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Sky TV to become Vodafone-SkyHere in New Zealand, television stories dominate the week’s telecommunications news.

Sky and Vodafone bow to the inevitable and call off their merger. Meanwhile TVNZ goes all in on streaming video.

For more than 40 years journalists have written about convergence. The telecommunication triple play idea: combining voice, data and television, is well over 20 years-old. I first heard about it in around 1990. That’s right, it pre-dates the commercial internet1.

Almost overnight, we’re on the other side of the revolution. Some bewildered people are looking back and wondering what happening. The rest of us wonder why it took so long to get here.

You say you want a revolution

The revolution is not that hard to understand, television uses electrical signals. They used to be analogue. Digital is better. Once TV was digital, it was only a matter of time before it became another stream of bits travelling through networks.

It took longer for the industry to grasp what that means in practice. Today we have Netflix and a cluster of junior would-be netflixen. We have binge viewing. We have on-demand viewing. Yacht races from across the world beam on to our mobile phones as we commute to work.

What we still don’t have is the choice and flexibility we get from other online media. That’s coming.

History lessons

If you look at the sweep of online history, a merger between Vodafone and Sky TV makes perfect sense. It made sense to the management and board of both companies. If you look at the deal with the eyes of a competition regulator, nixing the deal makes sense. It could have established a monster.

There is something odd about the Commerce Commission’s decision on the Vodafone-Sky merger. Yes, a merger would give one telco access to the crown jewels of sports programming. Yes, it could be exclusive access.

But Sky still has a monopoly on that material. A stand-alone Sky can cut an exclusive deal with a broadband company. Indeed, it’s quite possible that it will strike an exclusive deal with Vodafone. Today’s agreements and contracts between the two companies point in that direction.

Exclusive anyway?

So the Commerce Commission vetoed a merger because of something that will happen anyway. Am I alone thinking that is odd?

Whatever the logic, Sky and Vodafone have come to terms with the decision. The two issued a terse statement to the New Zealand Stock Exchange on Monday. It gave no reasons. But said they withdrew their High Court appeal protesting the Commerce Commission’s decision.

The marriage may be off, but the two companies remain good friends. The relationship is still on.

Free Sky Sport for Vodafone customers

In June Vodafone said it would give 12 months’ free Sky Sport to customers buying broadband and a basic Sky TV service. This is, more or less, the kind of arrangement the Commerce Commission worried about.

Elsewhere, Vodafone mobile customers can get a deal which includes free Sky Neon. And Sky is providing Vodafone with exclusive live coverage of All Blacks matches.

There’s a secondary commercial logic here, the phone company is now the team’s sponsor. Yet both deals have a whiff of the exclusivity that the Commerce Commission feared. Remember, in February the Commerce Commission said a proposed $3.5 billion merger would reduce competition.

Separate, but vertically-integrated

It said Sky and Vodafone had an opportunity to create a vertically-integrated business. That would give a single telco access to all popular sports broadcasting rights. There was a fear the market power wielded by the new business would lock out other potential bidders.

Now rivals fear the two non-merged companies are doing the same thing anyway. They are building a form of vertical integration without all the parts being in a single company.

The tragedy here is that, unlike Australia’s ACCC, our regulator can’t impose rules. That way it could OK the merger and insist the new company licence Sky content to all-comers.

There’s a ridiculous lack of broadcasting oversight in New Zealand. The Commerce Commission’s job is to ensure competition. We have intense telecommunication competition, but one company holds a TV sport monopoly.

TVNZ goes all-in on digital

From Monday, Television New Zealand will livestream channels One and Two. Viewers will be able to see all broadcast material over the internet on PCs, tablets and phones. Everything will be available online in HD 720p format. There will also be a new catch-up on-demand service.

Some material will be in box-set format for binge viewers. Programmes will be on Chromecast from next month and Apple TV later this year.

TVNZ plans to optimise its streaming service for mobile devices. It will also keep programmes available online for longer.

For now, there are no plans to do anything about television transmission. Although TVNZ says that could change depending on demand.

The ghost of Netflix

All these moves acknowledge the changing way people use television. The spectre of Netflix is somewhere there in the background.

The key problem for TVNZ is that it earns its revenue from advertising. This is more annoying and intrusive online than on broadcast TV.

