May 5, 2016
Operator
Ladies and gentlemen thank you for standing by. Welcome to the 21st Century Fox Third Quarter 2016 Earnings Release Conference Call.
At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time [Operator Instructions] As a reminder, this conference is being recorded.
I would now like to turn the conference over to our host, Mr. Reed Nolte, Executive Vice President, Investor Relations.
Reed Nolte
Thank you very much, Ryan. Hello everyone and welcome to our third quarter fiscal 2016 earnings conference call.
On the call today are Lachlan Murdoch, Executive Chairman; James Murdoch, Chief Executive Officer; and John Nallen, our Chief Financial Officer. First, we will give some prepared remarks on the most recent quarter and we'll be happy to take questions from the investment community.
This call may include certain forward-looking information with respect to 21st Century Fox's business and strategy. Actual results could differ materially from what is said.
The Company's Form 10-Q for the three months ended March 31, 2016, identifies risks and uncertainties that could cause actual results to differ and these statements are qualified by the cautionary statements contained in such filings. Additionally, this call will include certain non-GAAP financial measurements.
The definition of and the reconciliation of such measures can be found in our earnings release and our 10-Q filing. Finally, please note that certain financial measures used in this call, such as segment operating income before depreciation and amortization, often referred to as EBITDA, and adjusted earnings per share are expressed on a non-GAAP basis.
The GAAP to non-GAAP reconciliation of these non-GAAP measures is included in our earnings release. And with that, I'm pleased to turn it over to Lachlan.
Lachlan K. Murdoch
Thanks Reed, good afternoon everyone. Over the past few quarter's earnings calls, we've talked about the strength of both existing and emerging distribution platforms.
In this quarter, we've seen some positive tangible results of the work we've been doing in this area, which all of us here are pretty excited about. In a few minutes James will take through our thinking and the early milestones we've achieved.
But first, I'll briefly address the highlights of a good quarter for us. We continue to be focused on building powerful brands, making compelling content and driving advertising innovations, all of which create meaningful long-term value for stockholders.
This past quarter's results financials and operational demonstrates good progress against these objectives. The quarter itself reflected underlying strength led by double-digit EBITDA growth at the cable businesses, the second highest quarterly EBITDA ever at the Film Studio and further programming momentum at the network at our international cable channels.
Affiliate revenues grew by 7% in the quarter across our global television business and by 10% excluding currency impacts, this growth is supported by our investment across our entertainment news and sports brand. Fox Broadcast Network has a number one broadcast series with Empire, the number one news series with X-files and the number one scripted special with [indiscernible].
Fox News network at ranked all a basic cable for the first time on the strength of prime time rating, they were up 35% in the quarter. FX continue to define high quality culture defining storytelling, the People versus O.J.
Simpson, American Crime Story, is Cable’s most watched new primetime series and Baskets is Cable’s most watched new primetime scripted comedy and Nat Geo earned its highest rating ever with its recent docu series Story of God with Morgan Freeman. Add revenues grew 4% in the quarter.
This trend was fueled in part by 20% plus increase in domestic scatter pricing and also reflects the particularly strong Fox News viewership and Stars continued solid gains. The market has recognize the power of premium programming to win the attention of consumers, while the value of our broad reach for brand market is clear we continue to move towards a more efficient and effective targeted model that has enabled by streaming distribution.
At Filmed Entertainment the company delivered the highest grossing R-rated film of all time the Deadpool, which has earned more than $760 million in global Box Office receipts against a modest production budget. It is also the highest grossing film ever for a first time director Tim Miller a distinction we are equally proud of.
Looking ahead, we have the highly anticipated theatrical release of X-Men, Apocalypse and of Independence Day Resurgence in our fourth quarter and Ice Age 5 in July. In although it’s a ways off we have also announce the James Cameron is well underway developing four Avatar Sequels.
At our television production business, we produce three of the top four broadcast series of the current season Empire, X-Files and Modern Family and a number one new comedy Life in Pieces, sorry the number one new comedy Life in Pieces. In addition, we produce the absolutely fantastic The People versus Simpson, American Crime story.
Looking forward, the studio has three new Fox Series and development as well as 15 broadcast pilots [owe] (Ph) them for Fox. And it is clear that in a world where more people are accessing more screens across multiple technologies and platforms, the demand for such premium content will continue to grow.
It's why we are excited to be offering our portfolio brands to new consumer driven platforms like Hulu and Sling and its why we believe we are well positioned at this dynamic time in our industry. And with that, I will turn the call over to John.
John P. Nallen
Thanks, Lachlan and good afternoon everyone. You will have seen in today's earnings release that we reported very strong financial results in the quarter underpinned by a 12% increase in both EBITDA and adjusted earnings per share.
