hadid (who was behind theUCOM satellite licence bids and later sold out to Australis), has announcedthat he intends to start a film and television production company to capitaliseon the likely demand for a new product. Martin Hannes, the executive directorofContinental Cablevision, has stated that pay TV local production expenditurewill eventually be comparable to that of the broadcast networks..

If the level of total drama program expenditure remains low, it would alwaysbe possible to increase the required percentage of local content expenditureabove ten per cent. The.Senate Select Committee of 1992 recommendedfifteen per cent; more recently, a figure of twenty per cent has been suggested.

Siphoning

"Siphoning" refers to the acquisition of programs by pay TV operators thatwould otherwise have been shown on free-to-air television. Section 115 of theBroadcasting Services Act 1992 enables the Minister to list an event or eventswhich should remain available to the general public and to remove an eventfrom the list if he is satisfied that free-to-air broadcasters had the opportunityto acquire the television rights at a fair price, but declined to do so. It is acondition ofpay TV licences that licensees will not acquire broadcasting rightsto an event that has been listed under Section 115. This condition does notapply to narrowcasting licences. Notices under Section 115 must be laidbefore both Houses of Parliament and are disallowable instruments.

In February 1994 the Minister for Communications and the Arts asked theABA to conduct an investigation into which events should be listed underSection 115 of the Act. The ABA reported in May, providing four options forthe Minister's consideration:

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

• a "short" list;

• a list of major events; and

• a "watch list" and an activating mechanism.

The Minister announced the list of Section 115 events on 31 May 1994. Thesecomprised (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 ifthey were not being covered in an appropriate way. Both lists are attached tothis 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 notlisted because they are not subject to exclusive coverage rights.

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

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

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

According to the Sydney Morning Herald (11 November 1994), AustralisMedia has challenged the anti-siphoning list by asking the Minister forCommunications and the Arts to de-list the Australian-Pakistan cricket testseries that was recently completed in Pakistan. The rights to this series arebelieved to be held by Prime International and were not taken up by free-to-airbroadcasters. Australis is apparently interested in acquiring the rights so thatit can show highlights on its pay TV service next year. Any Ministerialdetermination will be of great interest as it may shed light upon the definitionsand procedures used under Section 115, especially, on the question of whatconstitutes a "real opportunity to acquire, on a fair commercial basis, the rightto televise the event". In particular, will the test of a fair price take intoaccount the increase in demand for the rights to televise sport caused by theintroduction of pay TV, or will it be determined by simple reference to pastpractice? The latter approach would amount to the imposition of a priceceiling on sporting rights for the benefit of the free-to-air broadcasters.

Recent reports of a rugby "superIeague" competition organised by News Corpfor pay TV have resulted in speculation that the anti-siphoning list may becircumvented. However, the Minister has stated that in his view the best rugbyleague (in whatever competition) should remain on free-to-air TV and that thisprinciple should apply to all major sporting events on the list (House ofRepresentatives, Questions without Notice, 17 November 1994). However,another possible problem with the administration of the list concerns thequestion of timing. The Act states that licensees "will not acquire the right tobroadcast 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 preventthem keeping the rights and broadcasting the event.

Pay Television 17

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

Program Standards

The Act also requires pay-TV operators to develop, in consultation with theABA, 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 before1 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). Withcompression techniques, simultaneous transmission ofmany services at a fasterrate becomes possible. Broadband services are those which allow thecombination and transmission of such "multimedia" packages (that is, thoseinvolving the convnergence of text, data, graphics, sound and vision).

In December 1993 the Government established the Broadband Services ExpertGroup (BSEG) to report on the technical, economic and commercialpreconditions for the delivery of broadband services throughout Australia. ItsInterim Report Networking Australia's Future, was presented in July. TheReport noted that the Australian telecommunications network was relativelyadvanced, with 1.8 million kilometres of optical fibre and 57 per cent of linesdigital. However, while 50 per cent of homes are within 700m of optical fibre,the absence of a cable television industry means we lack the infrastructurelinking homes to the network. The BSEG Report notes that the absence of anexisting, 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 availablewill be pay TV. Telstra's chief executive, Frank Blount, has been quoted assaying: "I don't think pay TV is the killer application. It is the one that hasthe most ready market now of some size and therefore will help pay for theinfrastructure to enter the broad-band interactive multi-media markets of thefuture" (Sydney Morning Herald, 18 November 1994).

