“Of course, there is more churn when you increase prices as we did late last year, but what we are absolutely not seeing is massive spin down to Kayo from premium subscribers,” Mr Thomson said.
“Kayo is in the earliest innings … that number has indeed been rising week after week in the two months since we’ve launched. We are on the cusp of the peaking sport selling season, which is Aussie Rules and rugby league.”
Kayo is charging users between $25 and $35 a month, depending on how many devices a user wants to use at one time. Traditionally Foxtel has made customers pay for an additional content package before being able to buy a sports package, making the price to access sport roughly between $40 and $50.
Foxtel hopes that by offering a cheaper price point it can boost its household penetration, which has been stuck at about 30 per cent in Australia for years.
However, Kayo risks luring existing Foxtel subscribers away from the more expensive option. It is also much easier to leave a streaming service, which charges month-to-month and doesn’t use lock-in contracts.
“The team in Australia are very focused on churn management, and we are investing a lot of money on data capability in order to effectively manage that churn going forward,” News Corp chief financial officer Susan Panuccio said.
“We really have seen very little spin off as a consequence of Kayo, but it is early days and we will continue to focus on that metrics as we move forward.”
Ms Panuccio said research done ahead of the launch of Kayo indicated there is a large segment of consumers who are open to paying for the service at the right price.
Morningstar analyst Brian Han believes Foxtel management had no choice but to go down the road of providing sport direct to consumers via streaming, even if the business suffers near-term earnings pressure.
“It’s encouraging they’re converting many of the trial users into paying customers. But, I think the result itself shows you why they are doing this and why they have to do this. Foxtel’s earnings base has declined quite substantially.”
Earnings, as reported by News Corp on Friday, were impacted by the merger of Foxtel and Fox Sports, which completed in the first half of calendar 2018.
On a pro-forma basis, earnings before interest, tax, depreciation and amortisation at News Corp’s subscription video services segment dropped 46 per cent to $US71 million ($100.1 million).
News Corp said this was related to lower revenue, increased costs for NRL and Cricket Australia’s broadcast rights, as well as high production costs for the newly launched Fox Cricket channel and marketing of Kayo.
Overall, News Corp delivered a 13 per cent increase in EBITDA to $US370 million, which reflected the consolidation of Foxtel’s result after its merger with Fox Sports.
For the six months ended December 31, EBITDA rose 26 per cent to $US728 million.
News Corp said lower print advertising revenue in the news and information services segment was offset by strong performances in digital real estate, including REA Group in Australia and Move in the US, as well as book publishing, including HarperCollins.
News and information services, which includes newspapers such as The Australian, The Wall Street Journal and The Times, fell 15 per cent in the second quarter to $US120 million. The result was up 10 per cent to $US236 million for the half.
Subscriber revenue edged up 1 per cent in the quarter, but advertising revenue slipped 5 per cent, when compared with the year-earlier period.
The WSJ grew its digital subscriber base to 1.71 million in the quarter, compared with 1.4 million the same time last year.
Combined circulation at News Corp’s Australian newspapers, including The Australian, The Daily Telegraph and the Herald Sun, jumped 18 per cent to 460,300 in the quarter from 389,600 subscribers in the year-earlier period.
Digital revenue within the news and information services division made up 32 per cent of revenue in the quarter.
The digital real estate service segment continued to grow, with EBITDA up 2 per cent in the quarter to $121 million. REA revenue grew 6 per cent in the quarter to $US189 million.
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