Sky fights for a way to beat global predators

Danger is lurking — and pay TV boss knows it, writes Damien Venuto

Terrifying as it was, the movie Jaws could easily have played out as a comedy of errors, with its foolhardy characters oblivious to the size of the threat lurking beneath the water. It’s a tempting metaphor to describe the plight of Sky TV, against the global corporate behemoths lurking around

New Zealand. But it’s only partly true — the threat is real enough, but Sky TV chief executive John Fellet is acutely aware of the danger. He sees the giant fin in the water, but it’s just unclear whether there’s a way to outswim it.

“We’re in a fight for our lives,” he told the Weekend Herald this week after the release of the company’s financial results.

That fight is against the rising threat of local and international streaming services, which offer more entertainment than anyone could possibly consume, at a fraction of the price of a Sky membership.

Nielsen research shows that Netflix has moved from the early adopters into the mainstream, with the service now available in 434,000 households and reaching as many as

1.2 million Kiwis throughout the country.

Given the ease of sharing a single Netflix account between friends and family, it’s questionable how many of those are paying customers but, as the company’s content weaves through New Zealand, it’s steadily attracting thousands of eyeballs away from traditional media. Most notably, Netflix is attracting people away from Sky, which lost

37,000 subscribers over

2017 (around 10,000 of these were lost after the closure of online DVD rental business Fatso).

While the company still has almost 780,000 subscribers, Fellet has not faced a more ominous threat to Sky’s pay TV model in his 18 years at the business. Yet, he remembers worse times.

“As far as nights I’ve tossed and turned in bed, there were many more in 2000 than there are now,” he says.

“The first year I took over, we were losing $44 million a year, and now in just the last six months we’ve made $66.7m.”

Sky wasn’t always the muchcriticised incumbent it is today. It grew into that role as it steadily chipped away at TVNZ’s hold over Kiwi viewers.

“We were the original disruptors. At one stage TVNZ had 95 per cent of the television viewing in New Zealand,” says Fellet as he reflects on Sky’s role reversal.

The parallels between Sky in the early 1990s and Netflix today don’t end there. Like the modern disruptor, Sky also led with a growth strategy focused on attracting as many customers as possible with great programming, regardless of the cost.

According to a Los Angeles Times report from last year, Netflix has accrued more than US$20 billion in debt, the vast majority of which is attributed to expensive content deals. This year, the company also committed to throwing a further US$8b on

700 original TV series and movies in

2018 — indicating that profitability is still a long way off.

“Content is great, but if you’re paying so much that you’re never going to be able to make any money out of it, something has to happen,” Fellet says.

In other words, Netflix will either have to increase prices or greatly reduce the amount of content it

HWatch:

nzherald.co.nz/ business crams into its service.

Fellet chuckles when asked how long it takes investors to lose their patience with an unprofitable business which continues to languish in the red despite rapid growth.

“It doesn’t matter until it does matter,” he says.

“Someday someone will sit there [at Netflix] and say, ‘now, wait a minute,’ as they did with Sky.”

Fellet says that shortly after he took over the business in the early 2000s, investors didn’t want to hear about growth any more.

● Joined as chief operating officer in 1991

● Became Sky CEO in 2001

● Peak revenue during Sky tenure: $928 million in 2016

● Revenue in 2017: $893m

● Peak profit during Sky tenure: $171.8m in 2015

● Profit in 2017: $116m

● Peak number of subscribers during tenure: 853,000

● Current subscribers: 779,000

“They turned and told us that by now most companies are turning a profit, so we ended up having to do a bond issue and lower our bank debt.”

Investor tolerance for unprofitability does appear to have a higher threshhold these days, with businesses such as Netflix and Uber running on hype and promise for years, rather than on actual returns. Investors keep investing in the socalled flightless birds of tech in the hope that one might be able to replicate the profit-generating machines of Google, Facebook or Amazon.

Battling against one international juggernaut has been challenging enough for Sky, but now Fellet also faces the prospect of going up against Amazon for NZ rugby rights, with rumours swirling that the company is poised to make a bid.

Sky has the rights tied down until the end of the 2019 Rugby World Cup, but Fellet will be hoping to extend his tenure well beyond that.

He wouldn’t comment on whether Amazon was pitching for the rights, but says he never underestimates any potential competition.

“Amazon can do whatever they want. If they wanted to be the biggest drycleaner in New Zealand, they could have that market in six months.”

Fellet does, however, question why Amazon would bother with the rights for a localised team in what is a relatively niche sport.

The All Blacks might count Dwayne Johnson as a fan, but beyond that there aren’t many who really care about the team beyond New Zealand. For a company with global aspirations, teams like Barcelona or Manchester United seem better partners.

“The more localised your sport is, the better you’re off,” Fellet says.

Ownership of sports rights has been something of a double-edged sword for Sky: it’s the heart of the business, but it’s also the reason Kiwis hate the company. For years, critics have laid into Sky for locking away the national game behind what many see as exorbitant fees.

Sky has now answered these complaints by introducing a lower entry-level price that allows sports fans to shave $25 from their monthly subscription.

It’s a bold move for a company which has always gained from high average revenue per user (around $80 a month). By offering the cheaper rate, Sky might stand to increase its overall subscriber numbers from the current 770,000, but it’s questionable whether these sign-ons will be as lucrative to the business as those who came before. Sky now has the task of attracting enough new subscribers to balance the losses caused by those who might shift to the cheaper options on offer.

Fellet has made a big gamble as he tries to beat the threat to Sky. Now, it’s just a case of whether he’s chosen the right course, and has a big enough boat. When speculation broke that Amazon could be pitching for New Zealand rugby rights, some sports fans started baying for Sky’s blood, hoping the global company would follow through.

However, those who are critical of monopolistic corporate power might be backing the wrong horse. Analysts are already calling Amazon the most powerful company in the world, and it’s only getting bigger.

If it were to win the rugby rights, that might end Sky’s tenure, but it would simply place the viewing rights in the hands of a much more powerful entity, which, importantly, isn’t reliant on rugby in any way.

“Long term, if the rugby isn’t successful, I’m not successful,” says Sky TV’s John Fellet.

“Similarly, if we’re failing, they’re not going to be any better off,” he says, in explaining the mutually beneficial relationship between NZ Rugby and Sky.

And while Amazon might enter the market with a much more attractive price point, there’s no guarantee it will stay there.

Remember, it wasn’t that long ago that the company didn’t even blink as it surprised Amazon Prime consumers with an 18 per cent price increase.