Sky TV launched legal action in a bid to force ISPs to block access to streaming and video download websites.

As you’d expect, the move didn’t go down well with the industry. At least two ISPs say they will fight Sky in court.

Sky sent notice that it will seek court orders for Spark, Vodafone, 2degrees and Vocus — which trades as Orcon, Slingshot and Flip – to block a list of unspecified sites. The date blocking should start is not specified in the letters.

Spark and Vocus seem ready to resist.

The four ISPs account for more than 90 percent of all online accounts in New Zealand. If Sky gets them to block, picking off the smaller players will be trivial.

Pirate Bay

Sky TV’s letter specifically names the Pirate Bay as a site it wants to be blocked.

The pay TV company says it is targeting illegal pirate sites as they are a threat to local entertainment industries and sporting codes.

The timing is curious. Most of the threat from piracy has subsided. The battle is won.

Once were pirates

It would have made sense for Sky to have moved against these websites in the past. But today piracy is only a shadow of its former self.

Vocus consumer general manager Taryn Hamilton says his company’s stats show visits to The Pirate Bay – a popular file-sharing site – is now at 23 percent of its 2013 peak.

Most of the damage to Sky TV’s business was done a long time ago. Today pirates are no threat. Legitimate online streaming services like Netflix, Hulu and Amazon are what is really killing Sky’s business. They have already killed the pirates.

They offer a similar mix of entertainment programming at a fraction of Sky’s price. Netflix is $15 a month, Sky TV is around $80.

Sport is different

Things are different with sports programming. Sky has the rights to the most popular sporting codes in New Zealand, there are no legitimate alternatives.

While determined customers with VPNs can often shop around overseas for a better deal, it’s often too much trouble for most people. And overseas coverage can be inferior,

Hamilton says the idea of Sky blacklisting sites is dinosaur behaviour and something you might expect to see in North Korea.

It is certainly dinosaur behaviour. The fact that Sky names the faded and diminished Pirate Bay as a public enemy is a sign of how out-of-touch it is with the current scene.

Yet blocking websites isn’t restricted to totalitarian North Korea. A number of countries have laws blocking pirate websites. Often after the kind of litigation Sky plans. Web-blocking regimes don’t always work. There are plenty of workarounds for determined pirates.

Fighting Sky

Hamilton says Vocus will fight Sky in court. His company is not alone. Spark says it also aims to fight the injunction. Last time there was a copyright battle, Spark sided with Sky TV.  InternetNZ says it is seeking legal advice. Vodafone, which has a close relationship with Sky, says it will comply with any court order. At the time of writing, 2degrees has yet to commit.

Should the four ISPs co-ordinate their defence, maybe with help from InternetNZ and other interested parties, life could be difficult for Sky, which is already in long-term decline as it continues to fail to adjust to new technology.

Lawyers are obvious winners here. Litigation is likely to be expensive. One problem is there is no precedent in New Zealand for this kind of complaint, the Copyright Act stems from a time before video streaming was practical. Until now most service providers have walked away from pitched battles.

Kodi victory

Around the time Sky sent letters to the ISPs, the company won an interim injunction against Fibre TV which sells the Kodi set-top box. Fibre TV sells the set-top box along with software designed to make piracy easy. The decision was made in the Christchurch District Court and Sky was awarded costs.

It is possible that the Kodi victory spurred Sky TV’s renewed interest in attacking the ISPs. Possible, but unlikely. Fibre TV was small and unable to put up much of a fight. The case against Fibre TV was a slam dunk and there’s not much public sympathy for the company.

On the other hand, the attack on ISPs looks set to be a public relations disaster for Sky. The move is unpopular with consumers.

Criticism of Sky TV

As you’d expect Sky TV has come in for a lot of criticism over its move – not just from the ISPs who are in the firing line.

It is fair to say Sky is struggling to defend an outmoded business model. Yet it is equally understandable that the company wants to protect the value of the rights it has purchased in good faith from movie or TV studios and sporting codes.

It is possible that Sky is acting against ISPs on behalf of rights holders. In the past, the big US-based media companies have attempted similar actions. They or the sporting codes could be bankrolling Sky’s litigation or even pressuring Sky to act as their proxy.

