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After months of speculation Sky says it will enter the broadband market next year. The move was the industry’s worst kept secret.

Sky says it will start by targeting its existing TV customers. Then it will focus on homes that are fibre-ready but not yet connected.

In a media statement, chief executive Martin Stewart says: “We want to provide the best possible sport and entertainment experience to New Zealanders. A high-quality, high-speed broadband service built specifically for entertainment helps us do that.

Rumours about Sky’s entry into telecommunications have swirled around the sector for months.

Make that re-entry. The Vodafone merger turned down by the Commerce Commission would have got it there earlier.

And that wasn’t the only attempt. In 2006 Sky took a look at buying ihug. It asked for an exclusive due diligence period. Ihug refused, opened the process and sold to Vodafone for $41 million.

Analysis: Slow moving Sky

Sky entering the broadband market is welcome. The company has much to offer and understands how to deal with customers.

That said, next year is ages away in internet years. Everything internet moves faster than other industries.

By 2021 Spark will have 5G towers1. Most likely, it will sell fixed wireless as an alternative to the fibre services Sky aims to sell. Vodafone may have extended its network and its fixed wireless offering.

It is also possible next generation satellite broadband services will be available2.

Fibre is a better broadband experience that fixed wireless or satellite. Yet not all customers know that. ISPs will carpet bomb marketing for the alternatives.

Stuff Fibre, the missed opportunity

Likewise, New Zealand’s broadband landscape could look quite different. Last week Vocus picked up the 20,000 or so Stuff Fibre customers. A wave of consolidation is long overdue.

The acquisition is not enough to move the market share dial.

Even so, a larger base gives Vocus more scope for economies of scale. And more customers to crosssell energy and other products to. It gives Vocus momentum.

Sky is short of cash. Buying Stuff Fibre may not have been easy for the company. Yet, Stuff Fibre would have been a good fit for Sky; a better fit than for Vocus.

And anyway, Vocus is not awash in loose change either. If the hard-up Australian-owned telco could cut a deal, Sky could have found a way.

Reasons to buy Stuff Fibre

Buying Stuff Fibre would have done three things. First, Sky would enter the market with a crash and a roar, wrong-footing rivals. Never underestimate the value of shock and awe in a competitive consumer market.

It could also have brought the expertise needed to kick-start Sky’s plans.

The third reason Stuff Fibre would have been a good buy for Sky is that, Stuff is also a media company.3 They share some characteristics. While the Stuff Fibre customer proposition is different to Sky’s, it’s not so different.

A virtual ISP

It is not well known outside the sector, but Stuff Fibre is, in effect, a virtual ISP. Stuff looks after the brand, sells subscriptions and counts the money. Meanwhile, in the background, a company called Devoli handles the technical side.

This is an ideal model for Stuff with a well-known brand and few in-house technical skills. The Virgin brand does something similar overseas.

The virtual ISP model would almost certain work as well for Sky. Maybe it still will.

Tick-tock

Every day that ticks by is another wasted day for a would-be ISP. By this time next year about two-thirds of all people who can connect to fibre will be using it. Of the rest, some will have chosen fixed wireless broadband. Others may choose never to buy broadband.

Other ISPs will have picked almost all the low-hanging fruit by the time Sky gets its act together.

Sky’s second strategy is to “focus on homes that are fibre-ready but not yet connected.”

Take away the two-thirds of home that will be connected by 2021. Take away the people who don’t want or can’t afford broadband. Then take away the fixed wireless broadband users. However you cut the numbers, that does not leave much of an addressable market.

More intense competition

Which can only mean that Sky will need to woo customers away from other ISPs. It still has sports right, it still commands a lot of entertainment programming.

The company says it will use these to pull in customers. Maybe.

The obvious case to look at here is Spark. Spark’s Spark Sport and its Rugby World Cup streaming have been high profile. Nothing draws in New Zealand customers more than the promise of seeing the All Black in action.

Now here’s the bad news for Sky: Spark’s fibre broadband market share fell during the last year. That’s the time it was giving away RWC streaming to new customers.

This tells you that Sky has a mountain to climb. It never looked easy, but Sky has to put its foot on the gas. It won’t get a second chance.


