Vodafone offers expertise for Sky

A merger between SkyTV and Vodafone NZ will change the dynamics of the retail telecommunications market in New Zealand. For Spark, and other teleco providers, differentiation from competitors is key, Forsyth Barr broker Suzanne Kinnaird tells business editor Dene Mackenzie.

Content and telecommunications go hand-in-hand in many markets, Forsyth Barr broker Suzanne Kinnaird says.

Optus recently acquired English Premier League rights in Australia. The same rights were fought over in the United Kingdom by both Sky Plc and British Telecom, both of which offered content and communications packages to customers.

In the United States, cable operators such as Comcast, Dish and Verizon all fought to provide packages of television series, movies and sports to subscribers.

In New Zealand, there had been a "phony war'' of sorts, she said.

Netflix had stirred up the market with its movie and TV series and Spark had trialled TV series through Lightbox.

"In New Zealand, as in other markets, sports remain key for pay-TV. It is here that SkyTV has locked up the key New Zealand sports for the next five years, signing rights contracts including satellite, over-the-top [broadband] and mobile. It has also been acquiring other premium content from the likes of Disney and HBO.''

An ongoing criticism of SkyTV had been its slow delivery of on-demand services.

Its Sky Go mobile service, while appreciated, garnered notice only when it had problems, Ms Kinnaird said.

What SkyTV had lacked was expertise in delivering content in a telco environment.

As content increasingly moved towards fixed and mobile broadband delivery, it was a significant deficiency.

Vodafone had those skills. It delivered both the core telecommunications services and solutions on top of those services.

In the UK, it provided Sky Plc sports content to mobiles under its Vodafone Red brand, and its networks delivered fixed line content.

Vodafone and SkyTV had resale agreements which were focused on resale of My Sky service and Vodafone's equivalent product.

Both looked to maximise the returns on the respective services.

In a fully integrated model, there was more flexibility where a lower margin on one product was acceptable if it led to an additional sale of another service like telecommunications, she said.

A real change would be if a fully integrated mobile sports proposition could be developed - a more robust version of Sky Go that could be used to differentiate Vodafone customers from Spark ones, just as Spark had used its Wi-Fi network to differentiate its services.

While Spark continued to generate revenue on its legacy calling business, the fixed line access market was increasingly competitive as the likes of Trustpower offered integrated power and telecommunications services.

That had brought down the pricing of fixed telecommunications services.

There was nothing comparable in the mobile market. Currently, SkyTV could not make money from its mobile content rights.

If Vodafone could create a mobile solution for its customer base around sports, it could use it as a point of difference to win Spark and 2Degrees customers and to help retain its own customers, Ms Kinnaird said.

The concern for Spark and 2Degrees was typically they would compete by building their own content proposition.

However, SkyTV had locked up all the premium sporting content - rugby, cricket, league, netball and the Olympics - mainly on five-year contracts.

Spark's retail revenue grew $39million in the first half of the 2016 financial year.

Its total revenue went backwards in the same period, highlighting how critical the retail market was to Spark.

"Compelling propositions around content and telecommunications would be difficult for Spark to compete against. When the Commerce Commerce reviewed SkyTV's rights contracts in 2013, it determined sports rights were not essential to develop a competing pay-TV service. This is unlikely to have changed.''

Spark had completed a turnaround, mainly cost reduction-related, delivering $250million in free cash flow savings per year.

Forsyth Barr was concerned about the risk to operating profit growth as high-margin fixed revenues continued to decline and had an underperform rating on Spark.

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