Comment: Sky rugby rights deal could face 'big problems' from Commerce Commission

Sky now has the incentive to keep customers on its satellite services. Photo / File

michael wigley

Sky and Sanzaar (the four Southern Hemisphere major rugby unions) might be unwise to proceed with the deal announced today without getting clearance by the Commerce Commission.

It looks to me to potentially have problems, which might only be solved by an unusually strong commitment on Sky and NZ Rugby to ensure wholesaling to Sky's competitors on adequate price and quality terms. Having been around many of these wholesaling obligation scenarios over many years in Commerce Commission matters, my expectation is that there is no sufficiently strong commitment in place between Sky and NZ Rugby yet (and in fact even a strong commitment may not be enough to allay the competition concerns).

It's complicated and I don't have all the facts, including the detail behind the scene, so I can't be sure.

When assessing a deal like this, the Commerce Commission looks at whether NZ Rugby's deal with Sky substantially lessens competition in the next few years relative to other alternatives that NZ Rugby has to supply its premium live content. That's a "with" and "without" comparison.

Do the rights going to Sky, with NZ Rugby taking shares in Sky, lessen competition in affected markets in the next few years, including telecommunications, content provision and so on, relative to the rights being sold in a different way? If yes, there is likely to be a breach and the deal cannot proceed.

As history shows, Sky has the ability and incentive to package the premium live footy with high-cost pay-TV packages, and to wholesale to other providers such as telcos with high-price and low-quality service so that competition to Sky is weak.

The poor quality of services supplied online, as wholesaled to telcos by Sky, relative to the quality of the satellite service, illustrates that. Plus, without the competition, Sky has little incentive to innovate and provide better-quality services, which it's demonstrated historically. The quality of service to NZ Rugby fans has fallen behind. (which one would have thought is a key consideration for NZ Rugby unions).

Against that background, the incentives to favour the satellite platform remove the powerful outcomes provided by online live rugby to incentivise uptake and growth of the new fast broadband networks. Live premium sport in NZ, and internationally, punches well above its weight in terms of impact on uptake and roll-out of the multi-billion-dollar fibre, fast copper and wireless networks. As the Vodafone and Sky Commission decision shows, the impact of live premium sports is substantial on our economy.

Online competition has incentivised improvement of streaming options. Photo / File

Sky already provides live sport online directly to viewers. Essentially any customer of a broadband provider such as Spark or Vocus can take that service just like that customer can take Netflix. Those services, called over-the-top or OTT services, don't require a wholesale relationship with the telco.

But, historically, that Sky OTT service for live sports has been relatively low quality, reflecting the Sky ability and incentive to encourage viewers to stay with a bundle over the satellite platform. This implies a real prospect that, unless forced to change this by Rugby, that history will continue, whatever SKY might say now.

So, keeping the status quo going forward – including with rugby taking shares in Sky too doesn't look particularly good for Rugby fans and the NZ economy (including as it slows down the move to using high-speed broadband networks). That includes in my view in terms of the key long-term objective of getting big money in to fund the game from the top level to the grassroots.

The Sky deal slows down migration from the legacy satellite network to the new world broadband networks, including by slowing down growth of those networks to rural areas. Sky has big incentives to keep customers on satellite, away from broadband. That's not good for NZ Inc.

But the mere fact that poor outcomes are possible is not the question for the Commission.

The question is whether that is worse than other alternatives that Rugby has as to selling the rights.

NZ Rugby's other alternatives to going with Sky are: a) to go with another single platform (such as the Spark/TVNZ JV or an international player such as Amazon) with or without a closer relationship, or b) it could make the content available to all platforms so there is competition in not for the markets. NZ Rugby could do that itself, contracting provision of the service (such as outdoor broadcasting), or it could contract another provider to do most or all (possibly even one of the retail providers).

It would be relatively straightforward for Rugby to get control to the distribution point to the competing platforms, by contracting in suppliers to do so, and thus that is a viable alternative, when the Commission considers the position. A number of sporting codes are doing that offshore. In my view, the Commission would put that alternative into the mix, to see if going with the Sky deal substantially lessens competition relative to Rugby being the producer and distributor to platforms.

The problem though with option "a" - the single provider – is that this has the same sort of problems caused by have only Sky as the provider. In fact, if the other provider is a telco such as Spark, that could be worse as it is more likely to lessen competition in the mobile, broadband and landline markets than if Sky is the provider. For example, the single platform such as Spark/TVNZ can get a stranglehold with its phone and broadband products packaged with live rugby tests, thereby neutering the telco competitors so much that they are too small to bid next time around. The single telco provider will take many customers from its telco competitors.

Sometimes, competition law problems might be solved where potential platforms are asked to bid for the exclusive rights. There might be sufficient competition at that level.

However, NZ Rugby only negotiated with Sky during an exclusive negotiation period granted to Sky some years ago, so that won't save Rugby and Sky (and sticking with implementing those exclusivity rights might in itself cause competition law problems depending on the detail).