  1. The South Island trial run doesn’t matter in the big picture ↩︎
  2. Cheaper perhaps, but unlikely to be as cheap as fibre ↩︎
  3. Media triva fans might recognise the two companies share common roots. Both stem from Wellington Newspapers in the 1980s. ↩︎

July 29 (BusinessDesk) – The $3.4 billion Sky-Vodafone New Zealand transaction the Commerce Commission rejected in 2017 was the most difficult of the vertical mergers former chair Mark Berry had to consider.

Source: Sky-Vodafone merger decision challenging – Berry | Scoop News

Would the Commerce Commission make the same decision today?

It could go either way.

One of the reasons the deal was turned down was Sky’s iron grip on sporting rights. Since 2017 Spark has entered the market with Spark Sport, yet aside from this year’s Rugby World Cup, it doesn’t have rights to any of the major NZ sporting codes.

Sky has gone from owning 100 percent of the sport market to something less than that. Yet it’s market presence remains substantial. It would be hard to argue things have changed enough to alter the merger decision. This could change if Spark Sport achieves lift-off.

Spark, you may recall, was one of the main objectors to the Sky-Vodafone merger. Its lobbying paid off.

2degrees featured prominently in Mark Berry’s deliberations:

“There was particularly a concern about what the future of that market would look like if we let this merger go ahead, and if that kind of effect happened – with customers being taken away from 2 Degrees such that it would no longer have the incentive or the ability to invest and compete.”

Former Commerce Commission chair Mark Berry

It’s worth reminding yourself that in some ways 2degrees is a talisman for mobile telecommunications market competitiveness. While 2degrees is a force, the market can be seen to be working. The company’s position is no strong today.

One other change since 2017 is that Vodafone now looks to be in a stronger position since its part-acquisition by Infratil. This would play into any Sky merger decision in a subtle way.

Infratil also owns a substantial share in Trustpower, the fourth largest internet service provider. It has told the Commerce Commission that Trustpower and Vodafone would remain separate.

There has to be some concern about this. Since the acquisition Trustpower has joined with Vodafone and Vocus’s unbundled fibre campaign. That could be a coincidence.

Yet given Trustpower’s strength in building bundles of services around broadband, the possibility that company might have preferred access to Sky content would set off all kinds of alarms at the Commerce Commission.

Sky TV has rebooted its streaming sports service with Sky Sport Now. It’s a new app for phones, computers and tablets offering 12 dedicated sports channels. It will replace Sky’s Fanpass from August 1.

At the same time Sky will start broadcasting a dedicated sports news channel. It will have local news and have local presenters. It will also pull material from around the world. This includes bulletins from Fox Sports News Australia and Sky Sports News UK.

The revamped streaming app will have dedicated channels for rugby, golf, cricket and football. Sky will add two ESPN channels and the new sports news channel to the mix. There will also be pop-up channels for major sporting events.

Better everything, high definition

Sky CEO Martin Stewart Sky Sport Now is the first evidence of the company’s new focus on online streaming.

Well yes. It’s also the first evidence that Sky is fighting back against Spark Sport. For months it has looked as if it had no answers, nothing practical to respond with.

The new app addresses one of the weaknesses of the old four channel Sky Fanpass by giving users access to replays and on demand content. There will also be links to statistics on games and individual athletes.

Pricing for Sky Sport Now includes a weekly $20 pass and a monthly $50 pass. Customers who sign up for a year pay $40 a month.

Sky Now competes with Spark

Elsewhere Stewart told Chris Keall at the New Zealand Herald Sky will be a more aggressive bidder when buying sports rights. He says: “If someone outbids us, they’re going to go broke”.

Of course he is talking about Spark Sport.

This is where things get interesting. In round numbers Spark’s revenue is about four times Sky’s. It has relatively little debt, which means it can access cheap money to invest in new products and services.

So, on one level Spark appears to be a formidable opponent. In theory, it could easily outbid Sky for key sporting rights.

Asymmetry

Yet Sport is only a small part of Spark’s business and it most definitely not the main game. Apart from anything else, Spark is about to embark on building a 5G mobile network. This could cost the thick end of a billion dollars over the next decade. There are other calls on its funds. Spark is multi-faceted business.

Investors might not be happy if Spark gets into a high stakes bidding war with Sky over sport.

Sport is central to Sky’s business. That’s likely to be even more the case in future as seemingly unstoppable streaming services like Netflix chip away at the other parts of its business.

