Sky in 2018: the pay TV giant has one last shot at the internet

It’s the biggest and by far the most profitable media company in New Zealand. In today’s instalment of his series on NZ media in 2018, Duncan Greive asks media executives why no one believes in Sky any more.

When the history of New Zealand media is written in the next few years, one CEO will tower above the rest.

Sky’s John Fellet was promoted in 2001, a period during which Sky was losing $1m a week. Early next year he’ll finally leave with it being perfectly normal for Sky to profit by more than $2m a week. In the intervening period he has overseen huge growth in subscribers, from around 430,000 to a peak of 850,000. He’s handled the end of analogue, the launch of MySky, and the retention of nearly all the major rights contracts which have made Sky so successful over the years.

And yet he also leaves with the company’s share price in the doldrums and its public reputation at a distinct low ebb. The company has begun steadily shedding customers, and its earnings per customer has started trending south. Its digital strategy is a mess, with everything from the rickety SkyGo platform to the way it has priced and promoted its digital sport service FanPass subject to public ridicule. To top it all, the merger with Vodafone, viewed within the company as the solution to many of its problems, was spiked by the Commerce Commission.

It looks for all the world like the case of a great CEO who hung around too long. One who was extremely adept during an earlier era but just couldn’t figure out how to make it through through the (admittedly incredibly tricky) internet age.

And yet speaking to senior execs from throughout the media over the past few weeks, all were positive about Sky’s chances. The suite of new products they launch next year includes multiple video on demand options and a ‘puck’ which will bring internet-delivered Sky to all TVs, alongside other SVOD products like Netflix and even Lightbox.

“I really like their new boxes. I love the Netflix button. You’ve got to applaud the change in direction,” said one rival. “But imagine if they’d launched that three years ago.”

That they have held off is mostly put down to an innovator’s dilemma – had they been bold and launched well-priced video on demand a few years ago the market would have thrashed them for cannibalising their own customer base. But by waiting until now they’re seen as having missed the technological boat.

Yet after many years facing a complex problem without a solution, Sky seems on the verge of solving the technological and pricing issue which has plagued it for so long. If it works, it has the potential to open up its product to a demographic and income level which has increasingly shunned it. It will also likely solve one of its major headaches: negative PR which has seen other media and social media regularly thrash it over its pricing and tech.

Then the new CEO will turn to face the biggest challenge of all: what to do about rights, particularly rugby rights. These are, very suddenly, very much in play, after Spark made its audacious move earlier this year to purchase the rights to a package of tournaments headlined by the 2019 Rugby World Cup.

With that one bid, Sky suddenly had its first true 21st century rival – one older, larger and richer than it, and manifestly willing to spend whatever it takes to win.

Handily there is precedent for this kind of war. In the UK there’s another giant pay TV service called Sky, and another former state-owned telco, this one called BT, that aggressively bid for rights to the UK’s version of rugby – Premier League football. It forced Sky to pay a huge premium in 2015, but placed a far smaller bid when the rights were renewed earlier this year. It has subsequently said that it’s happy being a “viable second” in the EPL rights game.

Spark is clearly committed to content – it has bought a bunch of other sports rights too – but acquiring rugby is not as existentially important to them as it is to Sky, and it might be harder for them to extract as much value.

This is not the only reason Sky has to be optimistic. Despite customer losses, it retains an extraordinarily large subscriber base of over 750,000 households. Those subscribers have been with it for years, even decades – it has trained them to consume content through its boxes. Those boxes screen sports with which it has established long-running relationships, sports that have benefited from cheques they never received before Sky came along. It screens those sports thanks to the biggest outside broadcast company in New Zealand which it owns and runs, backed by by the best commentary talent in the industry. And, sports aside, it has an extraordinary library of content – larger than Netflix and led by the jewel of HBO and Game of Thrones.

What Sky really has is a content sorting problem and a digital product problem. A Netflix-style interface for its linear programming would make it one of the best-stocked SVOD platforms in the world. Quality streaming for its sports and a better UX would make it one of the best sports services in the world. Each of these is supposed to be coming in March, when a custom Cisco system is launched.

