Wednesday, September 03, 2014

More on Kim Williams

I was somewhat scathing of Kim Williams' comments on the NBN that had been covered in an extract of his book. Today's Communications Day has alerted me to the fact that Williams has been at it again - that is again demonstrating a bias for prejudice over facts. But this time his attention is over an issue he should know more about - Pay TV in Australia.

Unfortunately Grahame Lynch's comment is only a report of what Williams says - not an analysis. Having already dealt with the detail of his claims about the NBN, let me now explain what he gets wrong about Pay TV. (Though I must thank Grahame for alerting me to the book's availability - my bookseller had advised 4 Sept as release date - but I bought it for Kindle just now).

Williams principal argument is that the excessive regulation of Pay TV resulted in the accumulation of significant losses. His conclusion is:

Some $10 billion was written off as a result of flawed policy and regulation. Bad policy is always hugely expensive in so many ways— not the least of which is, of course, investment confidence.

This is entirely a delusion. The bulk of that write off was a result of a failure to regulate, not the reverse.

At his book launch, according to Crikey, Williams noted that anyone who knew him also knew of his affection for the aphorisms of Mark Twain, in particular that "if you tell the truth, you don't have to remember anything."  Someone should have suggested to Williams that if he couldn't remember things he should look them up, not make them up. 

Williams starts his tale in the early 1990s saying:

Keating and I engaged in policy debate over the reform of the Broadcasting Services Act when he became prime minister (sic). At that stage I was at the ABC to set up its participation in the new subscription delivery regime, which was contemplated under the new 'renovated' Broadcasting Services Act...The reform of the act was a very messy affair with the worst example of the Bismark dictum on the making of laws. (Note: According to Wikiquote "dictum" is misattributed - its earliest known variant was "Laws, like sausages, cease to inspire respect in proportion as we know how they are made.")

It is a pity that Williams didn't start a little earlier with his policy analysis to reveal why in the re-write of the BSA there was any consideration regarding Pay (or subscription to use the industry's preferred descriptor) TV in the Act. For that the best source is Mark Westfield's The Gatekeepers (having been very close to much of this I can say the book is mostly accurate - except when it refers to Telstra's strategic partnership agreements as SPARs (p.237) - having been a co-designer of them I can promise you they were SPAs).

In 1980 then Minister Tony Staley commissioned the Australian Broadcasting Tribunal to report on Pay TV. It reported in 1982 with a recommendation that it be introduced quickly. Neither Staley, nor his successor Neil Brown (of ABC/SBS Board appointment fame) managed to act on the report. The incoming Labor Government was subject to intense lobbying, especially by the lobbyists for Packer, with (according to Westfield) particular effect on Victorian Ministers with the line"How would Victorians take it if they had to pay to see their football on television?"

The little movement that occurred was the advent of restricted distribution services to pubs and clubs - mostly distributing live sport, but especially racing.

This all changed on 2 October 1991 when Kim Beazley met with Richard Li (son of Li Ka-Shing controlling shareholder of Hutchison Whampoa) and and the MD of group Sion Murray. Beazley was on a mission to find potential bidders for the second telecommunications licence in Australia, which included the obligation to buy the Government owned satellite operator AUSSAT. Murray told Beazley "Unless you allow the satellite to be the exclusive carrier for pay television in Australia, we will not bid."

The rival bidder - Optus - had no interest in using the satellites for pay television - but without Hutchison (see note).  (the above is from Westfield Pp 23-25 & 57-60)

Economist Ross Jones provided a useful summary of the policy issues in the Summer 1991 issue of the CIS magazine Policy. Jones was concerned about the granting of a Pay TV monopoly of eight (to be expanded to ten) channels on the AUSSAT satellite platform. He did, however, observe:

The observation about the logic of the deployment of more than one cable system should be noted. The experience Jones talks about in the UK was eventually resolved by the merger of the satellite operators.