Third quarter revenues increased 6% over the prior year and growth at both our Cable Network and Television segments was partially offset by a slight decline at our Filmed segment. Absent the negative impact of foreign exchange, third quarter revenues increased to 9% over the last year.
Total segment EBITDA for the third quarter was $1.88 billion, a 12% increase over a year ago reflecting double digit growth at our Film and Cable Network segments and slightly lower results at the Television segment. Overall, unfavorable foreign exchange movements reduced the quarters EBITDA growth rate by 7 percentage points.
From a bottom line perspective, we reported income from continuing operations attributable to stockholders of $844 million or $0.44 per share, while adjusted EPS was $0.47 this year up 12% versus a comparable $0.42 a year ago. Looking forward with the first three quarters of the fiscal now behind us and based on all assumptions inherent net current outlook, we are comfortable with the fiscal 2016 EBITDA guidance that we provided to you on our last earnings call.
Specifically flat to low single-digit percentage growth above the $6.49 billion and we reported for fiscal 2015 excluding the BBS business. Now let me provide some additional context on the performance at our operating segments in the third quarter staring with the Cable Network segments.
Overall, total Cable segment revenues increased 10% and EBITDA grew 12% excluding an approximate $60 million negative impact from currency rates EBITDA grew 16% in the quarter. Note that this year's results included the consolidation of the National Geographic non-channels businesses that were acquired in our second quarter, which increased both revenues and expenses in the segment by approximately $90 million.
Domestic revenues increased 11% in total, with affiliate fees up 7% and advertising up 17%. As expected our domestic affiliate revenue growth decelerated slightly in the quarter primarily reflecting the timing of affiliate contract renewals.
Our expectation is that affiliate fee growth will step up as we begun the next calendar year consistent with the time table for upcoming contract renewals. Domestic advertising growth was led by higher ratings at Fox News the continued strength of local sports the RSNs as well as the consolidation of the acquired National Geographic businesses.
EBITDA at our domestic channels increased 7% over the prior year, reflecting a strong revenue growth, partially offset by higher political coverage at Fox News an increased content and marketing spend at FX driven by two new original series lead by the People versus O.J. Simpson.
At our international cable channels reported affiliate and advertising revenues both grew 6% versus last year, but on a local currency like-to-like basis affiliate revenue increased 20% and advertising revenue were up around 9% driven by strong growth as Star Entertainment channels and at the Fox Networks international channels. Reported international channel EBITDA increased 67%over the prior year even after reflecting to $60 million negative foreign currency effect.
This EBITDA growth reflects a higher revenues as well as lower sports right costs at Star due to the absence of last year's broadcast of the ICC Cricket World Cup. Turning to our Television segment, third quarter EBITDA was $125 million, $16 million lower than a year ago.
Total revenues increased 5%, led by higher retransmission consent revenues and higher political advertising revenues at the stations. This revenue gain was absorbed by increased sport program in costs, principally for NASCAR and NFL in the quarter.
At the Film segment, third quarter EBITDA increased $88 million versus last year, higher contributions from the Film Studio reflecting the successful theatrical release of Deadpool were partially offset by reduced TV production earnings, primarily from lower contributions from Glee, which had its final network season last year. Foreign exchange movements negatively impacted the segments EBITDA this quarter by approximately $50 million.
And finally regarding capital allocation from July 1 through today, we've repurchased approximately $4.2 billion worth of Fox A shares of which approximately $3.7 billion has been against our $5 billion buyback authorization. With that, I'll turn it over to James.
James Murdoch
Thanks very much, John and Lachlan. Welcome everyone.
So as you have seen it with a solid quarter, now there is a lot we will talk about and hopefully we can cover a lot of ground in Q&A. But I wanted to first highlight some of the objectives of the business well broadly and the progress we're making towards them and in particular, we talk a little bit about our digital business and plans.
Over the long-term but approaching quickly, our all entertainment will be consumed over IP streaming networks that means that what we create and produce is released into an incredibly competitive environment in which the customer can choose at any minute in any device, any entertainment that has ever been made. So first in foremost, we need to be making better things all the times.
We're immensely proud of the creative achievement to the business recently and the momentum that we have at each of our brands. We're in a better place in almost all of our businesses creatively.
This is driven by the investments we've made in our brands over the last number of years. We're positioning for success in this environment, where it's now worth making a distinction between linear and digital anymore, just as the walls between cable and broadcast melted away years ago.
We're building a business that has real scale, in streaming distribution and monetization capability. At here too we've made a lot of progress, we're very focused on the velocity we need to be add and even with some progress depending heavily on counterparties, these last three quarters have seen a marked step up in pace.
Last month we announced our participation in Sling’s, new multi stream digital video service with all of our entertainment and sports brands forming a core part of a new all digital product, priced well below the fully bundled MVPD offering that some customers find hard to digest. In this week, we can confirmed as well that we're working with Hulu to participate in a reimagined digital video service later this year that combines the current and live affiliate distribution model with an expensive and attractive SVOD window.