But what this strikingly shows is that two parties with their own monopolies are clubbing up. For competition regulators, one monopoly is bad enough, but two monopolies combined and leveraged may be a big issue for the Commission. Certainly, it is glaring question mark which isn't rocket science. Sky in its announcement this morning to the market correctly stated that it is the only platform that can provide the footie over all three of satellite TV, free to air (Prime) and online.

That's monopoly talk. And Rugby has the monopoly rights over live rugby and that is hot property.

So far, Rugby has lost its monopoly by being forced to use the Sky pay-TV platform. Sky had control not NZ Rugby. I suspect Rugby will look back in a few years' time and regret becoming tied up in this way again, given the ease with which a Sky can leverage things against NZ Rugby.

The second alternative of providing access to multiple providers is strong as it enables competition and innovation between platforms, leading to better services, prices, and options for viewers etc. NZ Rugby's public are likely to get better services, pricing and choices, caused by competition: Sky's service thus far shows how things fall behind when there is little competition in the market. That there is more competition for the market won't change that a lot. Plus, competition between platforms is more likely to encourage growth of fast broadband services including in difficult rural areas.

So far in the story, it may well be that giving the rights to only Sky or a Spark/TVNZ JV will be worse for competition, innovation, rugby fans and NZ Inc, than NZ Rugby instead making the content available to multiple providers on a basis enabling competition. If that is so, the Commerce Commission test likely is not passed and the single-provider transaction cannot proceed. The NZ Rugby Unions and Sky (or Spark/TVNZ in that alternative) would be in breach.

However, what if NZ Rugby requires the sole provider (Sky, for example) to commit to wholesale the content to other providers so there is competition in the market?

Yes, that might solve any competition and competition law problem. But there is a very big proviso. The agreed wholesale terms must be sufficiently good and robust that there can be genuine competition. That is because a wholesale commitment can be gamed very easily unless the terms are strong.

I have seen that happen time and again and it is the main reason why Chorus and Spark are split and a core reason why the Commission wouldn't allow Vodafone and Sky to merge. The single provider has strong ability and incentives to game this, to keep competitors ineffectual like tall dwarfs. For example, Sky has used a model by which it said it supplied the premium live sports rights to other providers on a "retail-minus" basis (that is, Sky provides the service to its online competitors at Sky's retail price less a certain percentage).

That "retail-minus" approach is easily gamed, as experience internationally and in NZ shows, especially where bundles of services, and changing bundles of services and pricing is commonplace, as it is for Sky. Not to be overlooked is that the wholesale terms can't be too harsh against Sky or it won't have incentives to acquire the rights. A balance is needed, but the history with wholesaling commitments is that they are strongly gamed against competitors.

Sky earlier this year said it was looking to encourage more wholesaling to competitors, but that talk does not get around the ability and incentive for Sky to still discriminate strongly against competitors, unless its obligations are made unusually clear.

Thus, any structure by which there is a single provider, or a single provider is tasked to provide wholesale services to all, where that provider is a retail provider too, is doomed to be gamed and fail, unless there is an exceptionally strong structure put in place. We have had so much experience with this problem over many years and we know it is exceptionally hard if not impossible to solve.

Sky will likely have in mind being able to have wholesale terms with competitors that keep customers on its largely fixed cost satellite network. It has the ability and the incentive to do so unless restrained. I expect that, in doing its numbers, it is counting on that. My pick is that they have so far negotiated wholesaling obligations with Rugby – if they have any – that are favourable to them.

Sky now has the incentive to keep customers on its satellite services. Photo / File

All that implies that NZ Rugby will need to be very careful to avoid breach of the Commerce Act, as will Sky. For Sky and NZ Rugby that is even more so due to NZ Rugby getting 5 per cent of the shares. I suspect that 5 per cent shareholding is the least of the worries, the main concerns in terms of a closer relationship between Sky and NZ Rugby being the shareholders' agreement behind the scenes. Having closer links between two players each with dominant positions increases those concerns.

The Commission knows about problems as to premium live sport - that was at the centre of rejection of the Vodafone/Sky merger – and as to inadequate and gameable wholesaling constructs as to price and quality.

The Commission won't accept a contract only as between Sky and NZ Rugby confirming robust wholesale rights; nothing short of a deed making an irrevocable commitment to other platforms, enforceable by them, will meet the requirements. It may be the Commission won't even accept that. The same applies to an alternative based on a robust commitment to OTT services, with sufficiently strong price and quality obligations.

There might be ways of getting this right, but it requires considerable care, where Sky will push strongly for a weak commitment (which is drop-dead easy). Plus, get it right and the likely regulation of live premium sports rights in the next three years is probably avoided. That great outcome is far more likely if NZ Rugby makes sure content is made available on a level playing field now.

A lost opportunity.

• Lawyer Michael Wigley specialises in competition, technology and IP issues. He acted for TrustPower , InternetNZ, Freeview and Blue Reach on the proposed Vodafone-Sky merger and has previously acted for Spark rival 2degrees