But to return to the point, the decision to open up the pay TV market at all was a consequence of another pro-competition decision, in telecommunications. And the monopoly proposed was only in the platform, not the providers.

The idea of satellite only Pay TV was already being challenged by the development of narrow-cast distribution systems using MDS (the 2.3 GHz spectrum now being used in regional areas by NBN Co and in metro by Optus for TD-LTE).

Williams refers in passing in his book to the ongoing policy discussions, the lobbying by television networks concerned that they would be closed out of pay and the lobbying by the ABC to have the two channel allocation made to them. Westfield covers this in detail - but suffice to say on Nine's Sunday program on 31 May 1992 PM Keating announced that there would be no platform restriction on subscription broadcasting licences.

This was the model that was legislated in the Broadcasting Services Act. Williams asserts that there was some "law of unintended consequences" and that once passed the Government was somehow surprised by the use of other technologies. It was not, it had realised the error of accepting Richard Li's proposal.

Williams asserts that the satellite services were used in "very light-touch, low levels of initial rollout." He attributes this to the decision to mandate a digital service. That wasn't the key driver - the key factor was marketing and the intersection of delivery platforms with the race for content.

However, the plans to auction the remaining MDS licences prior to the satellite services being launched was eventually de-railed - by the Prime Minister intervening again. In January 1993 the MDS auction was deferred. (Westfield Pp 131-137. This includes subsequent Australia Chairman Rod Price's infamous spray a Alan Fels about the latter's fate post the supposedly unwinnable - for Labor - election. This seems to be an unjustified assertion that subsequent ACCC decisions were payback).

When the digital satellite licences were allocated it was by auction - not the beauty parade that Jones complained of. It was, however, a very flawed auction process. The highest bidder was informed they had won and then given thirty days to decide whether they wanted it or not. A few players realised this and used the opportunity to place multiple bids.

One of the unsuccessful bidders was a consortium of Packer, Murdoch and Telstra (called PMT). The Telstra strategy in this venture was to utilise satellite as a market-finder; areas that had the highest take-up would be the first to get an HFC cable. Telstra had already deployed a test system in Paddington - a facility to which every media participant toured at some stage.

The (eventual) successful bidder for both was an entity called UCOM headed by Albert Hadid. Hadid on-sold the B licence to Australis and the A licence to a consortium headed by US pay operator Continental Century. The ABC licence - the C licence - was never taken up (I think - Williams directs us to Pamela Williams' Killing Fairfax for this story...see Note 2).

When the MDS licence auction got underway in 1994 Australis knew it needed to win the metropolitan licences, but wanted partners who would be franchises of the actual service (marketed as Galaxy) in regional areas. A UIH subsidiary the called CETV won most of the rest of the country and the Continental Century partnership bought trading as East Coast Television (whose MD Patrick Delaney now heads Fox Sports) held a pocket on the coast of NSW and Tasmania. CETV later changed its name to Austar (when I was working with them), and much later absorbed East Coast Television.

Ultimately the four channels that made up the A licence were provided by a group - XYZ - part owned by Austar. The other four channels that made up the B licence included Australis' biggest coup - a movie channel "Showtime" (of which more in a moment).

Apart from the delays that occurred in settling on the digital standard, the operators preference was to utilise their MDS licences first. The main reason was that the best sales channel was door-knocking, and it was easiest and most profitable to door-knock the areas where there was MDS reception.

It was at this point that the cable plays began. Optus' interest in HFC was entirely motivated by its telephony business - after all it was the firm that was going to make money from actual selling the satellite TV service. The telephony interest was a way to by-pass the very high rates Telstra was charging for what was then called "PSTN Ingress and Egress" (from which the PIE model used in regulatory proceedings got its name - this is now PSTNOA and PSTNTA). Telstra was charging an average of about 4.5 cents per minute.

Telstra ignored the threats. To make the threats real Optus partnered with Continental Cablevision to build Optus Vision. Despite the fact that Packer had been part of PMT and that Telstra and News each owned 15% of Seven, both Nine and Seven joined the Optus Vision consortium.

