KEY POINTS:
TVNZ's attacks on Sky TV are a sad indictment of the free-to-air broadcaster.
It clearly demonstrates that the state-owned operator has been completely outfoxed by the listed company and TVNZ is desperately trying to regain lost ground by attempting to convince the Government to regulate the Rupert Murdoch-controlled
company.
The conflict is a classic example of the tortoise and the hare story. Sky TV has a slow but consistent strategy that has been extremely successful whereas TVNZ has been constantly chopping and changing and has no clear corporate strategy.
The contrast between the two companies offers a great lesson for investors, directors and senior executives.
The story begins in the late 1980s with the formation of TVNZ into a limited liability company under the State-Owned Enterprises Act 1986 and the deregulation of the television sector under the Broadcasting Act 1989 (see timeline).
Before deregulation there were only two channels, TV1 and TV2. There was a strong belief at the time that TVNZ was more interested in producing programmes that senior staff wanted to make rather than those viewers wanted to watch.
TV3 Network was incorporated in October 1987 in anticipation of industry deregulation. It became the country's first commercial television operator when TV3 went to air on November 28, 1989.
Seven days later the company listed on the stock exchange after issuing shares to the public at $2.50 each. United States broadcaster NBC had a 14.9 per cent shareholding while the remaining shares were held by domestic institutions, companies and individuals.
There was a 15 per cent overseas ownership restriction on broadcasting companies at the time but this was abolished in May 1991 after the National Party came to power.
TV3 shares traded briefly above the $2.50 issue price but by the end of 1990 they had slumped to just 6c. The company was placed in receivership on September 14, 1991, less than two years after it first went to air.
The important point about TV3 is that investors took the risks and lost their money when the company was unsuccessful. TVNZ won the initial battle with TV3 but there were no pleas from the failed company that TVNZ should be reregulated or broken up to make it easier for new entrants.
There are winners and losers in the commercial world and most individuals are happy to invest on the basis that failures are acceptable as long as they receive their full rewards from successful investments.
The recent history of TV3 has been far more successful. The station was purchased by the Canadian group CanWest, which on-sold 30 per cent to New Zealand investors at $1.53 a share in July 2004. CanWest MediaWorks was delisted from the NZX in October 2007 after a successful takeover bid at $2.68 a share by an Australian private equity fund.
Sky Network Television was also established at the end of 1987 in anticipation of the deregulation of the television sector.
The main original investors were Craig Heatley and Terry Jarvis. ESPN became a shareholder in 1988 but the US sports network had to stay below the 15 per cent threshold because of the overseas ownership cap.
TVNZ invested in Sky TV the next year and when the pay television operator went on air in May 1990, with a news, sports and movie channel, the SOE was the largest shareholder with a 35.2 per cent stake. But Sky suffered big losses in its early years and four major US companies - Ameritech, Bell Atlantic, Time Warner and TCI - acquired a 51.1 per cent interest through a joint-venture partnership after the National Government canned the overseas ownership restrictions on broadcasting companies.
This diluted TVNZ's holding from 35.2 per cent to 17 per cent.
When Sky TV listed on the NZX in December 1997, after the sale of 56.5 million shares at $2.40 each, TVNZ's shareholding was diluted again to 12.6 per cent.
In June 1999 TVNZ made a huge mistake when it sold its remaining 12.6 per cent Sky TV stake for $2.75 a share or $127 million. The buyers were Independent Newspapers, Todd Corporation and a company associated with Sky TV chairman Craig Heatley.
The sale was highly controversial because it was some 40c below the market price and shortly afterwards Sky TV switched its sports rebroadcasting agreement - covering rugby, rugby league and cricket - from TVNZ to TV3.
The Sky TV shares sold by TVNZ for $127 million in 1999 are now worth $264 million, after taking into account the 2005 amalgamation scheme with Independent Newspapers.
The pay television operator has gone from strength to strength since TVNZ sold out whereas the state broadcaster has experienced one crisis after another.
The big difference between the two companies is their long-term strategy and its execution. Sky TV has clear long-term goals, which it implements effectively, whereas TVNZ seems to change from year to year.
Sky TV's simple objective is to increase its subscriber base while minimising churn (households that cancel their subscriptions). It grows its subscription base by adding more and more channels and it now has more than 100 channels and 720,000 subscribers.
The secret of its success is a consistent board policy, the support of its 43.6 per cent shareholder News Corp and a strong and experienced senior executive team. Sky TV has had only two chief executives since 1991, both with major pay television experience. Nate Smith had 12 years experience before he was seconded from Time-Warner in 1991.
John Fellet, who replaced Smith as CEO, also came from the US in 1991 as Sky's chief operating officer after 11 years in the pay television industry.
Fellet likes nothing better than showing the same updated graphs at each results presentation and most of the time they are moving slowly and steadily in the right direction.
Meanwhile TVNZ's strategy has been all over the place as demonstrated by the following examples:
* The company is no longer a 35.2 per cent cornerstone shareholder in Sky TV.
* The sale of its 29.5 per cent stake in Asian Business News in 1995 was strongly opposed by senior management.
* TVNZ introduced four free-to-air regional stations in 1995 but these were closed two years later.
* This week the state-broadcaster lost control of $15 million of charter funding because it was used to subsidise Olympic Games coverage instead of locally made programmes.
TVNZ's problems are three-fold: there is a huge conflict between its commercial and charter obligations; the company's politically appointed board is constantly changing; and there seems to be a revolving door policy as far as the chief executive is concerned, particularly compared with Sky TV.
New Zealand badly needs more companies with clear long-term strategies that are effectively implemented. It would be a tragedy if investors in these organisations are penalised because their industry peers have inconsistent strategies and cannot compete.
This week Sky TV showed Scott Dixon winning the Indy 500 and the Black Caps failing in Manchester whereas TVNZ would not have shown either event live.
We need to encourage well-run companies that meet consumer demands instead of dragging them back to the pack when their competitors cry foul.
* Disclosure of interest: Brian Gaynor is an executive director of Milford Asset Management, which holds 679,000 Sky TV shares on behalf of clients.
TV LISTING
Television deregulation and the rise and rise of Sky TV.
* June 1, 1960 - First television broadcast in New Zealand
* October 6, 1987 - TV3 Network incorporated
* November 26, 1987 - Sky Network Television incorporated
* December 1, 1988 - Television New Zealand incorporated as a SOE
* July 1, 1989 - Television deregulated under Broadcasting Act 1989
* November 28, 1989 - TV3 goes on air
* December 5, 1989 - TV3 lists on NZX
* May 8, 1990 - Sky TV goes on air with three channels
* May 7, 1991 - Overseas ownership restrictions abolished
* September 14, 1991 - TV3 Network placed in receivership
* December 10, 1997 - Sky Network Television lists on NZX
* June 29, 1999 - TVNZ sells its remaining 12.6 per cent of Sky
* July 29, 2004: CanWest MediaWorks (TV3) lists on the NZX
* June 28, 2005 - Sky Network Television amalgamates with INL
* October 15, 2007 - CanWest MediaWorks (TV3) delists from NZX
* April 2008 - TVNZ promotes the reregulation of Sky TV