If TVNZ wants to address Netflix head on, it might think about offering an ad-free paid option. Of course, it would need to have enough high quality material to make that viable. It could start by investing more in its news and current affairs programming.


  1. People started talking about the idea in the 1990s. I first heard the term around the time Kiwi Cable was building an HFC network on the Kapti Coast. The first serious attempts at triple play didn’t come until later. ↩︎

Sky TV to become Vodafone-SkyThe Commerce Commission declined the proposed Vodafone-Sky merger saying it would decrease competition in telecommunications.

That seems right1. The important thing is that Sky has all the important rights tied up. It owns or sub-licenses all the popular sporting codes. Most of all it has the rights to Rugby.

At the moment Sky has a deal with Vodafone to sell its services over broadband as a bundle. But in practice anyone with a broadband account can buy services from Sky.

Vodafone says it doesn’t plan to stop Sky selling to all comers, but that’s not a legal obligation. It could have made a formal undertaking to continue the practice, but did not.

Vodafone-Sky exclusive

Therefore, Vodafone could at any point decide that its customers get access to some or all channels. The moment, say, an important sporting fixture, becomes a Vodafone-Sky exclusive, then all other broadband companies would be in trouble as their customers switch telecommunications service provider.

This will be twice as effective if exclusive Sky material is distributed to Vodafone mobile phones.

The temptation to do this will be great. It is also why Sky was worth the price Vodafone was prepared to pay.

After all, what is the point of having a monopoly if you can’t milk it?

Clearly the move has other telcos rattled. A little over half of all homes have Sky. There’s the potential for them to be locked out of those customers. This applies to both broadband and mobile.

Integration

There’s also vertical integration. Telcos love vertical integration. It is anti-competitive.

The point of the government building the UFB fibre network and splitting Chorus from Telecom was to break vertical integration.

Having said all that, TV over broadband, especially over fibre, is, in general, a good thing.

That would have been a positive. It would be good if Sky could find another way to move all its business online.

A last point worth mentioning. The Commerce Commission can only say yes or no to a proposal. Overseas regulators, like, say, the ACCC in Australia, can impose conditions. The Commerce Commission can not. So it was not an option for the regulator to say to Vodafone “you can buy Sky, but must continue selling video services to all comers”.

Had that been the case, the ruling may have gone differently.


  1. Right in the sense that a merger would decrease telecommunications industry competition. Let’s not pass rash judgement on the Commerce Commission decision.  ↩︎

vodafone

Vodafone and Sky need Commerce Commission approval for their merger. From a telecommunications point of view, there’s no reason to halt the deal.

Five years ago government tore New Zealand’s telecommunications sector apart. Then remade in the name of competition.

The government pumped $1.5 billion of public money into building a new fibre network for people in towns. Today this goes by the name UFB (Ultrafast Broadband).

A separate RBI (rural broadband initiative) project aimed to improve services for people living in the country.

Taxpayer funds come with strings attached

By law, companies taking taxpayer money to build local fibre networks can not sell direct to consumers or business.

The law draws a line between retail service providers [1] and wholesale fibre companies.

Fixed wireless broadband blurs those lines. Fixed wireless broadband services from Spark, Skinny and Vodafone are not regulated [2]. They bypass wholesalers: Chorus, Northpower, UFF and Enable Networks.

At the time of the industry restructure, legislators and regulators anticipated deals like the Vodafone-Sky merger. What they failed to anticipate was the speed of fixed wireless broadband maturing as a rival to wired technologies.

Triple play, quad play

The key to understanding Vodafone-Sky is what industry insiders call the triple play. Triple play is where a telco offers customers phone, internet and TV. Consumers pay for everything in a single bill.

The NBR went one further mentioning a quad play which adds mobile phones.

Triple play is common overseas. And it is a regulatory concern. That’s because most overseas telcos offering a triple play have vertically integrated [3] networks. That is, they control every step of the journey from the customer’s home to the phone switches, internet and media servers.

Vertical integration

Fixed line vertical integration can’t happen in New Zealand. We have structurally separated fibre and copper networks. The connections between homes and RSP-operated networks are owned by wholesale network companies.

To get to that point the government insisted Telecom NZ demerge its Chorus business before it could win any fibre contracts.