Sky doesn’t have much of a future without access to a solid cross section of popular sport programming.

Virtual signalling

By signalling its willingness to outbid Spark for key sports codes, Sky is warning its rival’s investors that the costs could escalate. It is in effect asking if they have a stomach for the fight ahead.

This is not mere posturing. Spark has already blinked with other products that were part of its move into digital services.

The company is looking for partners to share the risk with its Lightbox service. You can take it as read Spark would sell Lightbox at the drop of a hat if there was a realistic offer. Spark also recently closed its Morepork security business.

Digital services like Spark Sport may not be as central to the company’s long-term plans as it has previously said.

There’s another clue for Spark watchers following the Sport project’s progress. Spark is now giving away its Rugby World Cup service to customers signing long-term contracts. This can be read as devaluing the brand, or it could be read as using sport to support the main business.

Room for two?

There can room for two New Zealand streaming sports companies if they can both get the mix right.

Spark doesn’t have enough in its current line-up to be a must-buy service. The Rugby World Cup is a one-off. English Premier League is a niche, albeit a fanatical one with an audience willing to pay.

It needs a long-running, popular, season-long competition, not just a few weeks of a cup tournament.

In effect, Spark needs main rights to at least one of Rugby Union, Rugby League and Cricket. Seeing as you asked, Netball is almost as important, but it can’t carry a channel on its own.

Sky, on the other hand, can’t afford to lose any of these major codes.

The long tail

This is not to say the other sporting codes don’t matter. There is a long tail. It helps to think of the big codes as being like anchor tenants in a shopping mall. They bring in the majority of punters who then stay on for the other options.

The acid test for Spark, indeed the acid test for New Zealand streaming sport is the Rugby World Cup. As Jeff Latch mentioned at Spark’s recent press conference, there will be unhappy people no matter how well Spark performs.

If the RWC is a triumph, Spark Sport can ask investors to loosen the purse strings building a bigger brand. If it’s a disaster, the project will be seen as a brief flirtation. Spark’s next move will be damage limitation and probably a face-saving exit from sport streaming.

Most likely the verdict will be somewhere between these two extremes. For some New Zealanders this will be more of a nail-biter than any action on the pitch.

Infratil is among the few companies able to unlock Vodafone New Zealand’s value. There is untapped potential. It may not be immediately obvious to other potential buyers.

That potential didn’t excite enough interest when the company was taken on the road after the Sky TV merger failed. Presumably, buyers looked in the wrong direction.

Most people see Infratil as an infrastructure company. It is that.

Infratil hold TrustPower key

Infratil also owns a little over half of electricity retailer TrustPower. This is the key to unlocking Vodafone’s value.

TrustPower isn’t any electricity retailer. It is also New Zealand’s fourth largest internet service provider.

Number four doesn’t mean big. Last year’s Commerce Commission monitoring report said TrustPower has a five percent market share of broadband connections.

That’s small. Even when added to Vodafone’s 26 percent, the two don’t get close to Spark. That company still has more than 40 percent of all connections.

Small but potent

If Vodafone plus TrustPower doesn’t alter the broadband balance of power, what is disruptive here?

The answer is Trustpower has found how to make more profit from connections. It sells bundles combining broadband and power in a single bill.

Buying Vodafone opens the door to a million Vodafone customers. Many of these will also buy electricity.

It turns out broadband and electricity are a potent mix. They may go together better than, say, broadband and pay TV.

Would you like fries with that?

TrustPower isn’t the only company to find value in the “would you like fries with that?” broadband and power proposition. Vocus acquired a small electricity retail business. It has been selling power to its customers.

Electricity and broadband have worked for TrustPower.

Both services need investment in billing systems. Billing is a large cost for both electricity and broadband retailers. Putting two services on a single bill trims costs. It increases margins by more than you might imagine. A few dollars per month times thousands of customers soon adds up.

Remember Vodafone has struggled in the past with billing.

There are other efficiencies. You don’t, for example, need to run separate call centres for power and broadband customers.

Golden handcuffs

These cost savings are nothing compared with the value Trustpower gets from having customers buy both services at once.

Customers who buy more complex bundles of services are less likely to go elsewhere. TrustPower cuts churn every time a power customer signs up for broadband. This also works the other way around.

