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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. 

King CanuteCallPlus backed down. From September it will stop providing Global Mode. The service allows customers to hide their whereabouts. That way they can buy low-cost streaming video services direct from the US, UK or elsewhere.

In return the big media companies halted legal action against CallPlus.

Among other things they claimed Global Mode breached the Copyright Act and the Fair Trading Act.

That won’t be tested in court. We’ll never know if Global Mode was legal or not. That’s a pity because it leaves important questions unanswered.

Plenty has been written elsewhere (and by me) on what is a rearguard action against new digital distribution models.

This was always going to end badly for the big media companies, even if they won the Global Mode action.

That’s in part because Global Mode was a local version of something consumers can buy elsewhere.

While the King Canute media companies have stopped a wave, they haven’t stopped the tide.

There’s something else.

Globle Mode looked legitimate

Regardless of the untested legal arguments, Global Mode looked like a legitimate way of bypassing content geo-blocking. Consumers who used it felt they were doing the right thing. They were buying media.

It has taken the media business decades to convince consumers they should pay for media and not use shady operations like Pirate Bay.

And for a while they were.

Overnight, the big media companies have closed that channel. Consumers addicted to the latest shows, to entertainment not available from officially sanctioned New Zealand distributors have nowhere else to turn.

Some will lose interest. Others will head back to illegal channels.

That is not a victory for media companies.

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.

A $45 per month Sky TV subscription is the centrepiece of Vodafone’s Red Home fibre internet package launched on Friday.

It’s a smart move combining broadband, phone and television that plays to Vodafone’s existing relationship with the pay TV monopoly.

At the press launch in a Herne Bay villa Vodafone head of consumer fixed services Steve Jackson said pay TV gives New Zealanders the incentive they need to move to fibre. That’s important given the slow uptake of residential fibre and the lack of any other obvious ‘killer application’ making fibre a must have.

Competition in fibre services, not media content

Vodafone deserves credit for identifying what customers want and finding a way to serve it. Thanks to Red Home, we have a vibrant competitive market in consumer-focused fibre internet.

Yet something disturbed me watching the impressive launch. Have New Zealanders been tricked into buying a spanking new delivery network for Sky?

On our behalf, the government has invested $1.5 billion of public money to seed the UFB network now being built by Northpower, Chorus, Enable and Ultrafast Fibre. Those companies are likely to tip in their own billions, by some estimates bringing the total cost to around $5 billion.

Real UFB cost is billions

On top of that, our largest telecommunications company was torn in two. At a further huge cost to investors. And, if the Coalition for Fair Internet Pricing has its numbers right, the thick end of another billion dollars will transfer from citizens to Chorus in a transaction the coalition describes as a copper tax.

Was all this just so that Sky can save on replacing its satellite and sell its content via fibre? Have we strengthened the monopoly?

It’s a question that was discussed before a single turf was cut on the UFB project. In fact it was discussed before the UFB contracts were announced. Nobody seems to have found any answers. Just don’t assume no-one is watching.

Commerce Commission warns Sky

Earlier today the Commerce Commission warned Sky about it contracts with service providers like Vodafone. The company escaped a fine for what the Commission calls historic breaches of competition law saying market changes reduce the opportunity for similar behaviour in the future. It also said it will continue to monitor Sky and will take the company to court if there is evidence of further breaches.

The Commerce Commission is a regulator. It acts like a police officer. What’s needed to deal with the relationship between Sky and companies selling fibre services is a fresh look at New Zealand media law – something our government seems reluctant to do.

In the meantime, the UFB’s real value lies in turbocharging New Zealand business – the residential network may be sold as a consumer product, but it will revolutionise life for hundreds of thousands of small companies working from suburban spare bedrooms, sheds and garages. That’s what our money pays for.

Any benefits to Sky are a byproduct. If that company becomes an abusive monopolist on the back of those benefits, a future government will have to step in and slap it down.