Today Chorus has monopoly control of the copper phone network. This is the old telephone network that runs from exchanges and roadside cabinets to our homes.

Monopoly

Chorus is regulated by the Commerce Commission to ensure it doesn’t abuse that monopoly.

The government’s long term plan is for a fibre network to replace the copper network. The UFB or Ultra-fast Broadband fibre network is more than half way through a roll-out in urban New Zealand.

Chorus is the UFB fibre provider for much of the country. Northpower, UFF and Enable Networks also have regional fibre monopolies.

Someone else’s network

To sell triple play packages to fibre, ADSL or VDSL customers, Vodafone-Sky’s traffic has to pass through a wholesale network. That leaves no room for vertical integration.

New Zealand’s structural separation means, by law, every retail telco gets the same access at the same prices to the same fibre and copper services.

Chorus can’t play favourites. It can’t cut sweetheart deals. Vodafone-Sky can’t get a better Chorus network than say, Spark or Callplus.

Reining-in the power

Among other things, this makes it easier for connected customers to switch service providers. At least in theory. Structural separation is a deliberate move to stop RSPs from wielding too much power over customers.

However, structural separation doesn’t reach every New Zealand broadband network.

Vodafone runs a US-style HFC (hybrid-fibre coaxial) network in parts of Wellington and Christchurch. It passes around 150,000 homes.

In these areas, Vodafone broadband services are vertically integrated.

Big, not too big

When the first stage of UFB completes in 2019, it will connect about 1.4 million users. Users and homes passed are not the same thing, but we can say in round numbers the HFC network will reach about one-tenth as many homes as the completed UFB network.

UFB competes directly with Vodafone’s HFC network. Most users already regard UFB as technically better. Over time the performance gap will grow.

Like fixed wireless broadband, some customers find Vodafone’s HFC network is all the internet they need.

Not a threat

On its own Vodafone’s HFC network isn’t a serious threat to the UFB. Its coverage area is too small. Not does it threaten regulation. It doesn’t keep Chorus executives awake a night.

There’s little scope for Vodafone-Sky to build an aggressive vertically-integrated business even in the HFC network areas. And anyway, there’s no monopoly.

The threat could change if Vodafone-Sky decided owning its own network is such a great idea that it extended the HFC footprint. Most observers think that’s never going to happen.

You have to be careful with words like never in the telecommunications business. Remember UFB architects also thought fixed wireless broadband would never challenge fibre. And yet it does.

However, the argument against extending HFC is strong. First, UFB has better technology. Second, building networks is hard, expensive and complex. Third, an extended HFC would compete with a network that is, in effect, government subsidised.

And let’s face it, you don’t want to go head to head with the people who get to write the rules of the game.

Fixed wireless broadband

If the old TelstraClear HFC network was the only non-UFB network, Vodafone-Sky would find it tough building a vertically-integrated operation. But it owns another more extensive network. The Vodafone cellular network.

Cellular networks can deliver fixed wireless broadband. They do this without anything touching the regulated Chorus or local fibre company-operated networks.

At present wireless broadband networks are beyond the reach of broadband regulation. Although there are plenty of mobile phone regulations for carriers to worry about.

Vodafone, Spark and Spark’s Skinny all offer fixed wireless broadband services. When it uses 4G cellular technology, fixed wireless broadband networks can deliver close to fibre-like performance.

Like rural broadband, only in towns

This is what Vodafone offers RBI customers in rural New Zealand.

Sure, performance is not always that good. And yes fibre has potential to go faster still. But as we’ve already mentioned, 4G speeds are more than enough for many day-to-day broadband users.

The only mainstream application that demands more bandwidth is high-quality streaming video. And you need to have more than one person in a house watching HD video to use all the bandwidth available from a broadband connection.

As things stand in New Zealand at present, fixed wireless broadband presents Vodafone-Sky with a potential second vertically integrated broadband network.

Fixed wireless limitations

Fixed wireless is not without challenges. The bandwidth is limited and shared. On the other hand Vodafone has plenty of suitable spectrum to play with and those resources will stretch further as 4.5G and 5G technologies arrive.

There’s a finite limit to how many fixed wireless broadband customers Vodafone’s existing network can support in urban areas. Fibre is often a better way to reach a dense population.

