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Home / Business / Companies / Telecommunications

Sky broadband? New boss Martin Stewart hints at move onto Spark's home turf

Chris Keall
By Chris Keall
Technology Editor/Senior Business Writer·NZ Herald·
18 Oct, 2019 04:50 AM7 mins to read

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Sky TV chief executive Martin Stewart: "Chorus are fantastic to work with." Photo / Jason Oxenham

Sky TV chief executive Martin Stewart: "Chorus are fantastic to work with." Photo / Jason Oxenham

How can Sky compete with a company with ancillary businesses that allowed it to subsidise losses in streaming? asked one shareholder at the pay-TV provider's annual meeting yesterday morning.

READ MORE:
• Job cuts at Sky: Up to 250 roles could be affected
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dividend axed
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• Chris Keall: Sky stake conflicts NZ Rugby

Nobody needed to be told who the retail investor was talking about: Spark, whose relatively robust profits from its core business give it the financial wherewithal for a drawn-out sports rights fight - or, like British Telecom in the UK or Optus across the ditch, to use sports content as a loss leader to draw new customers to their telco services, or upsell their base.

After all, Spark has already offered a free Rugby World Cup pass, worth up to $90, to customers who join its more expensive broadband or mobile services.

Sky chief executive Martin Stewart's reply hinted that his company might make a move on Spark's home turf.

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"We look at competitors and look at the bundles they offer and wonder if there are opportunities for us in those areas," Stewart said.

Sky has been here before, of course, with its mooted merger with Vodafone NZ that was shot down by the Commerce Commission.

Although the competitive landscape has changed, Stewart was lukewarm about another stab at the merger when he talked to the Herald after the AGM.

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Would Sky consider acquiring another broadband provider, like Vocus or 2degrees?

"I don't think you need to buy anyone in order to achieve the outcome that we would be looking for," Stewart said.

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Could Sky work with UFB fibre network operator and wholesaler Chorus to offer its own broadband?

"It's something that we've been looking at," Stewart said. "Chorus are fantastic to work with, and there are a number of other people in the supply chain who you can work with in order to deliver a service to the customer."

He added, "I think New Zealand has a tremendous regulatory framework as regards broadband services. It's a very open environment, a very clear and transparent environment - and one that encourages competition."

Spark's relatively robust profits from its core business give it the financial wherewithal for a drawn-out sports rights fight. Photo / File
Spark's relatively robust profits from its core business give it the financial wherewithal for a drawn-out sports rights fight. Photo / File

If Sky does end up working with Chorus, the network provider will take a big clip of the ticket - a contrast to Spark and Vodafone's most lucrative business, the mobile and fixed wireless markets, where they keep 100 per cent of the tab.

Broadband could be central to 'phase 2'

The new Sky boss, who took the reins in February, said "The most important thing for the previous seven months was to make sure we built the new team, that we held onto our rights, that we stood-up an improved streaming service, and that we actually laid the foundations for what the next six to nine months will bring, which is sales, marketing, customer service and pricing and packaging, and looking at adjacencies that make sense

One of those adjacency's is broadband.

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"It's too early to say how we will actually approach the [broadband] market, if we decide to go into it, but as I say, the market is incredibly open there are 96 different players in New Zealand," Stewart said.

The Herald interrupted that it could be better described as three major players, given Spark, Vodafone and Vocus (owner of Orcon and Slingshot) controlled some 90 per cent of the market - or five with Trustpower and 2degrees mopping up most of the rest of the market.

"That's absolutely fair to day," Stewart replied. "And that's because those services have multiple products and a good brand and lots of other add-ons and value drivers that they bundle together."

Spark offers its Lightbox and Spark Sport services free to qualifying customers, Vodafone offers Vodafone TV (with content in part wholesaled from Sky) plus free Netflix deals) and 2degrees has partnered with Amazon's Prime Video service, while TrustPower bundles broadband with electricity and gas deals.

"And that's exactly the same problem that I observed before I joined the business," Stewart said. "We just had one offering. Whereas bundling is where I think the main competition is - and that's where we have to look and see how we compete with it."

A push into broadband had been discussed at board level, but Stewart also stressed that no decisions had been made.

Beyond tiny NZ

The Sky boss said his company was also looking to expand beyond the relatively tiny New Zealand market, and to diversify its revenue to allow it to better take on rivals like the larger Spark (which has a market cap of some $8 billion to Sky's $500m).

He said Sky's recent acquisition of global streaming operator RugbyPass - which holds Sanzaar rights in 60 countries - in a deal worth up to US$40m met both of those objectives. He underlined that Rugby Pass has an online audience of more than 40 million (however, most read its content rather than paying to watch its streams. Founder Tim Martin earlier told the Herald that 20,000 pay. He hoped to increase that to 40,000 by the New Year, and he ultimately saw up to two million people worldwide paying for RugbyPass's $15/month full service).

Thumbs up for rugby, a minor rebellion over bonus shares

The key vote to effectively sign-off on the in-principle deal with New Zealand Rugby reached over the weekend passed with 99.9 per cent support, and the equity component of Sky Rugby Pass acquisition also received a strong endorsement with 98.4 per cent voting in favour.

But, notably, a chunky 25.6 per cent of shareholders voted against a resolution to issue Stewart with 800,000 share rights under a salary scheme.

The shape of 'Phase Two' of Sky's turnaround strategy is starting to emerge. Photo / File
The shape of 'Phase Two' of Sky's turnaround strategy is starting to emerge. Photo / File

Investors were not told the cost of the NZ Rugby deal, beyond that it exceeded 50 per cent of Sky's market cap, though Stewart said it was "materially more" than the previous five-year contract for All Blacks, Super Rugby and Mitre 10 Cup games. The Herald understands it increased by around $10m per year to a total $400m.

Stewart reiterated his line that the provision to give NZ Rugby a 5 per cent shareholding in Sky was revolutionary.

Disgruntled retail investor Coralie van Camp preferred the term "dilutory". She said from the floor that she had concerns about the Rugby Pass and NZ Rugby deals being a "double dilution.' (Both transactions dilute existing shareholdings, with NZ Rugby getting 21.8 million shares and RugbyPass Investors 25.1 million shares.)

However, she indicated she would vote for them out of fear Sky would be in a "terminal" position without rugby.

Another shareholder asked when Sky's suspended dividend would return.

No timeline was given. New chairman Philip Bowman (former of Sky UK) said that with new competitive threats, the rise of streaming and increasing content costs, for the foreseeable future profits needed to be "reinvested to reposition the company".

"Over the past few years, there's been relentless attrition of subscribers. We need to change the way this business operates," he said.

The launch of Disney's $9.99 a month Disney+ streaming service into New Zealand was another point of concern for investors at the meeting. Sky earlier confirmed it would have to pull its two Disney channels as the entertainment giant moved to reach consumers directly over the internet.

Stewart said Sky would fill the gap via a new deal with the BBC that will see the British broadcaster's "CBeebies" children's channel added to Sky's line up. A new family movie channel was in the works.

Change was the only certainty. Even the traditional sausage rolls were in short supply and quickly scoffed, with most investors left to eye a mountain of focaccia. Not all looked happy.

Sky TV
Sky TV

Sky shares, which dropped closed to 20 per cent to an all-time-low of 87c last week as Spark stole domestic cricket, then made up most of the ground on news of the Sanzaar deal, closed flat at $1.07. The stock is down 51.36 per cent for the year.

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