Hard News by Russell Brown


Sky and 2020

On May 1 this year, it will be 21 years since Telecom launched its first real consumer ISP – Xtra – kicking off the mainstreaming of of the internet in New Zealand. The company had finally surrendered its stance that the country needed no more than its business IT services and its (already by then old-fashioned) educational network NZ Online, and the more adventurous ordinary folks flocked to pay $5 an hour to "cybersurf".

But Telecom offered more than a connection. Xtra was also a content provider. Behind the infamous X-ville image map lay a small media empire, offering news and magazine content, generated by a mostly young, keen editorial team. A few months later, Clear Communications took a similar tack with with the Clear Net home page.

Phone companies clearly felt that they needed interests in content to woo customers online – and, hopefully, tap them for a little more cash once they got there. Xtra's excitable, unorthdox general manager, American Chris Tyler, pitched we journalists his vision of developing a "media engine" that Telecom would soon be able to sell to other telcos.

In the end, it came to fairly little. Xtra soldiered on as an editorial enterprise for some time, but it became clear that customers could find their own stuff online and Telecom would have little success in fencing them in to its own offerings. These days, Xtra.co.nz resolves to the Yahoo NZ page, a home for commodity news and the country's worst commenters.

A few weeks ago, I heard, second-hand, the thoughts of one of the Vodafone managers working on his company's proposed merger with Sky TV. He was astonished at how old-fashioned the culture was there, at how poorly they understood the internet. It confirmed my guess that Sky, which has prospered (to the extent that it still makes most of the money in New Zealand television) under the nailed-down model of pay TV, desperately needed the relative hipness of a telco partner.

In a sense, Sky is Telecom 20 years ago; a company with a prodigious lock on the market being forced by new entrants to do things it has traditionally not wanted to do. Vodafone could be its change agent.

Or not, as it transpires. The Commerce Commission has, to some surprise, declined clearance for the deal. The Commission's chair Mark Berry explained the reasoning today:

“The proposed merger would have created a strong vertically integrated pay-TV and full service telecommunications provider in New Zealand owning all premium sports content. We acknowledge that this could result in more attractive offers for Sky combined with broadband and/or mobile being available to consumers in the immediate future. However, we have to take into account the impact of a merger over time, and uncertainty as to how this dynamic market will evolve is relevant to our assessment,” Dr Berry said.

“Around half of all households in New Zealand have Sky TV and a large number of those are Sky Sport customers. Internationally, the trend for bundles that package up broadband, mobile and sport content is growing. Given the merged entity’s ability to leverage its premium live sports content, we cannot rule out the real chance that demand for its offers would attract a large number of non-Vodafone customers.

“To clear the merger we would need to have been satisfied that it was unlikely to substantially lessen competition in any relevant market. The evidence before us suggests that the potential popularity of the merged entity’s offers could result in competitors losing or failing to achieve scale to the point that they would reduce investment or innovation in broadband and mobile markets in the future. In particular, we have concerns that this could impact the competiveness of key third players in these markets such as 2degrees and Vocus.

“This is also against a backdrop of fibre being rolled out, making it an opportune time for the merged entity to entice consumers to a new offer. If significant switching occurred, the merged entity could, in time, have the ability to price less advantageously than without the merger or to reduce the quality of its service. Given we are not satisfied that we can say that competition is unlikely to be substantially lessened by the proposed merger, we must decline clearance.”

Sky's shares are tumbling in the hours since the news. And yet, Sky made nearly half a billion dollars in revenue and $60 million in profits in the past year. The local launch of the Viceland channel on Sky also serves as a caution about the real ability of content creators to make money on the open internet. Even Vice, the enfant terrible of online TV, realised it needed the reliable dollars of linear television. Sure, the growth is over, but the income isn't.

But there's a cliff-edge ahead. In 2020, New Zealand Rugby renegotiates its coverage deal, which sustains the game in this country. The chair of NZ Rugby's board is Brent Impey, the former CEO of MediaWorks. Does anyone think he won't do everything he can to control those rights and maximise the benefit to his organisation?

It's not hard to see Impey approaching Spark (or, for that matter, Vodafone) and pitching them a deal where they do all the hard stuff – technical delivery, marketing, customer relations – in exchange for the ability to bundle premium content with their services. As Spark has demonstrated on a smaller scale with Lightbox, telcos don't even need to directly make money from that content.

2020 is also the year targeted for 80% of New Zealand households to have access to fibre internet – and for the special regulations pertaining to the UFB rollout to be replaced by a new regulatory framework. MBIE began taking feedback on what that new framework should look like in July last year.

The submissions make interesting, if dense, reading. Most submitters, including Spark and Vodafone, view the Commission's proposed 15mbit/s "anchor" product as plainly unambitious (given that our early-adopter household already has gigabit service, yeah). Retail providers are looking forward to having access to "dark fibre" on the network, rather than buying services from Chorus. But however the rules eventually fall, it seems clear that 2020 will be a year of change: new means of wholesale acccess, new products – and the availability of the country's most valuable screen content.

It seems clear that 2020 is going to be a very interesting year.

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