Digital television deal a gateway to the future

The TVNZ-Telstra Saturn package is not just about TV channels - it's driving down the e-information highway, says RICHARD BRADDELL.

Convergence - that's why TVNZ and Telstra Saturn have cut a deal to go head to head against Sky in the satellite-to-home digital television market.

The importance of convergence is that while the television set is the prime household entertainment centre, in the not-so-distant future it may become just as important as the gateway to a host of information services including the internet and e-mail.

It may even become, via the set-top box that decodes the signal, the entry point for plain old telephone services, which in years to come will be delivered using internet technology rather than the circuit switches that at present transfer calls out of telephone exchanges.

That is in the future. In the meantime, the potential of convergence to create new business streams is the driving force behind the agreement signed this week under which TVNZ and Telstra Saturn will form a joint venture, which they hope to have operating by April or May.

The new company they will create will initially deliver conventional television content via a shared digital satellite platform - virtually identical to that which Sky uses to service half its 400,000 customers.

The difference from Sky is that TVNZ's free-to-air channels will remain just that, free with no monthly rental, although users will still have to make an initial investment in a set-top box decoder and dish that between them may cost around $200 - about the cost of getting an aerial installed.

Surprisingly, given that Telstra Saturn will be offering competing pay channels, the announcement was welcomed as "great news" by Sky's outgoing chief executive, Nate Smith.

The basis for Mr Smith's bravado seemed to be that Sky customers would then be able to pick up TVNZ's free-to-air transmissions - something they cannot do now because of the incompatibility of equipment and the absence of an agreement under which Sky might pick up the TVNZ signal.

But Mr Smith's optimism seems misplaced given that the joint venture's customers will use a different set-top box from Sky's one.

The TVNZ-Telstra Saturn equipment will be sourced from a different supplier, if only because of the exclusive supply arrangements Sky has with its decoder vendor.

The supplier is likely to be Telstra Saturn's Australian sister firm, Austar United, which has 150,000 decoders in warehouses.

They have been withdrawn from Australian service as customers have upgraded to interactive boxes.

Rather than confirming this, Telstra Saturn chief executive Jack Matthews said it was a strong possibility that the Austar boxes would be used.

As well as free-to-air, the decoders will also be able to handle Telstra Saturn's pay channels.

If interactive services are introduced, they will have to be replaced by more expensive boxes.

Mr Matthews said free-to-air installation would be done at cost, which one source said would be $150 to get an installer on site, plus the cost of the dish, which was $60.

At the kind of prices suggested so far, the assumption has to be that the "entry level" decoders from Austar will be provided free.

More expensive decoders capable of interactive services, to be introduced at a later date, are likely to be subsidised.

But while the agreement looks like a threat to Sky, it has its sceptics. One analyst, who asked not to be named, dismissed it as "perception over reality."

"My belief in the end is that content will prevail and people are only going to watch what they want to watch," he said, adding that people who now received the free-to-air channels would have little interest.

But TVNZ believes there will be a good market in areas of poor reception.

And while Telstra Saturn's pay TV does not have Sky's blockbuster of rugby, it should be affordable if it is priced at around $20 a month. In Wellington, it goes into one in five of the homes its cable passes. Sky's satellite is received by one in three homes nationwide.

TVNZ may add other channels to the package and it will also offer space to other free-to-air providers, including a Maori channel.

TV3 managing director Brent Impey said that it would consider going on the new platform, as it has with Sky.

For its part, Telstra Saturn will use the satellite to deliver TV to customers, most of whom will be outside the delivery area of its cable network, which currently operates only in Wellington.

There will be up to 16 digital channels that are possible on the satellite transponder that TVNZ has bought on an Optus satellite.

TVNZ is thought to have paid about $6 million for the transponder rights, but spokesman Liam Jeory declined to comment on speculation that it also has an option on a second transponder that could double capacity.

The Telstra Saturn deal is a godsend for TVNZ, which was thwarted by the Government when it baulked at its dreams of its own $200 million digital network.

The joint venture will be considerably cheaper and TVNZ expects to spend a lot less than $10 million, a figure that suggests that Telstra Saturn may well be picking up much of the costs and possibly a controlling interest as well.

From Telstra Saturn's point of view, it is easy to see why it would want to be there. Apart from national coverage, it gets a profile that would be impossible to generate by advertising alone.

Ultimately, Telstra Saturn will be the country's largest broadband provider, capable of delivering hundreds of channels of television to New Zealand homes, even though its largest revenue will be in telecommunications.

Now, its cable networks are operational only in Wellington, although service will begin in Christchurch soon, with Auckland possibly in business at the end of next year.

Because building fixed-wire networks is expensive - Telstra Saturn has already spent $400 million and has raised another $900 million to pay for network construction - it is likely that 35 per cent of the country may never be covered by its wireline service.

But does Telstra Saturn have the capacity to embark on a satellite rollout while it is engaged in, as one commentator put it, "the most comprehensive and engineeringly exhausting rewire of New Zealand."

Logically, it should draw on the skills of its Australian parents, Austar United, which has 400,000 digital satellite customers, and Telstra. But Austar is preoccupied with expanding its own satellite business. And skills are in short supply in Australia.

However, Mr Jeory is confident that TVNZ can come up with the skills, since its subsidiary, BCL, already maintains the terrestrial free-to-air television networks in Australia as well as New Zealand.

While TVNZ may also take over the sales and advertising functions for Telstra Saturn's pay TV business, its other contributions, apart from the satellite space, will be content libraries and the capacity to create new programming.

It may be a matter of opinion among viewers, but from a commercial standpoint TVNZ has fantastic content, which it would want to exploit in a digital environment, taking full advantage of the interactive possibilities that might provide.

It might do that on a free-to-air channel, or it could choose to collect the revenue by selling to Telstra Saturn, which might, for instance, repackage news in a more in-depth 24-hour channel.

Hence the logic that if TVNZ and Telstra Saturn fall into each other's arms, one can give the other programming skills, the other a network and together they can deliver, via satellite, free-to-air and pay television and interactive television to areas otherwise beyond their reach.

But the joint venture also raises a spaghetti of issues. Details about how content will be shared between the partners have not been spelled out. Nor have issues of cost-sharing.

After TVNZ and Sky Television's efforts to get together ended in acrimony, the potential for a falling-out between TVNZ and Telstra Saturn cannot be dismissed.

Both parties are confident of a deal by Christmas after the memorandum of understanding was signed on Monday. They also talk of a good deal more mutual understanding than was apparent in TVNZ's negotiations with Sky.

Also, the key sticking point in TVNZ's relationship with Sky is not an issue with Telstra Saturn.

TVNZ broke up with Sky despite the latter's willingness to give free access to its own satellite transponder, apparently because it was unwilling to allow TVNZ to develop its own interactive component.

Sky thought it was generous: the TVNZ view was that it was the tail wagging the dog as Sky, with 400,000 customers, would have control over TVNZ's access to its 1.4 million viewers.

While TVNZ would have been prevented from offering its own interactive content, Sky has been slow with its own satellite-delivered interactive services - although some are expected soon.

(While satellite is a powerful distribution medium for the downlink, it cannot be used on the return path, which is completed using a modem to a telephone line that Sky installs with its set-top boxes.)

Those issues have clearly been resolved to TVNZ's satisfaction in the Telstra Saturn relationship, as shown by a passage in their joint media release this week that said: "The strategic relationship between the two companies will also secure open access for TVNZ to Telstra Saturn's set-top boxes."