At this point Telstra's Frank Blount approached Optus offering to dramatically reduce the access prices - but Continental was here for cable TV and told Optus they couldn't negotiate. The launch of telephony didn't go smoothly for Optus, but once it was stable OptusVision still charged Optus the Telstra rate for access, claiming it was the market rate).

Telstra was now confronted with a scenario that was going to seriously erode value; but their own analysis determined that the loss was actually less if they also built an HFC network. Having done so they were confronted with the second issue of content. While some in Telstra favoured the pursuit of a deal with another US Pay TV operator, a small group in Telstra (including me) favoured a deal with News.

News was, however, also considering participating in OptusVision. The PMT venture was formally dissolved on 9 September 1994. At a meeting in LA over the weekend of 8-9 October 1994 Kerry Packer's CFO Nick Falloon (later Chair of TEN) met with Rupert Murdoch, Sam Chisholm and Bruce McWilliam (now at Seven). After the latter two left Falloon convinced Murdoch to join OptusVision - according to Westfield (P.277)  "he pressed the point that it was essential if the business was to be profitable that Australia have one dominant provider."

Murdoch's decision was relayed to Ken Cowley who relayed it to Telstra's Frank Blount. However a chance encounter that night and a bottle of red wine saw News and Telstra resurrect the deal. Once again according to Westfield (P.278) the two selling points for Murdoch was that in the JV with Telstra News would not need to provide any cash to build the cable network, and that PM Keating favoured the deal.

While News had prevaricated OptusVision and Australis between them had secured the rights to all the Hollywood movie content after frenetic and crazy competition. The Hollywood studios were confronted with two players each of whom claimed to be servicing the whole country. They had a very simple strategy for ensuring they weren't risking choosing a loser rather than a winner. The contracts stipulated a price per subscriber, but they also specified a minimum number of subscribers each year that translated into the forecast for the entire pay TV market in Australia.

Ultimately Foxtel acquired its movie content from Australis, but paying much more than Australis was paying. This movie content agreement was Australis biggest asset. On the flip side though, the franchise agreements Australis struck with CETV and East Coast Television in the end did not even cover the content cost Australis bore.

So now the stage was set. Australia and its franchisees settled into a partnership with Foxtel, and the OptusVision venture only had cable distribution (though it actually earned revenue from the Australis use of its satellites).

So a policy decision to introduce Pay TV to Australia, triggered by the opening up of the telecommunications market to competition, resulted in all three platforms of MDS, satellite and cable being used with essentially two competing content plays and two competing cables.

Despite latterly being a passionate advocate for competition, Williams in his book describes this as:

The law of unintended consequences, however, asserted itself with ferocious force, because the new approach separated the broadcast licences from delivery technologies and because those in the cosseted world of Canberra had not contemplated that other technologies and frequencies might be used for delivering subscription services. These, as an example, included cable -the intense fights conducted by Telstra and Optus have been written about extensively-and MDS...

Meanwhile the law of unintended consequences asserted itself with a vengeance (sic - this is only a few pages after the preceding text) after the new services were promoted across Australia....The result saw consumers being utterly confused and churn rates (the rate of subscriber rollover) between the various players in excess of 100 per cent per annum - again an attractive world first! It was real wild-west territory and horribly wasteful.

Williams tries to sheet the blame here entirely to the decision to mandate that the satellite service be digital. But the more rapid deployment of satellite would have had negligible effect on the cable competition. Satellite was inherently limited - especially if an analogue service was chosen - in the number of channels available.

But Williams is right - the real bloodbath was yet to come. This was the battle for sports rights. The "anti-siphoning" regime introduced with Pay TV was always an essential political element - the people who pay their taxes and vote had no interest in seeing the quantity of quality sport broadcast reduced. But it did not create the competition for sports rights.