All these protagonists seem out of touch with what’s happening on the ground. Netflix has shown how to make software piracy redundant. It charges what consumers consider a fair price for a decent selection of programming. That becomes a compelling alternative to navigating the dark side of the internet.

Sky needs to find a way to cut its prices to Netflix-like levels. From outside, that looks hard because it appears bundling channels lets Sky subsidise some content by overcharging for other content. If so, it is an unsustainable business model. Moreover, the problem has nothing to do with Orcon customers being able to see the Pirate Bay.

Also on:

Commerce Commission Monitoring ReportLast week Spark boss Simon Moutter told shareholders at the company’s AGM it is cheaper to win customers through merger and acquisition than through market efforts.

The NBR reports him saying: “We expect to see, and participate in, significant consolidation of the retail broadband industry over the next couple of years.

Give that Vocus NZ is on the market, it’s not hard to join the dots here. We can assume that Spark NZ is interested in buying some or all of Vocus.

If Spark buys Vocus NZ

There are other assets, including the fibre network built by FX Networks. But taking Moutter’s AGM comments at face value, Vocus’s broadband business is in his sights. That’s CallPlus, Slingshot, Orcon and a couple of minor brands.

Let’s assume the price is right and Spark is able to beat any rival bidders. What does this mean for market competition?

It all depends on which market you’re looking at. If we take the total New Zealand retail telecommunications sector as a whole, a Spark-Vocus acquisition would not change much.

A good starting for measuring market share among significant players is the 2016-17 TDL liability allocation determination drawn up by the Commerce Commission.

This is used to work out each telco’s share of the Telecommunications Development Levy. Only sizable telcos pay the levy, their share is proportional to the company’s share of the total qualifying revenue. In effect this number is the company’s share of the retail telecommunications market.

Spark dominates

Spark is by far the largest market player with a 35 percent share of the industry qualified revenue. Vocus is the fifth largest company on the list, but its share is a shade over three percent. Add the two together and the list looks much the same as before.

On this basis there is almost no obvious reason for the Commerce Commission to object to Spark NZ buying Vocus. The market dynamic would be almost the same as before.

The almost in that last paragraph is because the Commerce Commission’s Annual Telecommunications Monitoring report for 2016 shows Spark’s share of fixed line retail revenues as a line item. It has been falling for a decade.

By implication, Spark’s falling market share shows competition is working. If Spark acquired Vocus NZ, this figure would tick up. That may or may not be enough to ring alarm bells. Yet, while the Commerce Commission may not relish industry consolidation, it can’t necessarily stand in the way of bigger-picture market trends.

Broadband market

Retail broadband market share NZ 2016

Things get tricky if the Commerce Commission decides competition is important in the broadband market.

Spark is the largest broadband retailer with a 46 percent market share. Vodafone is number two with a 29 percent share. Vocus is the next largest player with 14 percent of the market.

The three top broadband retailers have 90 percent of the market.

Add Spark’s broadband market share to Vocus and you have a company with 60 percent of the market.

Spark is already the largest and in every respect it dominates. Yet to go from 46 percent to 60 percent would reset the market.

If Vodafone were to buy Vocus NZ, it would still have a smaller market share than Spark. The two would be, in effect, on equal footing.

Vocus NZ sale and broadband competition was first posted at billbennett.co.nz.

Vocus is preparing its New Zealand assets, which include mobile, broadband, and energy offerings, for sale by June 2018, while also exploring the sale of its ‘non-core Australian assets’ including datacentres.

Source: Vocus to sell New Zealand assets | ZDNet

The Australian parent is in trouble. As is so often the case, the people at the top decides to get rid of the New Zealand operation. After years of telling us otherwise, Vocus New Zealand is suddenly “non-core”.

Vocus New Zealand has been performing well. If anything it has done better than the Australian business.

The company’s annual report to shareholders shows the facts:

  • New Zealand revenue up 123 percent.
  • The consumer business is up 186 percent.
  • EBITDA up 103 percent in NZ dollars.
  • Average broadband revenue per customer is $71.
  • In the most recent quarter Vocus NZ had an 18 percent share of new UFB connections. That’s punching way above its weight.