We think this breaking down of licensing windows into a simpler and more straight forward set of rules is going to be very attractive for customers and therefore for downstream video retailers as well. We want to make our programming more available not less and we wanted to be able to innovate in the way we can monetize that programming on digital platforms.
This precedential move with Hulu means we can now licensed similar consumer services and products to new entrants or establish MVPDs, encouraging and enabling innovations downstream, creating a distribution infrastructure that allows us to monetize more effectively and all the while grow our direct to consumer capability. Our work on this front has not been limited to the U.S.
In India Star's groundbreaking Hotstar mobile video product, recently crossed 60 million downloads and just launched a premium subscription tier, leveraging our exclusive writes for HBO Originals, films and the Fox's library and over the next few months this service will also include a premium sports offering. In Europe, Sky Go and Now TV at our 40% owned affiliates Sky continue to go strongly and the launch of Sky Q is off to a strong start.
And in Latin America, Fox Plus our premium digital on demand service is growing well and is now available to over four million subscribers. This progress we're making put us on a strong footing and as we look across our global portfolio, we feel good about where we are and that we have the right strategies, assets and brands to see significant opportunities both in mature and developing markets.
The next decade is one of really immense opportunity for all of us at 21 CF and we're very focused on seizing it. So with that, we're happy to take your questions.
Reed Nolte
Ryan, can we go to Q&A please.
Operator
Okay [Operator Instructions] Our first question will come from the line of Richard Greenfield with BTIG. Please go ahead.
Richard Greenfield
Thanks for taking the question. During O.J and the American, I noticed, I think, everyone has probably noticed a real increase in the push that you are driving of FX now and I'm curious are you seeing a real pick up in users anyway you can qualify or quantify actually.
How many people are using FX now on an authenticated basis? Have you seeing a dramatic change and time spent.
And then just James you brought up the commentary about Hulu, which Mike Hopkins has actually talked about during your upfront this morning. Well curious how do you think about what's going to happen as you compete with legacy distributors, is it simply just the time is right to take matters into your own hands and kind of lead your path forward regardless of whether it ruffles feathers of the Comcast and the charters of the world?
James Murdoch
Thanks Rich for your question. Look on the first one, I don’t want to get into a specific numbers on FX now usage.
But one thing that we are very focused on is growing consumption on our kind of we call our owned and operated apps, the Fox Now, FX now and Fox Sports and we’re seeing good growth there and you are right we have been marketing that more on our air, because we think it's a really good consumer experience. We think it's a great way for customers to access the programming, it's available to many, many million of MVPD customers on an authenticated basis and it’s something that as you've seen as we've restructured and created our digital - direct to consumer group, it's something that we’re we are just very focused on building.
We think it’s the right thing to do to grow the audience in the streaming environment where we can innovate and monetize better in terms of data and analytics, in terms of how we create new add products and monetize them, the pricing we are achieving there. And that's true as well with Hulu, where pricing on Hulu from an advertising perspective is very, very attractive for us and we think that's a mix between Hulu our owned and operated apps as well as the VOD platforms belonging to the existing MVPDs where we're seeing really market growth marked growth.
And I will say that what we're seeing decline in terms of multi-platform usage is really in DDRs and as streaming availability comes forward and is much, much better and creates a better customer experience DDR usage seems to be declining or is declining on a percentage basis pretty dramatically. And that's something that is A, good and B, it’s something that we want to encourage.
But we need to make great products available for customers and make sure that we are putting together good product and working closely with our MVPD partners in terms of making sure the authentication pathways are as smooth and easy as possible, which as we all know there is a lot of work to be done to improve that and improve that part of the user experience. And your second question with respect to that Hulu and the competitive response, look I think our view is that we would like to make our programming more available not less.
We would like to our brands and the customer experience around our brands to new entrants in the downstream distribution market be they over-the-top or new products and services developed by the MVPDs. And that's just as I mentioned in the remarks earlier and offended new licensing to Sling for example under the core part of their new multi stream digital video service or licensing to Hulu as it develops its plans for this next generation video service for customers across the country.
And I think really the strategy for us is to create these products with simpler windows things like better in-series stacks, better customer experience and make that available to MVPDs generally so it's not really a question of some heightened competitive dynamic, it's always been a competitive environment downstream. And just as licensing to satellite and Telco's was seen a controversial at the time, we think these new entrants paying a fair price putting together a great products for customers is one that’s actually going to spur growth in the overall universe of video customers.
But also is one that’s going to make a better user experience driven by those competitive dynamics and we are very keen to play a part in that and be a catalyst for making that happen.
John P. Nallen
And we will install the same rights on the same terms through the existing our MVPDs as well.
James Murdoch
Yes. Exactly.
