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(image: Tina Tiller)
(image: Tina Tiller)

BusinessMarch 28, 2023

The high stakes of an obscure but very tense battle between TVNZ and Sky

(image: Tina Tiller)
(image: Tina Tiller)

For the first time in decades, a major new piece of Sky hardware launches without TVNZ’s channels alongside all the others. Duncan Greive explains why this is a big deal for the future of television.

This week marks a landmark for Sky NZ – the debut of a piece of hardware called the Sky Pod. It was announced back in 2018 and is the first wholly new device it has launched since MySky almost 20 years ago. It brings much of the functionality of MySky, but instead of via satellite it is delivered through a broadband connection. In fact, by coming bundled with apps like TVNZ+ and Netflix, it functionally turns any screen into a smart TV at a very reasonable $99.

It should be a triumphant week for Sky, which has endured a challenging few years with the rise of international streamers, the short but turbulent reign of CEO Martin Stewart, and an attempt to buy radio and outdoor powerhouse MediaWorks spiked by restive shareholders. Yet the Sky Pod’s launch happens under the shadow of a dispute with TVNZ that means it debuts without TVNZ1 or TVNZ2 within its electronic programme guide (EPG), taking some of the gloss off. 

This means that unless there is a dramatic intervention this week, the Sky Pod will be the first Sky device in decades to launch without the major TVNZ channels in slots one and two. It’s a situation that has the potential to significantly damage both organisations, with Sky’s new product debuting without two of the biggest channels by viewership in the country, while if it’s a hit, TVNZ could potentially lose tens of thousands of potential viewers for its linear channels, which remain by far its biggest revenue drivers.

The Spinoff has spoken to senior figures at Sky and TVNZ to get a window into what’s driving the dispute, who asked not to be identified due to the commercially sensitive nature of the discussions. The picture that emerges is of the two giants of our television landscape engaged in a high-stakes staredown – yet far from being a petty dispute, the underlying arguments have integrity, and reveal a meaningful difference in their digital strategies. Ultimately these are bets on how they see the future playing out, and while each is confident of its position, both cannot be right.

What Sky believes

While the Sky Pod is a brand new device for Sky, it is also functionally a replacement for the Vodafone TV. That device had its origins in an attempted merger between Vodafone and Sky that the Commerce Commission declined to authorise. Vodafone went ahead with producing it anyway, before ultimately deciding to end its support for the service, having proved unable to make it work financially. The Vodafone TV was similar to the Sky Pod in many ways – containing both linear TV and streaming apps, all delivered via the internet. Yet it differed in one crucial respect: sources spoken to by The Spinoff suggest Vodafone paid TVNZ for the privilege of running its channels through its service.

TVNZ has refused to confirm this arrangement, citing commercial sensitivity, while Vodafone has not responded to our queries by our deadline, but sources spoken to at both TVNZ and Sky say they are aware of such an arrangement. Former Sky CEO John Fellet confirmed that Sky has never before paid to carry a free-to-air channel – and indeed that way back in the day Sky launched without TVNZ, TV3 and Prime, only to have the channels ask to be carried as the service gained in popularity in the 90s.

Yet the Vodafone precedent is the basis for TVNZ seeking a similar arrangement from Sky to allow its channels to run on the EPG on the Sky Pod. TVNZ sources suggest it has offered the opportunity to allow for non-financial terms that would still get the channels onto the device, but that thus far Sky has rebuffed such an arrangement.

For Sky’s part, it believes that TVNZ should freely allow its channels to run on the Sky Pod for the same reason it has always run all its channels through MySky and other services. Namely, that there is a clear value exchange between the two parties, with Sky’s customers gaining access to a full range of high-quality channels, and TVNZ able to on-sell that audience to its advertisers.

