Chris Keall: A Sky TV move into broadband: The case against

New Sky TV chief executive Martin Stewart has talked up content and streaming. Photo / Doug Sherring.

COMMENT:

Wealth manager FNZC has created a bit of buzz with a research note flagging a potential Sky TV move into the broadband market.

It's an interesting theory, and it could happen.

Sky TV (which had no comment on the subject) has a new boss, Martin Stewart, who wants to shake things up.

And with Spark making an incursion into sports rights, it would surely be satisfying to hit the telco back on its own turf.

FNZC research head Arie Dekker calls it a possible part of a broader "offensive switch" that will also include more local production and more assertive attempts to keep key sports content and better manage relations with key rights holders (all points hit by Stewart in his first Herald interview).

For this column I'll take the Bad Cop role, looking at the case against a foray into broadband, as market-shaking as that would be. I think Sky would struggle to make meaningful headway, and could well prefer to put its energy elsewhere.

Yes, Sky TV and Spark have a similar number of customers each (around the three-quarters-of-a-million mark). People like the convenience of bundles, and the advent of UFB fibre makes it relatively easier to set yourself up as an internet service provider (ISP), as Trustpower did back in 2012.

But most people are locked into one- or two-year contracts with an ISP, with heady break fees in what is a low-margin, commodity market that relies on scale.

Sky could well spend a truckload of money over its first few years and still only have low single-digit market share against incumbents Spark, Vodafone and Vocus (owner of Orcon and Slingshot) who, nearing the end of the UFB rollout, still utterly dominate the landline broadband market. In the big two's case, they're not shy of tying broadband and mobile phone deals, making them hard to budge.

Sky could turn internet users' heads by offering free - or, more likely, discounted Sky TV content with its broadband.

But veteran competition lawyer Andy Matthews says if Sky tried to leverage its dominant position in what he calls "must-have" sports content to gain market share in broadband, "the Commerce Commission could raise a lot of the same questions it did over the Sky-Vodafone deal".

Another factor: New Sky TV boss Stewart has strongly pushed the line that he's heading a content company. He wants more Sky content to be delivered via apps and streaming, and he wants Sky apps to be on as many platforms as possible. That makes commercial sense as decoders head for the dustbin of history and scarce satellite transmission - which could be hogged and monopolised - is set to be eclipsed as a delivery platform by UFB fibre that's open to all-comers.

To make a distribution play after positioning himself as content guy would run counter to Stewart's narrative, and be questionable in business terms.

A content-led strategy suggests more Sky cooperation with internet providers, including possibly more liberal wholesale contracts, rather than going to war with them. Just think of the number of ISPs who promote Netflix.

Sure, common in the US, and other countries, for pay-TV providers to offer broadband and phone service, too. But the so-called "triple-play" - so storied during the dotcom boom - has less allure in the content-is-king age.

And, regardless, the US pay-TV providers in most case own their pipes, or are part of larger conglomerates that do. Here, the UFB fibre network is work is owned by Chorus.

Spark and Vodafone are making their money from mobile and wireless broadband - but in that market, there's no equivalent of the UFB to piggyback on. Sky would have to pour hundreds of millions into building its own network, or making a bold move like buying 2degrees.

That would be a lot for investors, and regulators, to digest.

Meanwhile, on May 3, FNZC raised its Sky TV rating from neutral to outperform, with a 12-month target of $1.74 (the Reuters consensus rating is a hold; Forsyth Barr has an underperform rating and $1.55 12-month target).

Shares - which touched $7 in the pay-TV provider's heyday - were recently trading at $1.26.

Sky faces headwinds it faces, which FNZC's Dekker called it a "speculative outperform" with "considerable risk."

Well-documented challenges remain, from new competition to piracy and attendant falling subscriber numbers and lower revenue per customer from those that remain.

But for brave investors, it could be worth a look, given how dirt cheap its shares have become with for a company that still makes solid profits ($53.1 million in first half) and still pays reasonable dividends.

Investors have already "priced in considerable earnings erosion", Dekker said.

If Sky can make better use of its powers of incumbency and content rights, its new CEO's plans for more streamed content could be the catalyst for a revival, the FNZC man said.

Dekker is also looking for "more visibility on what Sky can do in telco", as part of a possible "offensive switch".

I would park that part of the plan.

Spark declined the opportunity to comment.