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Sky and Orcon: Not a marriage made in heaven

Tom Pullar-Strecker reports on signs Sky Television is about to buy Orcon in Sky TV may enter the internet market.

He joins these dots:

Orcon director Warren Hurst indicated late on Friday evening that a deal for the sale of the internet provider was being worked on over the weekend.

Minutes earlier Sky Television said it expected to make an announcement about a “new Sky development” by Wednesday morning.

If Pullar-Strecker is right, the story is great journalism.

Great journalism, but a poor business strategy by Sky TV.

Orcon’s tricky position

Orcon is the number four internet service provider in New Zealand behind Telecom NZ, Vodafone and CallPlus.

It is a relative minnow. The company has around 60,000 subscribers and makes up about five per cent of the market.

Last year a group of private investors purchased Orcon from state-owned Kordia.

Loaded with debt

Although nothing official is on the record, industry gossip says the deal involved vendor finance from Kordia. This hasn’t been paid. The private investors have run out of money and need to sell.

Orcon’s problem is that providing internet services is a relatively low-margin business with high capital and customer acquisition costs. The two quickest routes to making money mean either finding ways to add value or from becoming larger and winning economies of scale.

Which means, at the right price, Orcon is a worthwhile purchase for another ISP wanting to build scale.

However, the asking price of $500 or thereabouts per subscriber is too high. That’s despite there being value in taking a competitor out of the market.

In other words, a rival ISP might snap Orcon up at a fire sale price, but it wouldn’t pay top dollar.

To make matters harder, Orcon ranked badly in the Consumer magazine comparison. Customer service is a particular problem. This suggests Orcon’s buyer will need to invest in technology and systems.

A good fit for Sky TV?

If Sky is looking to buy Orcon, it is because the pay television company thinks it can add value. It won’t be bulking up unless it buys other ISPs. While this is not out of the question, there’s no industry buzz about a deal being in the offing.

Sky doesn’t need Orcon to distribute its programming. It already has an exclusive partnership with Vodafone for that.

Buying puny Orcon would jeopardise a potentially strong Vodafone revenue stream with few overheads. Sky doesn’t have in-house ISP expertise, finding that would be another problem.

On the other hand, Sky has an efficient marketing and customer service machine. It has been hugely successful. Integrating an ISP into Sky’s customer service operation could make sense.

Problem child

There’s another reason Orcon is the worst possible ISP for Sky TV to acquire: Kim Dotcom.

Orcon used Dotcom to advertise its business earlier this year — whatever the rights and wrongs of the litigation and other actions around Dotcom, the man’s name is associated with file-sharing. That’s going to be a headache for Sky, which sits at the polar opposite extreme of that debate.

By all accounts the Dotcom advertising campaign was not a huge success. It may have struck a chord with consumers who, let’s say ‘lean towards content piracy’. Dealing with that will be a challenge for Sky and may cause even friction in its relationship with Hollywood studios.

It is hard to see how this issue can end well for Sky.

There’s yet another potential fish-hook. Until now Sky has managed to, largely, steer clear of the Commerce Commission and telecommunications regulation. The opposition parties have already made noises about this. If Sky becomes an ISP, it’s going to be harder for Sky to stay under the regulatory radar.

It’s unlikely whatever benefits Orcon brings to Sky will be adequate compensation for regulatory pain unless it is thinking of making further acquisitions in the ISP and telecommunications market.