8 Jun 2016

What's behind Sky-Vodafone merger talks?

From Mediawatch, 1:55 pm on 8 June 2016

With Sky TV in talks to merge with Vodafone, Mediawatch looks at what it might mean for the two companies - and their customers.

The All Blacks winning the 2015 Rugby World Cup

Photo: Supplied

The relationship between Sky TV and telecommunication companies has long been complicated, at times strained.

Since 1990, Sky TV has become a $2 billion business, with households paying monthly subscriptions for its growing array of pay TV channels.

As the dominant provider of pay TV, and the holder of exclusive rights to lucrative live cricket and rugby, telcos offering broadband or cable connections needed its content.

Vodafone was one of those companies - on-selling Sky’s channels to customers, bundled up with telephone and broadband.

In 2010, Telstra Clear CEO Allan Freeth complained its contract prevented the company going elsewhere for content. There were also claims Sky TV’s contracts with content providers, such as TV and movie houses in the US and sports organisations, effectively prevented other companies marketing the same content in New Zealand.

Vodafone bought Telstra Clear in 2012 as part of a strategy to turn the mobile operator into a Telecom rival, offering mobile services, broadband and pay TV. Vodafone CEO Russell Stanners signed up with Sky TV again, but the deal took nearly a year to negotiate.  

By this time, the Commerce Commission was investigating Sky’s arrangements on both fronts.

The internet changes the game

“Denying other companies the right to buy from alternative suppliers is never acceptable. Its shareholders may soon discover their golden run is over,“ the New Zealand Herald warned Sky at the time.

Fairfax Media business bureau deputy editor Tim Hunter put it more colourfully. Sky TV was “farting in the commission’s face” with its commercial behavior, he wrote.

After an 18-month investigation, the Commerce Commission found Sky TV had breached competition law in the past to the detriment of consumers and others in the same business.

But the market had changed since then, it said, so it imposed no penalty.

Internet-based on-demand subscription services had started up by then, breaking into Sky TV’s near-monopoly. While Sky was still dependent on old-fashioned “linear” broadcasting, New Zealanders were embracing cheaper on-demand viewing options available via the internet.

Sky TV's growth has now stalled. The number of households subscribing started to fall this year, and online competition has threatened the company’s other key measure of commercial success: ARPU (average revenue per user).  

The future doesn’t look much better. A recent Roy Morgan survey found almost one in four households now subscribe to internet TV services. Not many of those will be exclusively signed up to Sky’s one, Neon.

Last year, Roy Morgan estimated one in 10 households here had taken up Netflix, just three months after it launched in New Zealand. 

A PWC report released this week, meanwhile, said satellite TV subscriptions had peaked because of internet-based services like Netflix and Spark’s Lightbox.

"Subscription services are shifting from satellite-based services to digital. Satellite-based subscriptions will still be dominant in 2020, but won’t have the same growth trajectory as digital services," the report said.

How might a merger help Sky and Vodafone?

A combined or merged company would have much bigger scale and clout in the market, which would worry telcos such as Spark (and its online pay TV service Lightbox) and also big broadcasters wanting to build a bigger digital audience, such as TVNZ and Mediaworks.

It would have Sky’s lucrative sports and entertainment to offer without having to cut deals for it. It would also have the means of distributing it, via satellite and online. It would have more points of sale to push it to new customers.

A combined company would also be better placed to take advantage of gains from the roll-out of ultra-fast fibre around the country. The expensive and messy business of upgrading broadcast technology and customers’ receivers would also be far simpler and cheaper for one company.

Overseas, telcos and broadcasters have also been encroaching into each other's businesses to give themselves greater clout.

BT - formerly the ‘Telecom’ of the UK – has launched its own pay TV platform, denting the market dominance of Rupert Murdoch’s Sky TV. Sky TV responded by buying internet company Easynet for $NZ500 million and now offers bundles of pay TV and internet and phone to subscribers.