Tom Pullar-Strecker reports on signs Sky Television is about to buy Orcon in Sky TV may enter 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 percent 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. That 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. Yet I suspect 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.

I don’t 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.

7 thoughts on “Sky and Orcon: Not a marriage made in heaven

  1. Well, if Sky buys up Orcon I’ll have to look for another ISP. I was somewhat upset when Kordia sold it as a large part of the reason for me being with Orcon was that it was state owned but I didn’t move then because I couldn’t find a better deal. But I’ll be damned if I’m going to pay money to Sky.

    • Now that’s an interesting point. I was thinking there would be, let’s say ‘content sharing’ types on Orcon who wouldn’t be happy if their internet activity was controlled by Sky. Yes, there are others who have different objections to Sky.

      I guess another point is how does a company that is a monopoly in its core market play in a competitive arena?

  2. I hope the rumours are not true. I am an Orcon customer and I have given up on using their customer help desk. The team in the Philippines are wonderful for pr but don’t really get results in NZ. As a reasonably tech savvy user I just work around them.

    My real exit barrier is resetting up the WiFi ( for multiple devices) but if Orcon gets bought by Sky I will switch to SNAP or someone like them. Having been a Sky customer many years ago I want nothing to do with them.

    It never made sense to pay a subscription only to get the same or even more ads on their channels. I don’t give a rats about watching sport on TV which is the main reason Sky is still in business despite them showing the same dross that is on most TV channels.

    Now that Netflix is available Sky’s long term future is rubbish anyway so it would be a double albatross move to misquote Coleridge.

    Also – Orcon needs to come clean to its customers otherwise a fair number will start jumping ship so as not to be left stranded. Wearing another hat I am helping some customers of a hosting business that recently went broke and that is no fun.

    • So there we go, it’s already 60,000 minus three customers. 🙂 That average cost per user acquired is going to go well past $500.

  3. The rate of subscriptions for MySky and the move of other TV watchers to on-demand viewing is a good reason to move Sky’s distribution from Satellite based to internet based.

    Satellites have limited bandwidth resulting in huge numbers of channels all hugely over-compressed. The new development of offering unlimited internet packages is the first time that NZ’s internet would allow for tens of hours of video at 1-10Mbps data rates to be moved into homes without breaking data caps. Internet bandwidth would only need to accommodate what you’re currently watching/downloading rather than every channel like Satellite broadcast must achieve.

    This would allow for a set-top box plugged into your TV that would allow for streaming of live content and download of subscribed content from servers located in New Zealand. I’d suggest that the current Optus satellite will be the last satellite Sky uses for distribution.

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