The BSEG report notes that Australia, unlike some other countries, does nothave regulations prohibiting telecommunication carriers from participating inthe delivery of video material. This could permit economies of scope, withtelephone and video sharing capital and operational costs. It is apparent thatboth Telstra and Optus are moving to capitalise on this situation. Telstra'sVisionstream network has already passed 50000 homes, with a rollout targetof Urn homes by December 1996 and 4m homes by 1999. The network hasa 64 channels of analogue bandwidth, but will be upgradeable throughdigitisation and switching. The network will consist of optical fibre cable tothe neighbourhood hubs, with coaxial linking the J,mbs to homes. Each hubwill serve about 1000 homes. It is Telstra's intention that optical fibre willexpand to the kerb within five years, with each line servicing 10-20 homes.This will enable the introduction of interactive services such as video ondemand. Visionstream's Managing Director, Bob de Boer, believes 80 per centof urban homes will be passed by the network by the end of the decade.

On 21 September 1994, Optus Communications announced its plans for abroadband services network that would pass half of Australia's 5.5m homes bythe end of 1998. The cable would be mostly on aerial powerlines, and wouldprovide telephony, pay TV, FM radio and interactive multimedia services. Theconsortium developing the network, to be called Optus Vision, consists of theSeven Network (15 per cent), Nine Network (20 per cent), ContinentalCablevision Inc. (30 per cent) and Optus itself (35 per cent). Optus hasindicated 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 thenetwork itself until digitisation enlarges the number of channels available. Itconsiders that only this way with sufficient revenue be generated to justify theinvestment in the network. On the 24 November 1994 the consortiumannounced that it would not proceed with its cable network under theconditions announced by the Minister for Communications and the Arts.However, it would seem unlikely that Optus will withdraw from cableinfrastructure development indefinitely or it would soon be marginalised in the

. Australian market for telecommunications and braodband services. Particularlyas the deregulation of telecommunications (including local call networks) in1997 could also lead to cabling by other operators. For example, the pay TVlicensee Rowcom Holdings,· in partnership with US operator Cox CableCommunications, has announced plans for a $500m network in south-easternQueensland.

Some concern has been expressed over the possibility ofduplication of servicesby cable operators. For example, there appear to be three separate cablenetworks planned for south-east Queensland before many other regions obtaina single service. It had been reported (Sydney Morning Herald, 22 August1994) that the Minister for Communications, Mr Lee, had warned cableoperators that he would take action if they duplicated networks in high-incomeareas before cabling up lower income areas. However, Mr Lee has also statedthat 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 thatthis raises the question: will the efficiency gains of competition outweigh thecosts of duplication? The additional cost of duplicating coaxiaVfibre opticcable 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 increasesin telephony and other communication charges, which would have a flow-oneffect throughout the whole economy. While the case for the long termeconomic benefits of the "information superhighway" may be persuasive, thearguments for a "dual superhighway" could be seen as less convincing. Theopportunity cost of capital expenditure on this scale (if misdirected), in a timeof keen competition for infrastructure investment, would be another factor forconsideration.

The Minister dealt with some of these questions on the 24 November 1994when he outlined the Government's decisions on the·status of the Telecom andOptus cable networks. He drew attention to the benefits that have occurredsince the introduction of competition and the duplication of infrastructure intelecommunications. He concluded that duplication had cut prices, increasedinvestment, improved customer service and given customers a wider choice ofproducts and services. He again explicitly rejected splitting the country into

20 Pay Television

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

The equity of a universal fibre-optic cable rollout has also been questioned.If the massive cost of this development is to be spread over all customers, thenin effect it becomes a subsidised service for the "information rich" affluenthouseholds 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 cableservice for pay TV and network carriage still have to bear the high cost offibre-optic when they may only need basic coaxial cable.

According to estimates prepared by the. Bureau of Transport andCommunications Economics the costs of a hybrid fibre-optic coaxial cablerollout 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 Australianhouseholds by the year 2005 would be in excess of $40 billion. Such a servicewould be "limited" in that it would not have the full capacity of the"information superhighway" - a broadband network of fibre-optic cable to eachhousehold. 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 isestimated that of the $40 billion cost referred to above, almost sixty pet centwould be needed to service rural and remote areas, which represent about thirtyper cent of the total number or households. It would thus seem likely that onlysizeable rural communities and hardly any remote households would beprovided with cable unless the rollout were heavily subsidised, either by urbancustomers or directly by Govermnent.