Where are the buyers?

The problem for the Australian parent is there is not a conga-line of potential buyers waiting to snap up New Zealand telecommunications assets. That is, as always, except at fire sale prices.

It’s possible parts of Vocus might find willing buyers. Taken as a whole it is most likely too big for a single NZ telecommunications industry player to swallow whole. We’ve seen  the problem Vodafone had absorbing Telstra-Clear. 2degrees did a fine job integrating Snap. But that deal was at least an order of magnitude smaller.

Vocus is New Zealand’s fourth largest retail telco. It comes in behind Spark, Vodafone and 2degrees.

If the stories about a pending IPO are correct, you can rule out Vodafone as a buyer. Spark and 2degrees are also unlikely buyers, for different reasons. Although all three might like to rip juicy morsels from the carcass.

There may be regulatory reasons why none of the three bigger retail telcos would want Vocus.

Vocus New Zealand options

Which leaves three plausible options. The first is that the parent company has a big overseas buyer in mind. At times like these China often gets mentioned. Maybe that’s a possibility. We know Chinese telecommunications executives have been window shopping in New Zealand in recent years.

A second option is for a private equity buyer to pick up the business. It can’t be ruled out, but Vocus New Zealand was already in the process of applying something similar to the kind of rationalisation private equity firms apply.

The other possibility is some form of management buyout. Of course, these three alternatives are not mutually exclusive. And there is some smart telco investment money in the country. At least some of that will be from those who cashed out during the last five years of industry consolidation.

One thing is likely, the parent company might struggle to get back all it has invested in Vocus New Zealand.

The New Zealand telco sector has barely stopped to catch its breath since the government stepped-in with its nationwide ultrafast fibre programme started. That triggered a wave of merger and acquisition activity which is not over yet. It’s likely to be a busy year for the industry.

Also on:

cellular towerEarlier this year Communications Minister Simon Bridges wrote to the Commerce Commission asking it to investigate competition in the mobile market.

Last Friday the Commerce Commission confirmed the study will go ahead.

The Commerce Commission says study aims to “better understand how mobile markets are developing and performing, particularly around the competitive landscape and any emerging competition issues”.

In his letter, Bridges noted that, unlike many other countries, New Zealand does not have thriving mobile virtual network operators.

Mobile virtual network operators

MVNOs are a feature of many mobile markets around the world. They can account for a large slice of the market. In Australia MVNOs are about 10 percent of the mobile market.

Often run by well-known consumer brands, MVNOs buy wholesale services on existing mobile networks. They then sell them to customers without needing to invest in infrastructure.

MNVOs can increase competition and give consumers greater choice. They also tend to reduce prices and squeeze margins.

Carriers unimpressed

New Zealand’s mobile carriers are not impressed. Spark, in particular has spoken out. The company says there is no case for new mobile regulation.

The company’s general manager regulatory affairs John Wesley-Smith is quoted in a notice to the NZX on the study. He says: “We have three world-class networks delivering prices that are well below OECD averages and three mobile network operators that are ploughing significant investment into an intensely competitive market.”

This is largely true. Seven years ago before 2degrees entered the market, New Zealand mobile prices were high by international standards. Today prices are a touch below international averages.

Moreover, margins have dropped. While the mobile networks are solid businesses, they are not awash in profits. It took until this year for 2degrees to make its first profit.

That alone tells you the market is competitive.

It also speaks volumes that 2degrees, the relative newcomer and the smallest mobile carrier, is not calling for more regulation. In the past it has been the beneficiary of intervention.

Competitive enough?

You could argue, the carriers almost certainly will argue, that consumers are well served by the existing competition. From this point of view the market settings appear to be right.

And yet not everyone is happy. Last month the NBR carried a report saying Vocus general manager, consumer Taryn Hamilton believes his company cannot grow its mobile business without regulatory intervention.

Vocus has an MVNO agreement with Spark. The Vocus brands, Callplus, Slingshot and Orcon offer mobile services. There is also a 2degrees MVNO agreement with The Warehouse.