A million Vodafone customers have already proved they are creditworthy. There is probably enough data to know which customers are difficult to deal with. It may even be easy to identify homeowners or lead tenants, the people most likely to buy electricity.

Asymmetric information

There’s another aspect to TrustPower’s offer.

You’ll notice TrustPower’s advertising splashes the headline price of broadband. Usually this is so much a month less than other high profile broadband retailers. In some cases, the first months are discounted. A normal rate kicks in a few months into a 24-month contract.

TrustPower sweetens deals by offering Samsung flat screen TVs or other inducements.

It’s easy for consumers to comparison shop for broadband. There aren’t many speed and data options.

Selling photons and electrons

It’s harder to comparison shop for power Both are low margin products. Both are competitive markets. It is often easier to make more profit selling electrons than photons.

Vodafone and TrustPower under a single umbrella means more market power. That’s not helpful when it comes to inputs, companies buy broadband at regulated prices from wholesalers like Chorus and Enable. It is helpful when muscling to the front of a queue with partners.

We haven’t even mentioned TrustPower’s earlier bid to establish a mobile virtual network operator business. If nothing else, the company’s executives would have looked closer at the economics of selling mobile. This is Vodafone’s core business.

Infratil invests in infrastructure

Vodafone was due to float next year. The parent company, the UK-based Vodafone Group, wants to get as much of its New Zealand investment out of the country. It plans to invest in places like India where there is more long-term potential.

One challenge Vodafone faces and would otherwise continue to face is finding funds to invest in 5G. Doing the job properly would cost the thick end of a billion dollars over the next decade. Infratil can cover the spend.

Sure, Vodafone has other attractions. It won’t all be about cross-pollination with TrustPower. Yet the million-plus creditworthy mobile customers who might be persuaded to switch electricity retailer, are an important part of the company’s value.

My Box screen display

Sky TV is celebrating a court win against My Box, the streaming service that advertises its ability to play Sky’s content for free.

The Auckland High Court ruled that My Box cannot describe its service as legal. It confirms that using its hardware and software to show Sky-owned material is a breach of copyright.

The court will hold a hearing to decide costs early next year.

Sophie Moloney, Sky’s general counsel says: “This decision, along with the recent ruling against Fibre TV boxes in Christchurch, sends a very clear message to New Zealanders that these services are not all they are cracked up to be.”

Sky’s roundabout victory

What’s curious about this case is that Sky didn’t manage to win a straight legal victory over video piracy. It took action against My Box and the company owner Krish Reddy under the Fair Trading Act.

In effect, Sky’s successful legal argument was that My Box was making claims about its service that were misleading.

This echoes the way US authorities finally managed to nail gangster Al Capone because of his tax evasion, not his more serious crimes.

My Box pirate

What’s pleasing about this case is that Reddy is an out-and-out pirate. This isn’t like a bunch of kids being busted for watching a naughty episode of a show that isn’t even available through legitimate entertainment channels. It’s not like someone bittorrenting a missing episode or using a VPN to watch BBC coverage.

Sky has a far better moral argument here.

Reddy may not be a gangster, but his My Box business is copyright piracy on an industrial scale. He claims to have sold 17,000 boxes.

While you can’t argue that every one of those 17,000 customers would have otherwise subscribed to Sky, it’s clear that Reddy sucked a lot of money earmarked for video entertainment out of an industry that struggles to pay its way.

Last year I received one of the My Box spam emails. Heaven knows how the company got hold of my details. It did come via a long defunct but still forwarded email address.

Wake up call

The fact that it was spam is a wake up call in itself. But the email wasted no time telling me that I could get content for free without paying a Sky subscription. It looked crooked.

Piracy is in decline. There’s less need to steal content when it isn’t expensive to buy from the likes of Netflix or Lightbox.

Even sport, which comes with more of a premium price tag, is affordable for most New Zealanders. At least in relative terms. A year-long subscription to Bein Sport NZ or Sky Fanpass is roughly a couple of days pay for someone on a minimum wage.

Sky is My Box’s most obvious victim. In a way so are the people who paid the company money and believed they were getting legitimate access to streaming video services.

In theory, any customer would have a good case to demand their money back. I suspect they, like Sky, will find there are few if any assets left in the business.