Things are different outside the towns and cities with the RBI towers.

A Vodafone insider told me, for now, the potential urban fixed wireless broadband network market is measured in tens of thousands, not hundreds of thousands.

Wireless not head-on challenge to UFB

Although the Vodafone cellular network may ‘pass’ a million or more homes, it can’t service them all simultaneously with fixed wireless broadband. At least not today.

Faster wireless technologies are on their way. They’ll make better use of available spectrum, but there’s still a limit. As they say, you cannae break the laws of physics.

To get around the physical limits. Vodafone could build more towers. Doing so is far from trivial. There’s a financial cost – that might be justified. There are also social costs. People might want wireless services, they often don’t want more cellphone towers in their neighbourhood. Nimbys are everywhere.

With a little help from my friends

At best, with help from the network equipment makers, fresh investment in towers and smart planning Vodafone may stretch to supporting say 100,000 urban fixed wireless broadband customers.

If every house passed by HFC chose Vodafone-Sky, if Vodafone-Sky could maximise the 4G network fixed wireless capacity, it might, just, reach 250,000 customers. This compares with the 1.5 million reached by UFB.

Most customers on Vodafone-Sky’s vertically integrated networks would have viable alternatives to choose from. If anything customer choice is increasing, not reducing.

The issue here is not that Vodafone-Sky is hell bent on working around telecommunications regulation at any cost. It’s more that lucrative opportunities are emerging for Vodafone-Sky and, for that matter, Spark, to bypass regulations.

 

 


  1. Jargon alert. We used to call them ISPs which meant internet service provider. They now sell other services so they become RSP or retail service providers.  ↩
  2. Wireless broadband’s potential was understood when the UFB contracts were drafted. Chorus noted the risk in the documents it gave investors. ↩
  3. More jargon — sorry. Economists say companies are vertically integrated when they own different stages of production. For example oil companies once owned wells, tankers and petrol stations. Vertical integration is often a barrier to competition. When Telecom NZ was vertically integrated, competitors struggled to get a market foothold. In 2008 Chorus became a separate business unit. That was organisational separation. In 2011 the companies emerged, move known as structural separation. ↩

vodafone

Earlier today Sky and Vodafone New Zealand confirmed they plan to merge.

It’s a big deal…

The deal is worth about $3.5 billion. That’s huge by New Zealand standards.

Last month I interviewed Simpson Grierson partner Michael Pollard for the Capital Markets report in the New Zealand Herald. I wrote:

“Deals nudged the $9 billion mark in New Zealand in 2015, and mergers and acquisitions around the world, with global volumes up 37 per cent, had a flow-through effect into the New Zealand market.”

At the time observers thought 2016 would be a solid year for New Zealand mergers and acquisitions after an outstanding 2015. Although they all told me the action doesn’t tend to warm up until mid-year.

Thanks to the Sky-Vodafone deal 2016 will be even bigger than 2015 for mergers and acquisitions.

…but not as big as you might think

Together the new business has a forecast revenue of a shade under $3 billion for the next financial year and expects to see an EBITDA (earnings before interest, tax, depreciation and amortisation) of almost $800 million.

It will be one of the largest businesses on the NZX. Yet, it still won’t be as big as Spark NZ.

Spark’s latest half-year report showed the company had revenues of around $1.7 billion for first six months of the 2016 financial year. EBITDA for the same period was a shade over $450 million.

Telecommunications isn’t growing. Spark’s guidance says to expect growth between 0 and 3 percent in the second half of the year. Let’s take the lower figure.

That would give Spark revenues of around $3.5 billion and an annual EBITDA of a little over $900 million.

On that basis, Spark NZ would still be about 10 to 15 percent larger than the merged Vodafone-Sky business.

Triple play

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.

It is possible for the new business to run something along these lines using fixed wireless broadband — although data capacity could be an issue here. [1]

For the most part, the Sky-Vodafone business will need, at some point, to use the Chorus copper network or the various local fibre companies, including Chorus. These are open access, which means no vertical integration.

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

In Australia, Optus, a telecommunications company has the rights to English Premier League. If you want to watch English football in that country, you need to be an Optus customer.