In market terms these deals are a freak show. The existing MNVOs don’t add up to more than about one percent of the total mobile market. And that estimate may be generous.

Elsewhere in the world MVNOs can be seen as a positive by carriers.

Often the customers who choose an MVNO are the ones who would already be looking to move away from their existing accounts. If they choose an MVNO on the carrier’s network, the bulk of the revenue they generate stays with the carrier. There’s churn, but not churn to a rival carrier.

A new kid on the block

The other carrier-point-of-view argument in favour of boosting MVNOs in New Zealand is that it would keep out a fourth network. None of the existing carriers would welcome a new competitor.

In the past that may have seemed unlikely in a small market like New Zealand. However the market dynamics have changed.

New Zealand has four sizeable telcos: Spark, Vodafone, 2degrees and Vocus.

Vocus’ parent company faces challenges at the moment and is focused elsewhere. However, Vocus has been an aggressive investor in the past. It could be again.

Unlike smaller telcos, Vocus can buy spectrum. It could bid for new spectrum licences. It could build a fourth mobile network.

If the company decides mobile is straegic and can’t get what it considers to be a reasonable MVNO agreement with existing carriers, this is a plausible strategy. Let’s face it, mobile is stratgic for every sizeable telco.

Given this, Spark, Vodafone and 2degrees might do well to see the Commerce Commission study in a more positive light. Being forced by the regulator to offer more generous MVNO agreements would be preferable to facing a new rival.

Who’d want that?

broadband

Vocus says its fibre broadband customers with unlimited data plans now download an average1 of 430GB a month. The average for all Vocus fibre customers is 425GB.

With data use doubling every 12 to 18 months, a terabyte monthly average is in sight.

Taryn Hamilton, Vocus Group’s general manager of consumer for Orcon and Slingshot says: “While the average might seem high, Vocus customers have always used more than the national average.

“We expect usage to double again in the next 12 to 18 months. Given that, it’s pretty insane to think that the average data use for fibre customers will soon be more than a terabyte.”

Streaming video the driver

Vocus users are in front of the pack, but the rapid growth the company is seeing is common to most New Zealand Internet Service Providers.

The swtich from copper to fibre is significant, but the underlying reason for rapid growth is streaming video.

As a rule of thumb an hour of standard definition streaming video uses about a gigabyte. Move to higher definition video and an hour uses three GB. Most streaming video services automatically adjust to deliver the highest possible quality picture the connection can manage.

Chorus reports it saw a first inflexion point in data use when Spark began offering its Lightbox service. There was an even bigger leap when Netflix started operating in New Zealand.

The network company says traffic is now growing at 100 percent a year. That’s twice the rate data traffic grew in the pre-UFB era. The average amount of traffic per broadband connection across all New Zealand is now close to 150GB.

Fibre, copper traffic on the rise

Vocus says its customers with unlimited VDSL plans download an average of 288GB. Those on ADSL download an average of 225GB.

The average monthly download for all Vocus broadband customers is 288GB for those on unlimited plans and 230GB for all customers. That’s higher than the national average, but then Vocus’ customer base skews towards geeks, digital enthusiast and other heavy users.

Vocus unlimited plans dominate

Hamilton says the overwhelming majority of Vocus customers across all the company’s brands and speed options are on unlimited data plans. Almost every customer on the company’s 1000/500Mbps and 200/200Mbps products has an unlimited plan.

Around 85 percent of those on the 100/50Mbps service have an unlimited plan. The number drops to 77 percent for Vocus customers on VDSL services.

There’s a clear move to faster plans. Hamilton says most Orcon customers are already on fibre. Half of all new sign-ups choose the 1000Mbps plan. In part this reflects Orcon’s market positioning as the high-end brand for the most demanding internet enthusiasts.

 


  1. We’re going to use the term average a lot in this story so let’s make sure we’re all on the same page. Here we’re talking about the mean. That’s the number you get if you add up all the data used then divide it by the number of users. There are people who don’t like looking at these numbers this way, but the mean is easier to understand and more useful when making direct comparisons.↩︎