Williams asserts:

Bad regulation demands creative responses so part of the solution was found in the financially destructive, in many ways, forced launch of the Super League. The Super Rugby also followed. Both were invented contests and therefore were able to be shown in their entirety because they were not on the anti-siphoning list. It was outrageous or predictable, depending on your perspective.

This is simple delusion. Seven and Nine as the free to air rights holders of the AFL and NRL respectively partnered with OptusVision to provide both sports on Pay TV. The AFL product was a particularly strong driver of subscriptions because it had a wider national appeal than its free to air coverage. It wasn't the anti-siphoning regime that was the issue, it was the relationship between the free to air stations and one cable operator.

Wile Super League was an invented competition, News did all it could to replicate Packer's 70s cricket coup of so bowdlerising the League that the alternative product was worthless. In this they failed. They had however sufficiently downgraded the product to the point where the NRL and Packer needed to achieve a reconciliation.

Williams concludes:

I was to clean up the leftover commercial consequences for Optus, Telstra and FOXTEL with a deal in 2002 that saw FOXTEL contracted to provideits services to Optus and FOXTEL become the main brand name synonymous with the subscription TV category in Australia. At that stage the accumulated cost between Foxte's and Optus TV's establishment costs and the separate overlapping cable networks that supported delivery of their services exceeded another $7 billion in write-downs.

Actually, at the point Williams was brought in Optus had simply been defeated. Westfield's book ends at the point where Autralis died - its assets were carved up between Foxtel, Optus and Austar. But more had happened by 2002. OptusVision had been blown apart by first an increase in Nine's stake which contravened the shareholders agreement, and then litigation by Seven over this. Optus cable business was primarily focussed on broadband and telephony.

When Foxtel (and Telstra) made the decision to digitise their service and greatly expand channel numbers Optus was confronted with the choice to do the same. History had shown that such destructive behaviour was possible again...and the trade-off was the content sharing deal.

Yes the Pay TV era was incredibly destructive - but was it caused by a layer of prescriptive regulation or the reverse, an excessive belief in the viability of infrastructure based competition? Were the firms investing irrational or is the tendency of all firms to over invest in times of change systemic? (The latter case is also supported by the free TV story as the three national networks created by Skase, Bond and Lowy failed).

I will not even gratify with a refutation Williams absurd proposition that Senator Conroy as Minister "never had any intention of delivering on his word" in relation to anti-siphoning. I can only assume that one of the reasons for Williams eventual dismissal by News was his inability to negotiate any outcomes in the regulatory space at all.

In Pay TV, as it does in telephony, Williams' book should not be relied upon by anyone seeking to understand Australian communications policy.

Note: Hutchison was part of the Kaloori consortium. When I worked at Hutchison in 1998/99 there was a copy of the Kaloori bid document in the photocopy room. Unfortunately I never looked at it. My recollection (and I couldn't find a source) was that in the end Kaloori did not bid.

Note 2: The ABC joint ventured with Fairfax and US based Cox Communications to utilise the two satellite channels. The company Australian Information Media was formed and headed by Kim Williams. AIM needed to get access to a subscriber system, and for the satellite that meant Galaxy. AIM also negotiated with Foxtel and OptusVision. After Williams suddenly left the ABC/AIM to head Rupert Murdoch's Fox Studio business (note this is the sequence as reported in the Pamela Williams book that Kim Williams refers us to - Kim W's Wikipedia entry has it that he joined Fox Studios only after the deal failed, Foxtel and the AIM partners reached an agreement for the news channel that was agreed by then Foxtel CEO Mark Booth and Sam Chisholm. News of the deal reached the AFRs Mark Furness who wrote the story...which was how Rupert Murdoch heard of it and he instructed it be killed. It was Richard Freudenstein, Foxtel's legal adviser and now CEO, who had to advise the other parties the deal was off. Mark Furness was appointed Director of Corporate Affairs at Foxtel in 1997.  Kim Williams joined him there as DEO in 2001.
{Williams dates his move to Fox Studios as April 1995, the Furness article was 28 July 1995}
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