Football is popular, but it is a minority sporting code. Australia’s big codes are subject to anti-siphoning laws. This means pay-to-view media companies can’t wall off the most popular sports fixtures from broadcast television.

There’s no anti-siphoning law in New Zealand. If you want to watch Rugby Union, Rugby League or Cricket, you have to buy a package from Sky. While there’s no indication the merged business intends to stop selling these packages to customers on other broadband networks, any hint this could happen would be, let’s say, controversial.

Dumb dumb pipes

Paul Brislen touches on this last point in an opinion piece at The Spinoff. He says this deal might be great for shareholders, but isn’t so good for consumers.

Moreover, Brislen explains why telecommunications companies are worried about being little more than a dumb pipe. The short version is that it is hard to make money when your rivals sell an identical product.

By merging with Sky, Vodafone skirts around the dumb pipe problem. It means it can add value to the dumb pipe by making it the conduit for content. The problem here is that Sky’s content selling model is every bit as much of a problem as the question of dumb pipes.

Putting two companies faced with tough technology challenges in one basket could solve all their problems. Or it could mean executives have to face a war on two fronts instead of one.


  1. Let’s face it. Data capacity is an issue here. Vodafone’s 4G network can only support a limited number of fixed wireless broadband users. While there’s scope for bigger data caps, it’s never going to be the best delivery mechanism for voracious TV consumers.  ↩

Premier League Pass

Chris Keall, writing at the NBR, reports Lightbox Sport, a joint venture between Coliseum Sports Media and Lightbox, has lost the New Zealand TV rights to English Premier League football.

Coliseum’s Premier League Pass is innovative. It is special:

  • Premier League Pass packages top-flight English football in a handy, innovative online format. Fans can watch it on a laptop, tablet, phone or stream to a TV. A single subscription allows viewers to choose any format.
  • Every game is available. Fans need never miss their favourite team’s match.
  • Viewers only pay for the one sport, not a rag-bag bundle of codes.
  • Fans can watch when it suits. All games stream live, most games remain online for a day allowing easy catch-up. A handful of games stay online all week.

$200 for a season seems reasonable and inexpensive compared with Sky Sport. To get a more limited football coverage from Sky would cost at least five or six times as much.

I watch live games on my iPad Pro. The picture quality is often, although not always, first rate. An uncontested VDSL connection helps there.

New Zealand’s awkward time zone is brutal on English football fans. Depending on the daylight saving, games are usually played sometime between one AM and mid-morning. I often wake at 4:00 to catch my team’s game live — sometimes with headphones under a warm duvet.

Other times I catch up at the breakfast table with a cup of tea.

Flexible

This flexibility is so much better than the alternatives. I found this out the hard way.

When Premier League Pass first appeared I signed up for the season. For a while I enjoyed it. Towards the end of the season I had to miss many games because my workload was so high I found myself too busy to watch, even early on weekend mornings.

So for the second season I decided to, ahem, use a VPN and watch the games broadcast on UK television. This approach was unsatisfactory. While Premier League Pass had the rights to every game, the BBC and ITV did not. I often missed important matches.

Worse, I could only watch these games at set times. It may have been possible to find a way of recording matches over the VPN, I never got there.

I left the worst part of this story to the end. Last season, the club I’ve supported since I was six years old, Chelsea, won the championship. I saw about eight or nine games that year. This explains why I was first in the queue when subscriptions for the current season went on sale.

And, yes, I know Chelsea has had an awful season. It’s been painful, but if Premier League Pass was in business next year, I’d sign on again. It’s just too good and so much better than the alternatives.

Next season

What will I do next season? It depends, if the new rights holder offers a similar service to Premier League Pass, I’ll be there.

Otherwise, I’ll sign up for Chelsea’s own TV service. It’s cheaper than Premier League Pass and includes European games, assuming there will be any next season. On the other hand, I won’t get to see many non-Chelsea games. That’s a pity.

Premier League Pass isn’t perfect. It doesn’t show cup games, European matches or internationals. I’d pay more if they could be added. Yet it was the best thing to happen to New Zealand TV sport in a long time.

For a short time Premier League Pass showed the potential of unbundled sports television. Friends from overseas, including those from England, often told me they were envious of the service. Let’s hope something similar returns in the future.

This story originally said the rights were lost by Coliseum Sports Media.