Richard Greenfield
Just a follow-up on that walk lane. So will you be able to - the same distributors will be able to create the same types of skinny bundle that you are going to create with Hulu.
John P. Nallen
We've referred a column of our core bundle, as appose to a skinny bundle because it’s really the core brands with Dolby represented in the bundle, but yes Rich you will.
Richard Greenfield
Thank, very much. That was a great follow-up.
Reed Nolte
Operator, could we have the next question please.
Operator
The next question comes from the line of Michael Nathanson with MoffettNathanson. Please go ahead.
Michael Nathanson
Okay, let me keep on the Hulu questions. Can we talk bit about right and in seasons stacking one of the challenges have been in the past couple of years is that as a network you have not bought all the right and then as a studio you may not have sold those rights.
So could you give us a sense of how you are thinking that evolving on in season stacking. Is that the way you expect for Fox and FX to controls own and would you sell in season stacking rights of the networks like [Indiscernible] so talk about rights for a second.
Lachlan K. Murdoch
Look I think there is - our preference would be to - if you want to think about establishing sort of standards at least for us anyway is that we would have full in season stacks available to customers. We think that the best customer experience, we think it's sensible and I think there has been a little bit of - its taken a little while for the industry if you will to settle on how to price that, I mean how do you think about those things.
I think that's getting more established now. So yes we we’re very focused on having full season stacks for current seasons and then having a more seamless sort of hand off between that and the later SVOD Windows.
So simplifying those rights in those windows is something that we are focused on really in an effort to eliminate what our - can appear to customers as really arbitrate hold backs driven by business rules that they don’t care about and our focus is on how do you make a better customer experience. We think in season stack is a key part of that
Michael Nathanson
Last one would be on [international] affiliates, one of the frustrations also is some of these packages cant role internationally, because we don't have affiliates on board. So talk about the process of being able to offer all the affiliates maybe Hulu or Sling, how is that going to evolve?
Lachlan K. Murdoch
Those things you know the affiliate agreements, the affiliates tariff agreement on a national basis is something that Hulu and the affiliates are sort of involved in. We would anticipate that we would be able to achieve substantially national coverage pretty soon for all this things.
I mean it’s kind of necessary, but each affiliate group and each agreement is different and that's something that - in the Hulu's case they have to have with those affiliates in Sling’s the same.
Michael Nathanson
Okay. Thanks, guys.
Reed Nolte
Thank you Michael. Ryan, could we have the next question please.
Operator
That comes from a line of Alexia Quadrani with JP Morgan. Please go ahead.
Alexia Quadrani
Hi thank you. Sorry to sort of stay on the same topic here but James, I mean just to clarify from your earlier comments, in this evolving kind of anywhere, anytime model that you talked about more demand, potentially better pricing, but potentially risk to linear model in terms of that revenue stream.
Is this the net positive for Fox? Or is it sort of determined depending on how successful you are, I would love your thoughts on that.
And should we assume that when you are doing these deals like with the [indiscernible] and Sling, you are getting a premium pricing to what you would get more of the traditional model.
James Murdoch
I think we've talked about it before Alexia. Thanks for question.
We talked about a little bit before, I think if we can establish the right sort of licensing arrangements, the streaming distribution model is actually much better model. You have to take into account as well, our ability to monetize advertising in a different way, we believe that there pricing on a streaming and streaming advertising base can be much, much better than network pricing.
Given our ability to target, our ability to have lower ad loads, our ability to put new kinds of ad products like engagements units and so forth into the marketplace. So we think from an advertising perspective, it can be a superior business and from an affiliate income perspective, we're obviously very focused on getting a fair price for each of our brands and all of our brands in aggregate so that the streaming distribution business is a net positive as you put it for our overall set of brands.
Alexia Quadrani
And then just in terms of pricing, is it a [indiscernible] that you get better pricing on these new entrants on these over these top products or is it sort of every contract is different?
James Murdoch
I think, we take all of our distribution agreements, so if you look at them in a round that overtime we can achieve price increases et cetera, but certainly these agreements are in line with what the current market is for these brands to be distributed in the current season to customers.
Alexia Quadrani
Thank you.
John P. Nallen
Yes net-net economically to us, we'll be from an affiliation point of view, we'll be agnostic in terms of whether customers in MVPD customer or the MPPD customer.
Alexia Quadrani
Thank you.
James Murdoch
Yes.
Reed Nolte
Thank you, Alexia. Rryan next question, please.
Operator
Our next question comes from the line of Jessica Reif Cohen with Bank of America. Please go ahead.
Jessica Reif Cohen
Well two questions. One is just a wrap up of what everybody has been asking, so just to go through the skinny bundle components, pricing on affiliate fees, it sounds like will be at least the same so no loss there.
