19 Jun 2016

In the middle of a media mega-merger

From Mediawatch, 9:08 am on 19 June 2016

Sky TV wants to merge with giant telco Vodafone. Mediawatch asks Sky's long-serving leader if today's broadcasters are destined to end up as divisions of big telecommunications companies. 

Sky and Vodafone logos

Photo: Supplied

This week Sky TV set out its case for merging in a 144-page "explanatory memorandum" for investors who need to be persuaded that it is a good idea.

It included an independent assessment from valuation adviser Grant Samuel, whose insight into the company and its prospects made for fascinating - if at times dry - reading.  

"The proposed transaction is expressly designed to address the deterioration in Sky TV’s strategic position,” said the Grant Samuel report.

“Sky TV’s strategic position as a 'pure play' pay television operator is not attractive over the longer term. The rise of internet-based subscription TV services has flattened Sky’s growth and subscriber numbers and its earnings are bound to fall," it concluded. 

Sky TV's chief executive John Fellet talking to RNZ's Colin Peacock.

Sky TV's chief executive John Fellet talking to RNZ's Colin Peacock. Photo: RNZ / Francesca Emms

The National Business Review put it more bluntly under the headline Is Sky TV a dead duck without Vodafone?

“Forget the Rio Olympics. Forget next year’s British and Irish Lions rugby tour. Sky can no longer hide behind its spin of future events being a cure for its falling subscriber numbers,” the article said.

The stakes are clearly pretty high. Sky’s memo to investors says Sky will have to pay $21 million to Vodafone if the merger doesn't go ahead. 

A merger can only happen if the Commerce Commission gives a green light to the creation of one of New Zealand’s biggest companies, which would have enormous clout in both broadcasting and telecommunications. 

Sky’s own directors and three quarters of its shareholders also need to vote on the proposal next month. Some may not want to see the company's independence surrendered to a phone company.

"That's up to them. That's why we have a vote," Sky chief executive John Fellet told Mediawatch. "The telecom business is very competitive, as is the media business. It is not a slam dunk". 

The cover of the Sky's document urging investors to vote for a merger with Vodafone.

The cover of the Sky's document urging investors to vote for a merger with Vodafone. Photo: screenshot

Taking a back seat?

If the merger goes ahead, Mr Fellet will no longer be in charge. After more than 20 years spent reversing big losses and then building and maintaining Sky’s pre-eminent position, he would be the head of content at the company, led by his current Vodafone counterpart Russell Stanners.

As more of people's screen time is devoted to computers and mobile devices, telecommunications networks become ever more important to media companies. Does the Sky / Vodafone deal point to a future where broadcasters become mere content divisions for the big telcos like Vodafone?

"I'm not sure who holds the power," Mr Fellet said. "It has more to do with convergence".

In the UK, he said, the dominant pay TV company BSkyB bought an internet company for the same reason, but he conceded the biggest telcos would always be bigger companies than the biggest broadcasters, especially in a small market like New Zealand. 

Priced out of the market?

Sky has the rights to top rugby, league, netball and cricket locked up until after 2020. Other online providers outbid Sky for English football and PGA golf from the US recently, but this past week both sports have returned to Sky TV. It has exclusive TV rights to shows from the likes of HBO, Disney and Viacom as well as Hollywood studio movies.

Sky packages start at $49 a month and customers customers wanting sport, movies and premium TV drama can pay more than $100. On average, Sky's 800,000-odd customers pay just under $80 each per month.

Will they continue to pay so much when an estimated 250,000 people are getting quality shows on demand from US-based Netflix for a fraction of the cost? Spark is also prepared to let people have its service Lightbox for nothing to lure and keep broadband customers.

Mr Fellet concedes viewers aren't loyal to his company, but to the content.

"We've been perfect for the baby boomer generation. But my children are 'millennials' who consume content in a completely different way with their mobiles. We will have to break down our packages and we have started to do that. I have to figure out how to get my content to this new generation. If this deal goes through I think we'll be in a better position."

Vodafone has actively promoted Netflix in the past and even installed dedicated special servers to ensure a smooth service for users of Sky's big online rival.

If the Sky and Vodafone do merge, would he want to switch them off?

"It's tempting, but as a potential owner I'd be crazy. If you start throttling competitors, its too easy for customers to switch their broadband providers".

It's a dilemma which shows just how quickly media and telecommunications businesses are becoming one big industry.