Its pricing problem for satellite has always been overstated – one of the issues with being a monopoly supplier is that consumers have nothing to compare you to. However “its pricing stacks up internationally”, according to one competitor – it’s the product bundling which makes it expensive, an issue partly solved by its new $25 packages.

In fact its revenue model makes it unique among the New Zealand media. Where the rest attract and sell attention for advertising – or in RNZ and Māori Television’s case, are state funded to achieve specific goals – Sky has always charged audiences for access to bundled content (advertising is a small and shrinking part of the pie). Subscriptions, incidentally, are the same model Netflix uses, and the one NZME is betting big on to save the Herald. Which is to say that Sky’s existing model is the current hottest thing in media.

It’s only its delivery mechanism which is out of style.

The question is whether it has waited too long to roll its new products out. Whether it can bring new subscribers across after all these years. “One of the biggest problems with Sky is the mentality: We must defend our expensive subscriptions at all costs,” said one rival. The level of resentment it has generated by refusing to offer serious unbundled products before 2019 has meant consumers are actively rooting for competition. And while Spark faces significant hurdles ahead of launch – including capacity, platform, marketing and presentation – it also has a huge chunk of the population who are ‘anyone but Sky’, and are desperate for meaningful competition.

That’s also true at a talent level. Sky’s building doesn’t help: an ugly, squat series of warehouses a long way from the city, it’s clearly the worst place to work in big media. And you could say similar things about some of their staff – many key roles, both on and off screen, have been in the same hands for far too long.

While Sky’s core satellite product will be relevant for a long time in a country as hilly and sparsely populated as ours, an NZ on Air survey earlier this year suggested another danger.

Sky subscribers are turning off linear more swiftly than Freeview users, suggesting that it might be just a matter of time before the value proposition is out of whack.

The scale of the digital challenge is very real, too. And it’s not just Netflix – there are a number of meaningful services being built up. While Sky’s current HBO deal gives it strong online rights, the service is available as HBO Now in other territories. Many sports have direct-to-consumer online models, and there is no reason to think that trend won’t arrive here too. And once these tectonic forces of cash and consumer behaviour start to move against you they can be impossible to resist.

For all that: Sky made over $120m in profit last year – and even marginally increased its underlying earnings in a market in which everyone else is back by double digits. This means it’s better placed than anyone to make a late but orderly transition into the future.

And while everyone is sweating what New Zealand Rugby will do with its rights when the current Sky deal expires in 2020, there’s a scenario which is not winner take all. In fact the trend internationally is to parcel up rights in either chunks of games, or break digital and linear in two. That latter would make a huge amount of sense in New Zealand, and ensure that both Spark and Sky get packages that work for their core customers. It makes sense for NZ Rugby in that it preserves the engagement of two bidders in the market for rugby, something bound to grow the overall pie.

Taken cumulatively, despite new competition from the likes of Netflix and Spark, Sky’s position is far from doomy, according to those I spoke with. While advertising has been subjected to intense weightless and largely taxless online competition, the amount of quality content people are willing to pay for access to remains stubbornly finite. Sky has captured huge chunks of that, with long-running and multi-faceted contracts as well as a proven ability to capture new customers through marketing.

There is a scenario in which 2019 is the year it bounces back: new online products, a new internet version of its Sky box and a whole new generation buying in. It’s not impossible to imagine the likes of HBO, Fox News (ugh, but still), movie channels and niche sports turning hundreds of thousands more households into lower value but higher volume Sky subscribers. That by 2021 it might have lost another 100,000 satellite subscribers, but gained 350,000 new online subscribers.

Whether it will ever make as much money as it did at its peak a few years ago remains to be seen. But of all the major media companies, Sky seems best-placed to complete a true transformation, and in so doing outrun what currently appears an ugly fate.

The Spinoff’s NZ media in 2018 series: the running order

Monday December 10: TVNZ

Tuesday December 11: Stuff

Wednesday December 12: Sky

Thursday December 13: MediaWorks

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Friday December 14: NZME

Saturday December 15: RNZ

Sunday December 16: Spark, Bauer, Māori Television


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