Advertising monetization should be better, is there any other revenue driver that we should be thinking about and I think James you said that all the brands link on Sling and Hulu, I just want to clarify when you say all the brands, do you mean including the RSNs all of the Fox Channels?
James Murdoch
I think on the Sling package has been outlined out there and it's all of our brands but Fox News had in earlier deals with [indiscernible], so that's not included at this point. The Hulu agreements, Hulu arrangement is for all of the brand including the RSNs and the Sling includes RSNs as well.
Look we think the RSNs are a huge driver here, I think sports in the screening environment can be enormously attractive and priced attractively to customers. I think it obviously drives the big audience in the liner and live viewing, but we look around the world not just here and see sports really driving over-the-top consumption as well.
So I think that the sport feature is really attractive and it’s something that's very fresh and new in over-the-top environment with these new products.
Jessica Reif Cohen
Okay and then just to may be probably change that question. So as we are approaching the up-front market, I would love to get your thoughts, but also how different will this be in terms of component, I mean you are clearly going down the path of more targeting, more platform, selling across platform, selling more holistically.
Could you just give us your thoughts on kind of what is ahead in the next few months?
James Murdoch
Well first of all, on the up-fronts generally, we're really excited about the up-fronts, we think that all of the networks are in really good shape creatively. And as Lachlan mentioned in his comments, scatter pricing has been really strong, it's been a strong market so it's really great moment to go right into up-fronts and we're very excited about that.
I think also your point about the changing components of how we sell advertising, we're really focused here on how do we sell a total audience, and how do we really market to our advertising partners to other brands to the attention of that audience. I think we are driving incredible engagements in our audience both in linear as well as in digital platforms and we want to add that up and really creates something that’s very valuable for those advertisers.
It is a more complicated process right now just because we have varying measurement techniques and we have to really add all of that up and have a more broad conversation with advertisers, but it’s one that they've been extremely focused on and excited about. So I think the engagement with all the big brands we work with has been strong and I think in up-fronts you will see a bigger component of digital obviously and sticking together all of this multi platform audience to create one platform for video consumption that makes sense for people.
I think that's going to be a trend that's going to continue. But ultimately, we have to think of it less as the sort of sliced and diced different commercial windows and more about a total audience across all of these platforms, which sometimes its current programming, sometimes it's a month old programming and we continue to add cumulative audience and engagement overtime and raise that.
It’s really exciting in terms of the overall audience growth and overall inventory growth.
Jessica Reif Cohen
Thank you.
Reed Nolte
Ryan, could we have the next question please.
Operator
Our next question comes from the line of John Janedis with Jefferies. Please go ahead.
John Janedis
Hi thank you and maybe a bit more of a follow-up James. Back to the ad market, you talked about the strength and I think it's well appreciated that the traditional TV ad markets has been tight for a variety of reasons including ratings.
So with the younger viewers watching less live TV and given your comments, I guess some response to Alexia and Jessica how more receptive or advertisers to buying VOD and DAI as an alternative relative to six to four-months ago. Again to your point, just to trying to thinking about alternative ways to increase inventory and monetize shows that don’t include shortening the length of the actual program,
James Murdoch
I think qualitatively I would say buyers are much more engaged around buying that multi platform audience. And that's been a progression, because that's really where a lot of the audience is.
So when we look at total ratings being down in any given - for any given network X-percent actually the total multi platform audience is holding steady to up, when we put it together. So I think we are moving away from saying okay look let's get people to go from plus three to plus seven and we are really talking about total audience plus 30 plus 60 whatever.
As I said, I think on these call before, all viewers are alive, so all of the viewing should be counted as live viewing and its a question of establishing the currency that people can buy easily and get their head around and that's a negotiation that you have. But certainly there is an appetite to really follow where the viewers and where the engagement is and that is multi platform and it is across a longer period of time.
John Janedis
Is that more so you think a calendar 2017 event or is it beyond that or are we much closer to meeting later this year?
James Murdoch
Well I think we are going to see continued growth through this year and I think in 2017 as well. I think it’s as a component part of our total viewing the multiplatform viewing outside of the live window or the liner window I should say, continues to grow, we expect that to continue into substantially all other than in our sports to news business, which we’re adding a streaming and ad targeting capability with the new platform.
But obviously in sports to news the vast majority of the viewing is actually live.
John Janedis
Thank you.
Reed Nolte
Thank you John. Ryan, could we have next question please.
Operator
And that comes from the line of Vasily Karasyov with CLSA. Please go ahead.
Vasily Karasyov
Thank you very much. I wanted to ask about Star India.
Fiscal 2016 was a year when investment there and I think you invested additional sports right on some over-the-top applications I was wondering if you could give us an update on how that went and should we expect to see a benefit into fiscal 2017?
James Murdoch
So thanks Vasily. first So of all, yes we have been investing as you all know in the Indian business, but the sports investment in particular and in the digital investment with Hotstar and we will continue to do so.