Most of the discussion and excitement surrounding broadband services hascentred on technical and hardware developments. Yet, as the BSEG Reportnoted, "the content of communication services is a fundamentally moreimportant issue than the means of delivering them".4 It is content, rather thanhardware, that will determine the financial success of broadband services,including pay TV. There is little or no evidence of significant consumerdemand for some of the proposed services - video-on-demand, home shoppingand banking, interactive TV and video games. In the US initial excitementover the "information superhighway" together with the merger of

4 NetworkingAustralia's Future. The Interim Report of the Broadband Services Expert Group(July 1994): 12.

Pay Television 21

telecommunication and entertainment corporations, has dimmed appreciablywith the failure of market tests of interactive television and technicaldifficulties with multi-media products. However, as one commentator hasnoted:

If the fir;t offerings of the grand information highway fan short' of inspirational, takecomfort that most media need years - sometimes decades - to begin fulfilling theirpotential. And the telecommunications industries that are delivering the bevy of newservices 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 thoseoperators with access to both capital and programming will survive. This willgenerally take the form of an alliance with either US cable companies ortelecommunication 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, toestablish the Optus Vision network. Optus is believed to have

',programming deals with ESPN Inc (a major sports program service in theiUS), Warner Bros:, Disney and MGM as well as having access to the

resources of the two television networks. The consortium has recentlystated that it will not proceed with its cable network but would insteadbecome a program provider to the Telecom cable 'system.

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

• Australis Media: has satellite and MDS licences which will make itavailable 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, andis 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 topboxes on order from US company, General Instruments, and has signed acontract with IBM Australia to install and manage its subscriber system.

•

•

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

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

Commercial Prospects

The plethora of planned services, together with regular announcements ofpostponements, will not create an environment conducive to commercialsuccess 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 betweensatellite, MDS and cable equipment. These difficulties may recede with thespread of cable and the development of franchises and the rationalisation ofbilling systems, although the process will be a slow one.

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

In the UK the two satellite operators were forced to merge and initial losseswere high. It was not until BSkyB acquired exclusive rights to live footballthat the system began to break even. Such exclusive deals will not bepermitted in Australia. Heavy discounting and give-aways of satellite receptionequipment was also a feature of the UK experience. After four years, 12.4 percent ofUK television households owned satellite receivers and a further 2.8 percent subscribed to cable. In New Zealand the take up of pay TV services has

Pay Television 23

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

If 15 per cent of Australian households were to subscribe to pay TV at a rateof $10 per week, then the annual expenditure would be around $460m. As apoint of comparison, expenditure in 1993-94 on other cultural goods andservices 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 $2036mwhile those of the public broadcasters (ABC and SBS) were $754m. In 1991­92 ;radio station advertising revenues were $425m.

:~~:'

Thllre .is no evidence to suggest that the introduction of new recreationalservices leads to a real increase in household expenditure on such services. Infact, the proportion of discretionary household income devoted tocommunications and recreation services and equipment has varied onlymarginally over time. However, significant falls in prices have allowedhouseholds to purchase an increasing number of these items within a givenlevel of spending. This suggests that pay TV operators will have to competewith existing services for revenue, rather than attract new recreational. .

expenditure. In this competition they will face not only established servicessuch as free-to-air TV, home video and cinema, but also emerging multi-mediaand 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 and Cultural PolicyImplications (1994): 4-5.

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

24 Pay Television

In the long term, cable would appear to have an advantage over MDS andsatellite 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 majorpopulation 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 currentarrangements they do have a number of options. The satellite service could beupgraded to provide a greater number of channels and improved reception.Another option would be to obtain channels on the cable networks. AustralisMedia's exclusive programming deal with three of the Hollywood studioswould put it in a good position to negotiate access with Telecom and Optus.

The contents of the proposed services in Australia remain a problem. Themost popular programs on pay TV are sports and movies. Anti-siphoningregulations have severely restricted sport programming and the Hollywoodproduction houses will be able to exploit the competition between theAustralian providers to extract high prices for their programs. With a smallsubscriber 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 AustralianVideo Retailers Association has recently announced a $I.5m promotioncampaign.

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

Pay Television 25

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

Policy Issues

While the commercial prospects for pay TV may remain unclear for someyears, there are a number of policy issues that may need to be addressed in themore immediate future. In summary, these are:

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

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

• the balance between competitive efficiency and the C0sts of duplicatingcable networks;

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

• the degree of participation and collaboration by the free-to-air networksthat 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 foreignownership to prevent de facto control being exercised by overseasinterests. The current ABA inquiry into the control of the Ten Networkmay have implications for the ownership structures for Australis andContinental 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 TelevisionBroadcasting Services (March 1993).

