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A streaming trail of disruption

Sky TV is buying Lightbox from Spark to try to compete with Netflix, Disney, Apple and Amazon. Mark Jennings and Bernard Hickey analyse the deal as an example of how the streaming revolution is not only disrupting media and telecommunications, but the economy as a whole.

Remember when Sky TV under long-time boss John Fellet tried in 2016 to merge with Vodafone New Zealand under its almost-as-long-time CEO Russell Stanners? They tried to create a local telecommunications and televisual entertainment powerhouse to take on the likes of Spark and Netflix at a time of explosive data use by mobile and big screen streamers. This was just as 4G and Ultra Fast Broadband networks were ramping up to full speed.

That merger was blocked by the Commerce Commission in early 2017 on the grounds they would have too much market power. Both CEOs have since moved on, as has the CEO of Spark, Simon Moutter. Under new management, the three big players in the adjacent markets of telecommunications and pay television have now realigned and the shape of that realignment became clearer today with Sky TV's acquisition of Spark's Lightbox.

Where once Sky TV was partnered with Vodafone and wanted to merge with it, now it is doing deals with Spark and is open to using any platform. Where Sky TV once fought tooth and nail against Spark for sports rights, it has now partnered with Spark to buy its orphaned entertainment streaming platform and will jointly market a streaming platform to Spark customers.

Sky TV and Spark appear to have declared a truce with each other and joined forces to fight a bigger threat: whoever wins the global winner-take-all contest for supremacy in entertainment streaming. Where once the televisual contest was a local one between Sky TV, Spark, Mediaworks and TVNZ, now there is just one local player with the heft to bid for the local streaming and broadcast rights to compete against a raft of global competitors that includes Disney, Amazon, Apple TV and is led by Netflix.

Why the realignment now?

This is all about three new leadership teams dealing with growing pressures from local shareholders hungry for dividends, but also facing global streaming competitors just as hungry to blow their shareholders' cash on winning the global top spot in consumers' streaming subscription lists.

Vodafone took on former Spark, TV3 and TVNZ executive Jason Paris as the CEO of its New Zealand arm mid-2018 with the aim of floating it off here, but then sold it to Infratil and Brookfield for $3.4 billion in May this year.

Sky TV appointed British pay television executive Martin Stewart to replace Fellet in November last year. Since then, Stewart has grabbed the reins to first fight back against Spark and secure key rugby rights from New Zealand Rugby, and now to call a truce with Spark on entertainment streaming and look to partner with other former rivals such as TVNZ.

Spark also has a new leader who wasn't in charge when the former monopoly launched heavily and expensively into the content market to try to compete against Netflix and Sky TV with 'over the top' offerings of sport and entertainment that could take advantage of much better and more reliable broadband networks. The man behind that content-driven strategy was Simon Moutter, who left earlier this year and was replaced by internal hire Jolie Hodson.

Now the dust has settled, this deal announced today shows where the lie of the land is: Sky TV has opened up to work with Spark and they have joined together to fight the common global enemies. It also shows Spark's drive into content is not as sure a thing under Hodson as it was under Moutter. Spark announced in March it wanted to exit Lightbox just before Hodson was announced as Moutter's successor.

Here's the deal that confirmed it

Sky TV announced on Thursday it would buy Lightbox from Spark for an undisclosed sum and market a joint Neon/Lightbox service to Spark's customers. The deal ended their rivalry in streaming entertainment television and is an admission they can't compete alone against the big spending global giants of Netflix, Disney and Apple, who are all now marketing here directly after the launches last month of Disney and Apple. The deal also suggests Sky and Spark may think again about their expensive rivalry over sports rights. It also means Sky TV is open to working with others besides Vodafone, which has been careful to avoid competing for content rights and has its own broadband bundling deal with Sky TV.

For now, commercial reality has overcome sporting rights rivalry between Sky TV and Spark.

Sky is buying Lightbox for an undisclosed sum. Minus the content costs, that sum is likely to be minimal as Lightbox has been a money loser for the telco. Sky will merge Lightbox with its own streaming service Neon, although it hasn't said which brand or platform it would use, or whether it would use its own SkyGo streaming system. The deal was closed on Wednesday night and makes sense for both companies as the competition from Netflix, Disney + and TVNZ on-demand increases.

It probably would’ve happened sooner if war hadn’t broken between the two local players for the rights to high profile sports like rugby and cricket.

Sky won the rugby and Spark won the cricket

Spark succeeded in winning the rights to domestic cricket before Sky shut them out of the rugby with a monster deal that ended with NZ Rugby getting five percent of the pay TV company’s equity.

It’s clear that Sky TV's Stewart and Spark's Hodson have moved past the immediate battle and done a deal that is in the interests of their shareholders.

The combined Lightbox/Neon platform will have a realistic chance of footing it with the big guys, particularly if it is bundled with other Sky/Spark products. Continuing the standalone services would have seen both lose market share as neither had enough critical mass.

Spark’s Marketing Director, Matt Bain, says: “We’re really pleased to have found an ongoing home for Lightbox with Sky as part of a new combined SVOD platform with Neon. Following completion of the deal, we’ll be working closely with Sky to ensure that all existing Lightbox fans have a positive experience through this transition period, and we look forward to partnering with Sky to offer the enhanced new service to Spark customers.”

Sophie Moloney, Sky’s Chief Legal, People and Partnerships Officer says: “Sky will bring our Neon service together with Lightbox during 2020 to offer New Zealanders an outstanding range of entertainment content from New Zealand and around the world in a proudly kiwi way.”

“With the increasing arrival of the mammoth global players in the New Zealand market, the purchase of Lightbox allows Sky to offer an enhanced, highly appealing and competitive entertainment service, delivered by Kiwis to Kiwis," she said.

