JOHN MENADUE. How Murdoch got a foothold in Foxtel. (Repost from 1 February 2014)

At the last election Rupert Murdoch showed how ruthlessly he plays the political game-a game that has delivered great commercial benefits for his organisation, not just in Australia but particularly in the US and UK. One example of favours delivered by governments is the way the Australian Government in 1995 secured an invaluable foothold for News Ltd. In Foxtel. 

Foxtel was formed in 1995 through a Joint Venture between News Corp (Fox) and Telstra. News Corp obtained this position through political influence.

From that beginning News Corp went on to establish a controlling interest in Foxtel. Whilst News Corp owns only 50 % of Foxtel it effectively runs Foxtel through its power to appoint the CEO of Foxtel. In addition News Corp owns 100 % of Fox Sports.

Let me set out in some extracts what I personally witnessed in Murdoch’s entry into Foxtel. I first set this out in 1999 when I published my autobiography. “Things you learn along the way”. (The full text can be found on this website. See particularly pages 279-281)

 

In December 1994, I got a telephone call from (a Keating Minister) in Canberra about a possible appointment to the Telstra Board. I was asked about my relations with Rupert Murdoch. I assumed that the caller was trying to establish whether I might have any conflict of interest, a standard query before such appointments. I said I was not aware of any conflict because, whilst I had worked for Murdoch in the past, my links were then quite tenuous. It became clear to me, however, that I had misinterpreted the question. The caller was wanting to establish whether I would be a supporter of Murdoch on the Telstra Board. I kept my counsel, and was appointed to the board. I learned very quickly the significance of the Murdoch query when I found myself on my own a few months later opposing the Foxtel joint venture between Telstra and News Limited.

The circumstances and reason for my opposition were set out in a letter I sent to the chairman of Telstra, David Hoare, on 9 March 1995. I have decided to put this on the public record because I think board behaviour should be more transparent.

“At the Board meeting on 2 March 1995, I said that I had not been persuaded about the proposed arrangements with News Limited and Australis (which would supply movie content) … In the Board paper of November 3 [when I was not a Board member] the first criteria for pay television partner selection was ‘strength in content creation, content distribution and packaging’. The paper added that News Limited’s strength was that as the ‘… world’s third largest producer, distributor and owner of films and television programming (Fox) could guarantee content availability’

On the basis of our belief that News Limited could supply content, I assume, the Heads of Agreement on 11 November (1994) was signed. My basic problem is understanding how such an agreement could be signed without being satisfied that News Limited could ‘guarantee content availability’.  Didn’t we check whether News could and would deliver?  Were we too trusting? [All movie film content, except Twentieth Century Fox, had been signed up by Optus or Australis.]

It seems to me that most of our problems have flowed from this flaw in the Heads of Agreement: News Limited’s failure to provide content on acceptable terms. Content is the primary issue, the rest is secondary. News Limited has clearly not delivered content and on 25 December at 3am!, News Limited ‘signed a Heads of Agreement with Australis without knowledge of Telstra, which secured the Australis programming (for the joint venture) on an exclusive basis for cable distribution’.  This Heads of Agreement was for 50 years! – since amended to 25 years.

As a result of News Limited’s failure to deliver on content as expected by Telstra, we are faced with a punitive arrangement with Australis which will deliver content ‘ … significantly more expensive than planned’. Further the agreement is for 25 years. One result of News Limited’s failure to deliver content is that Australis will reap a financial windfall, at the expense of the Foxtel joint venture. The increase in programming costs has clearly affected the business case which I find unconvincing. It was not discussed at our last meeting … “

There was also a generous marketing incentive payable to Foxtel by Telstra for each pay television connection. The logic of this was that Telstra’s telephone business would benefit from each pay television connection.

A bad deal, however, was only part of the problem as I saw it. The other was the political pressure that was being applied. The board was told by the managing director that ‘the Government wants us to do the deal with News Limited’, as I set out in the same letter to the chairman. …

Before a Board decision was made, the chairman, David Hoare, said that on such a critical issue there must be unanimous board support before the Foxtel joint venture would go ahead. When it came to the final decision, I said no, I wasn’t persuaded as a director that I could support the business case and I objected to what I regarded as political influence being brought to bear.