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

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

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

Bureau of Transport and Communications Economics. CommunicationsFutures 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 PolicyImplications (1994).

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

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

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

Independent Inquiry into the Circumstances Surrounding the Non-requirementofa Deposit for Satellite Pay-TV Licences, and Related Matters. Report byProfessor Dennis Pearce to the Secretary of the Department of Transport andCommunications (May 1993).

Inquiry into CertainAspects ofthe MDS Tendering Process 1992-93. Reportby Professor Dennis Pearce to the Secretary of the Department of Transportand 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 of the Broadband ServicesExpert Group (July 1994).

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

Notification by the Australian Broadcasting Authority to UCOM Pay-TV PtyLtd in Relation to the Allocation of Satellite Subscription TeievisionBroadcasting (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-SatelliteSubscription Television Broadcasting Licences for the Delivery of MultipleSubscription Television Broadcasting Services via MDS t1 Star Vision PtyLimited (Canberra,S September 1994).

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

Report by the Trade Practices Commission on the Allocation ofSubscriptionTelevision Broadcasting Licence B to Hi Vision Limited (Canberra, 16 June1993).

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

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

Trade Practices Commission, Draft Detennination. Applications forAuthorisation by the Australian Broadcasting Corporation in relation toproposed arrangements for the supply of satellite subscription televisionbroadcasting 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 NoRestrictions(cross media)

Foreign 20% individual 20% individual No limit No limitOwnership 35% total 35% totalLimits

Licensing ABA allocates a service licence ABA allocates a service Class licence Class licenceMechanism licence

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

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

TPC ABA must request TPC report re: ABA must request TPC report No Noinvolvement s.50 & 5.88 Trade Practices Act re: s.50 and s.88 Trade

before allocating licence Practices Act before allocatinglicence

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

apply

Special 1. 10% of program expenditure 10% of program expenditure No NoLicence on Aust. drama on Aust. dramaConditions 2. No advertising until July '97 No advertising until July '97(part 7 3. Rental availability of reception Rental availability of reception NIA NIABroadcasting equipment equipmentServices Act) 4. NIA Termination of rental

agreement with I month'snotice NIA NIA

5. Adequately involve Aust NIAindustry (Lic A, B & C only)

6. Accessibility of domestic NIA NIAreception equipment NIA

7. Fair price access to subscribermanagement system NIA NIA NIA

8a. Transmission system inaccordance with digital NIA NfAtransmission standard NIA

8b. Lic A & B will commencewithin 6 months of notifying NIA NIAdigital transmission system NIAstandard

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 inclusiveAFL Final SeriesAFL State of OriginMatches of the AFL premiership competition

Australian Rugby League 1994 to 2004 inclusiveRugby League Final SeriesRugby League State of OriginMatches from the premiership competitionInternational "test" matches involving the senior Australian representativeteam, played in Australia or overseas

Rugby Union 1994 to 2004 inclusiveInternational "test" matches involving the senior Australian representativeteam, played in Australia or overseasWorld CupHong Kong Sevens

Australian Cricket Board 1994 to 2004 inclusiveTest Cricket involving the senior Australian representative team, played inAustralia or overseasWorld Series one day cricketWorld Cup one day cricket.One day internationals involving the senior Australian representative team,played in Australia or overseas

Soccer 1994 to 2004 inclusiveNSL finalsEnglish FA Cup finalWorld Cup

Tennis 1994 to 2004 inclusiveAustralian OpenWimbledon OpenFrench OpenUs OpenMens Hardcourt Championship - AdelaideWomens Hardcourt Championship - BrisbaneNSW OpenDavis Cup when an Australian representative team is involved

Netball 1994 to 2004 inclusiveInternational matches involving the senior Australian representative team,played in Australia or overseas

Basketball 1994 to 2004 inclusiveNBL Final Series

Golf 1994 to 2004 inclusiveAustralian MastersAustralian OpenUS MastersUS OpenUS PGABritish Open

Motor Sport 1994 to 2004 inclusiveFormula One Grands Prix500cc Motorcycle Grands PrixAustralian Touring Car Championship (Bathurst 1000)Australian Indy Car Race

Watch List

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

Each event of the Winter Olympic Games, Nagano 1998, including the openingand closing ceremonies.

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

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

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

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

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