“We’re excited at the possibilities it presents, and the opportunity to attract new customers to Sky and continue to grow our streaming services.”

Sky said the deal was conditional on commercial, legal and regulatory approvals as required, and Sky and Spark anticipate completion by early 2020. There would be a transition period once the deal is completed, during which Lightbox and Neon customers would continue to be able to use their respective services in the same way they do now. Spark said it would contact Lightbox customers today to let them know that nothing would change immediately.

Truce in sports rights battle?

Industry watchers will be interested to see if this deal leads to greater cooperation between Spark and Sky in other areas. Both CEOs must be concerned about the escalating cost of the battle for sports rights and the production costs of covering local matches.

Sky’s first priority though, will be securing enough compelling content for the Lightbox/Neon service. The big US studios are withdrawing more and more content from the open market as they develop and push their own entertainment streaming services.

A key deal will be how or whether Sky renews its current contract with HBO, which supplied series such as Game of Thrones, Big Little Lies, Veep, The Sopranos and Sex and the City for its Soho and other channels.

And HBO Max too?

HBO is now owned by AT&T Warner Media and is planning to roll out its own streaming service, HBO Max, from May 2020 in the United States, extending through Europe and Latin America in 2021. It is not clear yet whether or when it might launch HBO Max in this part of the world.

Sky, Lightbox, TVNZ and Mediaworks are also now unable to stream Disney content, which includes movies and television series from Disney, Pixar, Marvel, Star Wars and National Geographic.

The deal also shows how much pressure there is on other local streaming platforms such as TVNZ On Demand and Mediaworks' TV3 system. It's no coincidence TVNZ has stopped paying dividends to its owner, the Government, and TV3 is up for sale and a deal is expected within days.

The Government has had to delay until early next year a decision about whether to try to merge TVNZ with Radio NZ to create a single public broadcaster, in part because of the complications around whether TVNZ can continue to be a free-to-air advertising-funded broadcaster, or whether it pivots to become a subscription-based niche operator. The free-to-air model depended on being able to buy programming from overseas studios relatively cheaply and then having a relatively large captive market it could charge high advertising rates for.

This deal shows how much pressure that model is under from the global streaming platforms, who are now pushing up series production prices and marketing directly to TVNZ and Sky viewers.

Explaining why inflation is so low

The latest deal also shows how quickly and comprehensively a local industry that once had a captive market has been sucked into competing against global players with much greater scale to invest in content, user experience and technology platforms.

What was once a 'non-tradeable' industry with solid profit margins and relatively high prices, has quickly become part of the 'tradeable' sector, with falling prices, improving service levels and massive disruption.

It's fantastic for consumers and hard for shareholders. This is also proving difficult for the Reserve Bank, which is seeing technological disruption driving down prices or suppressing inflation in parts of the economy that were once inflation generators. Sky TV's average revenue per customer per month hit a record high of almost $80 in mid 2015 for its 852,000 customers. That has since dropped to just under $75 per month for 779,000 customers as at June 30.

Households that can live without watching rugby are now disconnecting in droves each month, finding they can buy one or two streaming services for a total of less than $30 a month. Spark Sport, which does not have Super Rugby or the domestic All Blacks games, but used World Cup rights to launch itself to a new level, costs $19.99 a month. Hodson was positive about Spark Sport in her November 7 annual general meeting address, saying it had met Spark’s initial hopes of gaining 200,000 customers after the World Cup, although many will have since cancelled after the Cup ended. Technical problems also hit the service during the key All Blacks vs South Africa pool game, which was a publicity headache for Spark.

At least initially, a combined service would not be able to combine its price. Lightbox's standard price is $12.99 a month, while Neon costs $13.95 a month. Sky TV's current satellite-delivered packages start at $25.99 a month for a basic package, but adding sport costs $31.99 a month, Entertainment (box sets, UK TV, news and documentaries) costs $25.50 and Movies costs $20.93. Buying the full set would cost $104.41 a month. If Sky was forced to 'unbundle' sport, then customers could in theory create their own bundle of Sport plus Netflix and one other for less than $50/month.

This pressure on both ARPU and subscriber numbers has forced investors to revalue future the pay television operator's revenue streams. Sky TV shares have fallen from a record high $6.92 in July 2014 and a market capitalisation of over $3 billion to a record low yesterday of 72 cents and a market capitalisation of $322 million.

Now it's services that are globalising

Manufacturing was globalised in the 1990s and 2000s after China and Eastern Europe entered the global economy, helping to cut the real prices of cars, appliances, electronics and all sorts of physical goods. That affected around 40 percent of the economy. Now services sectors such as media, retailing, financial services, education and health face similar sorts of price pressures as global companies are able to access customers through fibre and mobile broadband connections on devices are that increasingly cheap and easy to use.

The remaining 60 percent of the economy that is non-tradeable will come under pressure as international brands with massive scale and the ability to deliver services cheaply and easily will compete with local companies and, potentially, government services.

The squeeze lower on prices has put the Reserve Bank under enormous strain, given its mandate is to keep inflation around two percent, regardless of whether it is structural or cyclical.

If it is structural and the Reserve Bank is forced to keep stimulating with unconventional measures such as quantitative easing to buy government or mortgage bonds, then it risks skewing the economy with further asset price inflation at the same time as deflation of goods and services prices.

The irony is that as fast as Sky TV's share price falls, the prices of the houses around around its Mt Wellington studios are rising just as fast.

Get it early – This article was first published on Newsroom Pro and/or included in Bernard Hickey’s ‘8 Things’ morning email of the latest in-depth business and political analysis. Get it early by subscribing now or starting a 28-day free trial.

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