That said, the peak investment year is really behind us and actually this fiscal year in 2016 you will see it will have been strong growth for Star overall over the last year and we expect that to continue. We’re extremely pleased with how the sports investments is going particularly with Kabaddi and Cricket the two kind of biggest there.
Kabaddi is a new sport that's growing very well, we will be investing in expanding that season and growing that sport, but also on monetization of Cricket rights is actually getting much, much stronger as well for a variety of reason. So I think we are happy with how that investment has gone and in the Hotstar side and digital it's 60 million plus downloads of the app and increasing consumption of pretty substantial length.
These aren’t really short film videos people are watching soaps, they are watching dramas, they are watching sports and we think it's a very, very exciting new platform for us. So we are pleased with the investment and how it's gone and going forward.
We are very confident that the growth in terms of EBITDA from the Star business will be in line with the target that we've laid out in the past, which is getting towards the $0.5 billion of EBITDA within a few years in 2018 and towards a $1 billion were on the end of the decade.
Vasily Karasyov
Thank you
Reed Nolte
Thank you Vasily. Ryan, could we have next question please.
Operator
That comes from the line of Todd Juenger with Sanford Bernstein. Please go ahead.
Todd Juenger
[indiscernible] like just a couple of quick one on affiliate piece if I may, these are very mundane question. If somebody be willing to just walk us through a bridge of domestic cable affiliate fees from the growth rate from last quarter down to the growth rate this quarter.
I think the two main elements we have about are the [Yes blackout] (ph) and whatever is going on with core cutting and shaping, just wanted to confirm that. On a related note, when we think about pricing is back to over-the-top bundles.
With your traditional distributors grown accustom to these annual rate increases per sub, so you've been questioned already on what the starting price is for your networks with these new services. I would like to extend that question and see should we expect annual rate increases with those type of distributors as well or not.
Thanks.
John P. Nallen
Todd this is John, I'll take the first part. So yes you are right, there is deceleration from Q2 to Q3 and as I said, we expect the step-ups to occurring in the beginning of calendar year because of the timing and that's really what happened in Q3 as against Q2, we anniversaried a number of step-ups in Q2, so we enjoyed that lift and that benefit leading to the 10% growth and now that pattern is more comparable year-on-year in Q3.
James Murdoch
And I think what we'll see in terms of affiliate fee growth going forward is an acceleration in 2017 and 2018 as new affiliate agreements come up and we're able to do that and then with respect to sort of pricing for new entrants. Now we go back to looking at whenever we seen new entrants come into the marketplace, we see a increased competition and we think that really increases the value of programming upstream not only do we continue to invest in that programming and make it better for customers.
But also the value of that increases the more competition we have at the downstream retail level. So we're very confident that we're going to continue to be able to grow the value of our programming in these brands, in a downstream retail environment that's more competitive not less, more innovative not less and that's a real shift.
So what we would really like to see, I think, everyone would like to see, where we think these new entrants can be catalyst for and hopefully there will be more of them is growth in the total video consumption universe downstream as well as into the broadband only household as well as replacement products for some customers. But also continued pricing strength as that competition increases.
Ultimately, it's up to us to make products that are distinctive, that are great, that customers really care about and that's why we you know are so focused on these brands that we've been investing in and simplifying our investment around to make things that ultimately matter for customers. That matters for our distributors and we think we can get a fair price with that approach.
Reed Nolte
Thank you Todd. Ryan, could we have the next question please.
Operator
That comes from the line of Doug Mitchelson with UBS. Please go ahead.
Doug Mitchelson
Thank you so much. I think James, Lachlan how could I not continue to ask about Hulu.
I mean one of the great debates I think we're going to continue to have with these virtual MVPDs will be optimizing subscriptions in customer experience versus the desire that generate advertising revenue. And you touched on the potential for lower ad loads.
Has you experience with Sling or any of your surveys or studies given you a sense of what the right ad load is going to be for these virtual MVPDs. And if you were ad load on VOD online for streaming ends up quite a bit lower where we see you, will we see your live ad loads harmonize with that over time?
James Murdoch
I think I wouldn't say today that I wouldn't be able to predict today, what the ideal ad load is two years from now, three years from now, four years from now. We would say the experience that we have is that A, the advertising loads are highly relevant to the customer experience, there is no question about that.
There's no question in that we invest a lot in programming and we invest a lot in kind of achieving a suspension of disbelief amongst our customers as we create the cinematic kind of experiences for them. And then we had jerk them out of that environment to show them advertising.
That's obviously necessary economically in many cases. but I would say that's biggest lesson we've learned is interesting with the Hulu ad free option, where customers can opt in to pay a premiums to buy out essentially their own time to buy their own engagement.
Many have chosen to do so, but certainly not all of them. So customers are smart and they understand the value equation here.
