Sky TV merger to give Vodafone strangehold on internet TV, objectors say

Tuesday 16th August 2016

Allowing Sky Network Television to merge with the New Zealand operations of Vodafone will entrench Vodafone's control of premium content, particularly major sports events, and stifle competition in the internet and streaming TV markets, say a chorus of objectors to the proposed tie-up.

Submissions published on the Commerce Commission website this morning show virtual unanimity among major players in the telecommunications and broadcasting sectors, who say Sky would do better if it offered its sports and entertainment packages to the whole telecommunications market rather than to one player.

Among those arrayed against the $3.44 billion merger proposal, announced in June, are Vodafone's primary telecommunications rivals Spark New Zealand and Two Degrees, along with state-owned broadcaster Television New Zealand, utility company Trustpower, which offers broadband bundled with electricity and gas, and the lobby for the online sector, InternetNZ.

"Based on Sky’s current wholesale market arrangements for premium sports content, we don’t believe the proposed merger is in the best interests of New Zealand consumers and so should not go ahead in its current form," Spark New Zealand’s general manager of regulation, John Wesley-Smith, said in a statement. “Sky has a monopoly on rights for premium ‘national sports’ in New Zealand. Given Kiwis’ love of these sports, they are 'must have' rights for media content providers."

A submission prepared for third-ranked national telco 2Degrees and TVNZ says while the net present value of the merger to Sky and Vodafone is calculated at $770 million, there would be a $1.09 billion NPV uplift for the market as a whole if Sky were instead to become a content wholesaler with no ties to any particular provider.

"Revenue synergies would be much larger because the wholesale offer would be extended to Vodafone's rivals who serve 60 percent of the market collectively," says the report from Auckland-based consultancy Covec. While there would be none of the $435 million of estimated cost savings from the Voda-Sky merger, the pair would also avoid integration costs.

"Sky's share of the counterfactual revenue synergies would be materially lower than $1.09 billion because it would need to share this gain with telecommunications firms," Covec's John Small says. "Nevertheless, any positive share of the extra $1.09 billion would be better for Sky than the status quo.

"On the applicants' own analysis, wholesaling content to all (or most) telecommunications providers is a financially attractive alternative for Sky."

The 2Degrees and TVNZ submissions focus on the importance of access to time-sensitive major sporting events to spurring competition in the converging markets for telecommunications services and online entertainment.

"The success of ... new services and the extent to which competition in the retail pay TV markets grows will depend on the extent to which entrants can gain access to premium content and especially premium sports content," says a report from London-based Plum Consulting in supporting documentation to the 2Degrees submission.

There were "numerous examples from around the developed world, including in New Zealand, of entrants in the pay-TV market which have failed commercially due to a lack of premium content."

The 2Degrees submission quotes a submission from Vodafone's UK operation to the regulator in that country about the dangers of "ignoring the effects of 'key content' across wider and traditionally unrelated markets such as mobile or broadband only customers" to have "an enduring and irreversible effect".

In the October 2015 submission to Ofcom, Vodafone warned that "a variety of telecommunications markets will be severely harmed" unless such content could be secured on "fair, reasonable and non-discriminatory terms".

In its submission, 2Degrees says the proposed New Zealand merger would give the merged entity "both the incentive and the ability to leverage its substantial market power in content markets to lock-up premium content for exclusive delivery over its own platforms, foreclosing competition in the residential fixed-line and retail mobile markets."

The Covec report notes that while Sky has always offered its existing services to any of New Zealand's 80 to 100 telecommunications retail service providers, "only Vodafone has taken up this offer".

"Our analysis concludes that the reason all but one of many RSPs are not offering Sky's full suite of content is that they cannot afford to do so on the terms offered" and that most of the expected revenue gains for the merged Sky-Vodafone would be achieved by Vodafone being able to "up-sell" Sky services to its customer base, with such increases only possible by Sky giving Vodafone a "lower input price".

Spark's submission says Sky offers "limited, unattractive wholesale options".

“Sky's current wholesale arrangements are essentially about reselling Sky boxes. We’re not interested in being tied to this outdated distribution model as it doesn’t work for our customers who want better choices that let them watch their sports whenever and wherever they want to,” said Spark's Wesley-Smith.

BusinessDesk.co.nz

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