UFB roll-out among reasons for ComCom decision

SKY TV/Vodafone merger press conference at the Craigs Investment Partners offices. Photo / File

The government-sponsored roll-out of a national telecommunications fibre network was among the complicating factors against a tie-up between pay-TV operator Sky Network Television and telecommunications group Vodafone New Zealand by putting too many customers into play, the Commerce Commission says.

The competition regulator rejected the $3.44 billion merger to create a vertically integrated pay-TV service and telecommunications provider in February, and almost two months later the commission today released its reasoning behind the decision. At the time, the commission said a principal objection was the ownership of "all premium sports content", which the merged entity could then bundle up into a single mobile, landline, broadband and pay-TV offering, which in itself posed a real chance of substantially reducing competition.

The 145-page report says there's no close substitute for premium live sports rights in New Zealand, which made it easier for the merged Sky-Vodafone group to attract customers at the expense of smaller telecommunications service providers (TSPs). What's more, the roll-out of the government-sponsored UFB programme presented a "significant opportunity" to attract new customers with a larger bundle of services.

"The roll-out of UFB is expected to promote increased rates of switching in New Zealand, with approximately 1.1 million premises in play by 2019," the report said. "Given this, and changing consumer preferences, we do not consider that historic rates of switching from other jurisdictions provide a reliable predictor of future switching in New Zealand."

Once the UFB programme is completed, the regulator said the evidence suggested churn "significantly reduced for customers on bundles" which would "lift acquisition costs and "likely put a significant number of customers 'out of reach' of rival TSPs".

In a separate statement, Sky TV said it and Vodafone were assessing the report "so that they can determine their future steps in relation to the proposed merger, if any". The companies filed High Court papers to make sure any appeal would fall within the statutory timeframe.

The companies want to create the country's largest telecommunications and media group, with Sky TV buying Vodafone NZ for $3.44b, funded by a payment of $1.25b in cash and the issue of new Sky TV shares at a price of $5.40 per share. Vodafone would have become a 51 per cent majority shareholder in Sky TV, in what amounted to a reverse takeover. The pay-TV operator planned to borrow $1.8b from Vodafone to fund the purchase, repay existing debt and use for working capital.

The regulator said the merger could boost competition in the short-term as companies fought more aggressively for customers. However, that would change over time and the commission said it couldn't rule out at least one of the significant TSPs "would suffer a significant loss of scale", squeezing margins and reducing their ability and incentive to invest.

"This, in turn, would allow the merged entity to raise or maintain prices at levels higher than would prevail absent the merger," it said.

The regulator said it didn't need to reach a firm conclusion about which sports rights are premium, and that it was sufficient to recognise Sky holds the rights "to the majority of popular live sports content in New Zealand, for which there is no close substitute."

As more premium sports is watched online, the regulator said it anticipated consumers would value bundled packages of telecommunications and content more highly, and those "offered by a single supplier such as the merged entity are likely to be even more attractive to consumers who view their content and broadband and/or mobile services as closely related, if not as one and the same thing."

The regulator said New Zealand differed from other nations in that only one broadcaster holds the majority of live sports rights, and that there aren't any anti-siphoning laws to prevent pay-TV operators buying monopoly rights.

"This potentially makes the rights to these sports more valuable than elsewhere, and switching to the merged entity may be higher than might be expected elsewhere, given there would be only one provider of integrated broadband bundles containing premium live sports content," it said.

Sky shares fell 0.8 per cent to $3.82.