So we think some will pay a premium in that environment to have no ad load, some will value the lower ad load that exists on Hulu today for example than in the broadcast environment. And I think in a streaming environment, the real opportunity here, is to have better pricing and more targeting across the piece, which allows us to continue to reduce the ad load as more video shifts and more consumption shifts to the IP streaming platform.
Doug Mitchelson
And increased CPM at the same time
James Murdoch
Yes and increase pricing.
Doug Mitchelson
And I think the debate will obviously continue with part of the thought is if you create this new business model and let’s call it new and it ends up with worse economics to start because ad loads are lower and it can take a while to grow the CPMs to where you want them to be or perhaps just because you presume younger customers furlough ad loads, they won’t come into the product without that. But you build a sustainable business that can grow from there.
Is it worth it to take that step down in economics initially, hoping that ultimately you can either grow that business from subscriptions or targeted CPM as that make sense?
James Murdoch
Yes, look I mean we're doing that today with what we're doing in terms of encouraging usage. The question earlier, was around FX Now, we certainly don’t fully monetize all of that streaming viewing today, but we're totally convinced that it's a better ad experience for customers and better ad experience for advertisers and it can be a better business than the traditional broadcast ad load business.
So we do that today and I think it's too early to call how big that investment is, but fundamentally we do believe in a long-term of this business, we invest against a long-term of this business and establishing these streaming platform at scale is absolutely worth it.
Doug Mitchelson
And we've been running a lower ad load and Empire for instance and we do that on a show-by-show - on a series-by-series basis, and make those judgments every day, either worth building the value of those series in those brands and obviously in many cases that absolutely is.
Reed Nolte
Thank you Dough. Ryan, could we have the next question please.
Operator
That comes from the line of Omar Sheikh with Credit Suisse. Please go ahead.
Omar Sheikh
Hi there, quick couple of questions. First of all on a Hulu again.
James I wondered if you could just outline what you think the market opportunity is for this new product and where do you think - what does your research tell you about what sort of customers you are going to get. Is it going to be another complimentary product and just to get you added to new subscribers you expect on the existing Hulu subscription product, kind of what sort of numbers the subscribers might should be we thinking about over the next few years.
That's the first question. And secondly, I want ask about Star India, there are some sports rights deals that are coming off in the a couple of years, I think IPL rights coming up in 2018.
I wonder whether you could just give us your sort of current thoughts on what you think Star might need in terms of incremental sports rights over the next couple of years? Thanks.
James Murdoch
Thanks Omar. Look it's really going to be for Hulu to comment on their customer numbers and expectations specifically, so I won't really get into that but I would say that when we look at the proliferation of new MVPDs new virtual MVPDs or the existing MVPDs innovating.
creating new over-the-top products and improving their own product experience. I think the opportunity is very large and one that is very much worth pursuing and very much worth trying to be a catalyst to create, but I think the specific subscriber goals et cetera better less to those distributors.
With respect to India, I don’t think were really focused at this point on incremental rights, but in all of our sports businesses, not just Indian we always seek a balance and we have to see when new rights come available. How do they fit, how can they would be monetized or other rights things that you would give up to pay for those and you have to create a balance of investment there that you think is delivering the right value for customers and the right value for the distributor.
So I certainly don’t think given the performance of the business, there is any necessity you have incremental rights on top of where we are today, but from time-to-time we may invest in new rights and let other rights go or find ways to monetize new rights, so that it's not necessarily an incremental investment. But we love the sports business, the cricket business is strong as I mentioned earlier, from a monetization point of view it's very strong right now for Star and it's a sport that we’re obviously very committed to.
Omar Sheikh
Thanks. Alright just a follow-up could I just ask on Star.
Do you think the total sports cost to Star have peaked?
James Murdoch
The total sports investments for us in terms of the investment losses in establishing the sports business have peaked, whether or not the total cost base of sports over the long-term that's a really question of what is the size of revenue as well. So I think I would say that the investment losses that in creating the sports business has peaked and we’re seeing the business move towards profitability.
Omar Sheikh
Perfect. Thank you very much.
Reed Nolte
Thank you Omar. Ryan, could we have the next question please.
Operator
Comes from the line of Dan Salmon with BMO Capital Markets. Please go ahead.
Daniel Salmon
Hey good afternoon everyone. James, maybe could we return to Hotstar for a little moment for a better for worse you probably focused as a little bit less on the OTT options overseas and I'm just curious about where your bigger picture ambitions are for it particularly with differentiation versus some of the other over-the-top products there.
That seem to be a little bit more driven by TV shows and films and you talked a little bit more about brining sports there and also maybe how Netflix’s entrance into the market affects the competitive dynamics for it?
James Murdoch
Well first of all I think the Hotstar business - it's an exciting business because it's really broad based, so we already do include sports in the Hotstar business, but not live, it's on a delayed basis. So the premium sports often would be coming later this year and we think it's going to be attractive.