Nielsen numbers obtained by The Spinoff suggest that 45% of TVNZ linear viewing over the past year happened in households with a Sky subscription. This implies that almost half of TVNZ’s linear advertising revenues are connected to Sky’s satellite system – which is why Sky remains bewildered by TVNZ’s refusal to be a part of its next-generation device. Fundamentally, Sky remains a believer in a channel-based systems, and that bundling different entertainment options is better for its customers than a raft of streaming services. This is why it has produced the Sky Pod – it thinks both on-demand and linear systems will coexist for years to come.

(Neither side has mentioned it, but there is room for significant escalation from here. If Sky were to go nuclear, it could plausibly contemplate removing TVNZ from its satellite system. This would infuriate its customers, while also causing financial chaos for TVNZ, which could lose a huge chunk of its revenue overnight. Former Sky CEO John Fellet says that’s very unlikely, due to the company’s fundamentally customer-centric worldview – but it’s not impossible.)

How TVNZ sees the future

TVNZ is understood to view the arrangement very differently. It is increasingly thinking seriously about the end of linear television, in much the same way as the BBC, which has indicated much of its linear services will end this decade. It has accumulated the biggest domestic streaming audience on TVNZ+, which is now viewed as a major asset and the largest part of its future business. The state broadcaster also streams channels like TVNZ1, TVNZ2 and Duke through that app, and says that Sky’s customers can still access those channels through TVNZ+, which comes preinstalled on the Sky Pod. It seems to be betting that the advantage of prompting more logged-in TVNZ+ users will negate any loss of audience it suffers through its absence from the EPG.

While some might argue that it could have its channels in both locations, TVNZ would always prefer a logged-in user of its infrastructure, which will allow it to gain more data and theoretically extract a higher value for its advertisers. It also removes the opportunity for viewers to fast forward the ads – still a big selling point for the EPG system, coupled with the ability to record live TV (this is not currently part of the Sky Pod, but Sky says it’s working on it).

It can be viewed as a high-stakes game of chicken between Sky and TVNZ. The Sky Pod system defaults to linear TV, which means the first channel you encounter is no longer TVNZ1, but Three. The inertia of the legacy TVNZ audience has always been a big advantage – if the Sky Pod takes off, its absence could potentially erode some of that power. However TVNZ might view its audience as so big and consequential that its absence could render the EPG and potentially even the product itself less useful out of the gate, further entrenching some of its digital advantage.

A ruthless operator

Part of what drives Sky’s dismay at the situation is that the ultimate owner of TVNZ is us. It views this as ruthless commercial behaviour that is completely at odds with the way you would hope the state would behave in a market in which it operates, especially one as socially important yet financially unstable as media. That instead of operating to weaken the private sector, Sky hopes TVNZ would instead try to lift all boats by making its content as accessible as possible. 

Sky sources point to statements made by broadcasting minister Willie Jackson (who declined to comment for this story, citing TVNZ’s operational independence) about the collaborative future of TVNZ as part of its merger with RNZ under ANZPM. What TVNZ’s actions suggest, according to Sky sources, is that with the merger abandoned, TVNZ will continue to operate in what it perceives to be its own best interests – even if they carry the risk of structurally weakening other players within the sector.

The backdrop is a television landscape that has rapidly reconfigured over the past couple of years. Discovery’s purchase of Three and other TV assets means one of the biggest legacy media companies in the world is now part of our local industry. The rise of streaming and continued growth of UGC platforms like YouTube and TikTok has introduced a destabilising new dynamic into the competition for advertising and attention. Most directly, Spark Sport has blinked first and exited the market, but its decision to send a major tranche of sports rights to TVNZ brings it into much more direct competition with Sky. 

It all adds up to a sense that the market is accelerating and getting more chaotic – and that this small dispute foreshadows more consequential battles to come. The official end of Vodafone TV is not until March 31, meaning there are still a few days for a resolution to be found. But no side seems in any mood to budge, meaning the principle of maximal distribution that has underpinned free-to-air for decades suddenly seems a little shaky. It’s a small but meaningful change that could escalate into a far bigger battle if cooler heads don’t prevail.

Correction: an earlier version of this story misidentified the device at the centre of this dispute as the New Sky Box instead of the Sky Pod. The Spinoff regrets this error.

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