It is tempting for governments to try to bend government business enterprises to their party-political advantage. I learnt that is one of the responsibilities of boards – to try to stop that happening.

When I dissented, the chairman said that my opposition had vetoed the project. Perhaps he hoped to force me to change my mind. I said that I couldn’t. In further discussion some directors said that they thought it was unreasonable to require a unanimous decision. The Foxtel proposal was then agreed but there would be no suggestion in the board minutes that it was unanimously agreed. I sent the letter which I have referred to on March 1995 to the Chairman for the records of the company to explain my opposition…. Perhaps earlier in my career I would have kept my head down.

To clean up the books for the partial float, Telstra wrote off $818 million in its loss-making Broadband Network and Foxtel pay television business in 1996/97 after a loss of $155 million in 1995/96.  A loss of $166 million followed in 1997/98.

David Potts, in the Sun Herald on 27 July 1997, commented, ‘Telstra has been taken for a ride by Rupert Murdoch and taxpayers will foot the bill for what may add up to be the most scandalous deal every embarked on by a government authority … For the Keating Government to have allowed and maybe encouraged, for all we know, a taxpayer owned authority to do [this] secret deal … was straight out of a banana republic’.  Chanticleer in the Financial Review of 23 July 1997 described the Foxtel episode as ‘the largest strategic and financial disaster this country has ever seen’.

I recall Allan Ramsay writing at the time that after reading my account of political influence he felt like vomiting.

This political influence led on from a foothold for Murdoch to a dominating position in Foxtel. With so much now at stake in Foxtel it is not surprising that Murdoch and his loyal retainers are such bitter opponents of the NBN which potentially opens up the airways to many competitors for Foxtel. In advancing his business interest Murdoch relies much more on exploiting his political power than competition in the market. The Telstra Board gave him a great leg up. I saw it at first hand.

 

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2 Responses to JOHN MENADUE. How Murdoch got a foothold in Foxtel. (Repost from 1 February 2014)

  1. David Havyatt says:

    Interesting post, but the early losses should be compared to David Thodey’s comment in the AFR last year that Foxtel was the best deal Telstra had ever done.

    There were two questions. Did Telstra need to invest in HFC? If so, did it need a content partner. As Board members knew and Frank Blount stated in “managing in Australia” the decision to invest in HFC was value destroying, but it was less value destroying than not investing. Just like the NBN it is no surprise that a Pay TV venture made losses in its early years, it has made up front capital investment for a 25 year or more business.

    Once the decision has been made to invest you need content. Despite News and Telstra each owning 15% of Seven, Seven had joined Nine in Optus Vision. As Menadue says the movie content wound up being signed by Optus and Australia, which meant there was no other partner with better access to content. Partnering with News was the right option for Telstra, despite extensive internal opposition.

    As for the political interference, that was beyond my pay grade. But what is known is that Packer had approached Keating proposing geographic cable monopolies, a proposition Keating rejected because of who was asking. And that would have been the bigger political concern at the time was the prospect of Packer building an us opposed Pay TV business.

    History shows that Telstra made the right call for its business in the 90s, and that was the decision before the Board.

    On the other piece, the accusation that the motivation of News in opposing the NBN because of the threat it posed to Foxtel is highly disputed territory.

  2. Do any of you remember this – MINEHAM – IT’S IN MY HEAD MATE – refers to biography of John Button – A Paper on Media Policy –

    1994
    Prime Minister Paul Keating versus Rupert Murdoch News Corps

    Government decisions that helped BANKRUPT Australis included the pay TV Licensing system that, without the customary requirements for lodging a percentage of the deposit, attracted frivolous bids and vastly inflated the purchase price ($200 million for both A and B licences).

    By Contrast Murdoch paid only $1500 for his cable licence. The Government (Paul Keating) further helped Murdoch with a Ministerial Directive, which allowed for monopoly cable delivery (cable owners were allowed to choose program providers and were not required to provide open access).

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