Sky and Vodafone plan $3.5 billion merger

Sky and Vodafone New Zealand confirmed merger plans. The deal is worth about $3.5 billion which is huge by New Zealand standards.

The combined company is expected to generate just under $3 billion in revenue next financial year and an EBITDA of nearly $800 million. This will make it a major player, but Spark NZ would still be slightly larger in both revenue and EBITDA.

Analysts say the merger mirrors the US “triple play” model, combining TV, phone, and internet services, but New Zealand’s open-access networks limit full vertical integration.

Vodafone’s 4G network may handle fixed wireless broadband, but data capacity could constrain TV-heavy households, meaning the new business will still rely on networks like Chorus’ copper and local fibre lines.

Last month I spoke with Simpson Grierson partner Michael Pollard for the New Zealand Herald. Deals hit $9 billion in 2015 and global M&A growth flowed into New Zealand. With Sky-Vodafone, 2016 is shaping up even bigger — though activity usually ramps up mid-year.

Triple play strategy in New Zealand

Somewhere in the thinking behind the Sky-Vodafone merger is the knowledge some US companies combine media and telecommunications. They may even be profitable.

In most case these are cable TV companies who also offer phone services. Or phone companies who deliver cable TV through their pipes.

You may hear this described as a triple play. That is a service provider selling TV, phone calling and internet connections with only one bill.

On the surface this is where a merged Sky-Vodafone business is going.

Yet there is one important difference between the US style triple play strategy and what happens in New Zealand.

America’s triple play operations are vertically integrated. The service provider owns the cable connection to a house. It controls everything all the way back to the telephone switch, internet server and TV broadcast suite.

That can’t happen in most of New Zealand. It may work in those parts of Wellington and Christchurch where Vodafone inherited the HFC network.

Limitations of fixed wireless and open-access networks

While the new business could theoretically deliver services using fixed wireless broadband, Vodafone’s 4G network has limited capacity for high-volume TV users. This means that, for most of New Zealand, Sky-Vodafone will still need to rely on open-access networks like Chorus’ copper and local fibre networks. This prevents the kind of vertically integrated triple-play seen in the US.

How this will play out and whether the new business hits regulatory hurdles is not yet clear. One thing is clear, if Sky-Vodafone’s competitors can appeal to the Commerce Commission, they will. Expect to see courtroom dramas as this plays out.

Content strategy and sports broadcasting

In Australia, Optus has the rights to the English Premier League. To watch English football there, you must be an Optus customer.

Football is popular but a minority sporting code. Australia’s big codes are subject to anti-siphoning laws, meaning pay-to-view media companies cannot block the most popular fixtures from broadcast TV.

In New Zealand, there is no anti-siphoning law. To watch rugby union, rugby league or cricket, viewers must buy a Sky package. While there is no indication the merged business plans to block other networks, any hint of this would be controversial.

Avoiding the “dumb pipe” problem

Paul Brislen notes in The Spinoff that the deal might be great for shareholders but less so for consumers.

Telecom companies worry about being “dumb pipes”: when rivals sell identical products, it is hard to make money.

By merging with Sky, Vodafone adds value to the pipe by controlling content distribution. But Sky’s content model has its own challenges.

Merging two companies facing tough technology and network challenges could solve problems — or force executives to fight on two fronts instead of one.