But the peaks in usage come not just from sports, but also from the availability of new scripted series as well. So as you are seeing pretty broad based usage across that and something that’s pretty encouraging and reasonably long session times.
The key issue in India around that over-the-top services mobile video in particular is really to tariff structure you know and media to tariff pay in terms of data from the Telco. So a lot of the consumption is bigger on Wi-Fi when people are at home or an internet café et cetera and until we can get - until you get larger data caps or flat pricing et cetera.
I think that's going to continue to be a dynamic and that does put a constraint on pricing that's why the core business in Hotstar is free is just its just so many people can download and use, because it becomes quite expensive given the data tariffs. And then with respect to the premium subscription service that we just launched, I think it is more square in competitive dynamic with the Netflix which just launched their et cetera, which you can view that we wanted to have at attractive price for people, so it's price underneath where some of the other competitors are.
But with some of the best premium international television in the world for example from HBO, from FX, from places like that. so it's a really attractive service, but it's too early to comment on what scale it's going to be, what we think the growth is, we really just launched it a few weeks ago, so it's the premium server.
So that's where that is. Was there another part of your question I don’t think so okay.
I think we have time for one more question.
Operator
Okay and that comes from the line of Bryan Kraft with Deutsche Bank. Please go ahead.
Bryan Kraft
Hi good afternoon. I was hoping to ask two question if I could.
First, how are you handling the technology side of the digital streaming business both from a platform and network aspect as well as the advertising insertion. And then separately when you talk about a core bundle of networks for Hulu, and there are companies like yourselves and on major broadcasting cable networks with very few of the mid-size and smaller networks.
But you have got other companies that have similar major network assets, but at the same time have more of a long tale of mid-size and smaller networks. How do you reach agreements with those companies without having to load to basic tier up with more channels than you want and also how do we think about the smaller cable network groups.
Thank you
James Murdoch
Thanks. Well on that last seasoning, really that's a question for the distributors right, so it’s a question for Hulu, it's a question for Sling, et cetera.
And those are things that they have to deal with it, then they are coming to agreements with these things. Yes we are investor in Hulu and we are early licensee I guess and so we can talk about our position around that.
But as you said, we've spent a lot of time over the last couple of years simplifying that's brand portfolio, getting into places where we have five big brands that really matter for customers and we're going to stay focused on that. The other piece of that is really for Hulu or Sling or any of the downstream retailers.
And what was the first point of your question, sorry.
Bryan Kraft
How are you handling the technology side of the streaming business?
James Murdoch
Oh yes sorry. Well I mean again there is a lot of be it a Sling or Hulu or the traditional MVPDs, obviously that's for them to do, our real focus here is how does the user interface work for us in terms of our owned and operated apps, what are the things we have to interface with their systems.
But we're not in the business of direct streaming ourselves that much, but we work in particular on the authenticated apps very closely with the managed network, the facilities with distributors to try to figure out how the best customer experience could be there. But it's not again, I think that's really a question for the video platforms be it Hulu or Sling or any of those guys and how they do it.
We've restructured some of our own organizations but more focused on investing in this technology and customer experience and approximately development, we consolidated that into one group, we've really stacked up during that in some of the best product people from around our business and affiliates into that. And it's something that’s you will see we will progress on from product perspective over the next six, nine, 12-months and continually thereafter.
Bryan Kraft
And TrueX the primary technology provider for the advertising insertion?
James Murdoch
For the advertising yes, and it's really now formed a core part of what we call our advanced advertising group which really does all of the tech ops and everything around that advertising for our digital and linear across the piece. So we have one place there to managed all of that inventory, price it properly and develop new products.
Bryan Kraft
And then my last follow-up, I promise, do you think that you are going to move to more of programmatic approach to selling advertising, as you move to more of dynamic ad insertion streamed world?
James Murdoch
I think programmatic is a really big word, it means a lot of different things to a lot of people, is mostly the buying and selling and advertising from just inventory management and pricing point of view going to be done by machines in the future, yes. But that's not a comment on pricing, that's a simple question around efficiency and process.
Bryan Kraft
Great. Thank you James.
Reed Nolte
Thank you Bryan. At this point we are out of time.
Thank you everybody for joining today's call. And if you have any questions, please give Mike Petrie or me a call.
Thanks.
Lachlan K. Murdoch
Thanks, everyone.
James Murdoch
Thank you.
Operator
Okay ladies and gentlemen that does conclude today's call. As I mentioned earlier, it is recorded and it is available for replay that reply will be available starting after 07:00 eastern tonight going for two weeks until May 18, at midnight.
The dialing numbers 1-800-475-6701 with the access code 391082. Those numbers again 1-800-475-6701 with the access code 391082.
You may now disconnect.