Sky TV: Pay broadcaster has defied odds

Some rivals fear that Sky's growing strength will cut others out of the competition for programme rights. Photo / Paul Estcourt

Craig Heatley has his own take on the old line from Victor Kiam - the Remington shaver man who liked the company so much that he bought it.

The Sky Television founder - and hands-on chairman for many years - sold out of Sky seven years ago. But he still likes the company so much that he happily bought back in six months ago.

"I bought quite a few million shares during the market turmoil when the share price slid to $3.30," says Heatley.

It's been a good buy - yesterday Sky Television was trading at $4.61.

"I controlled Sky for a long time but essentially sold out to Rupert [Murdoch], not through any lack of confidence - I just did not want to have so many eggs in one basket."

With Terry Jarvis, Alan Gibbs and Trevor Farmer, Heatley oversaw Sky's launch with three UHF pay channels in May 1990.

Two decades on, Heatley spoke to the Business Herald about those gruelling early days for pay television and the creation of a company that now reaches into almost half of New Zealand's homes.

Establishing Sky, he says, "was harder than we expected, with New Zealanders initially struggling with the new concept of paying to watch TV".

The three analogue channels - for sports, movies and news - were initially offered in Auckland, Hamilton and the Bay of Plenty, but expanded to the rest of the country and increased to five. Ironically, in its 20th year, Sky is expected to next week reveal plans to close the UHF service.

Heatley says that in those first four or five years the company suffered significant losses, with the huge capital outlay leading to US cable TV investors, including Time Warner, buying in from 1991 to 1996. In those early days investors spent six times more than expected to build the company before it began breaking even.

"At one stage we were losing $1 million a week - that focuses the mind," says Heatley.

"Some very smart people laughed at us.

"Coopers and Lybrand made a report for some people who were looking to invest. They said that Sky had too many fixed costs, that it would never reach 100,000 subscribers and would wind up in bankruptcy."

The costs remained high but exclusive rugby rights boosted sales, followed in 1997 by the addition of the Direct Broadcast satellite platform. After a slow start Sky has emerged as New Zealand's most successful television company, with a market capitalisation of $1.8 billion.

But that success means Sky is now being blamed for many of the ills facing the rest of the industry.

After two decades of watching Sky grow into a juggernaut, TVNZ and TV3 are showing a rare unanimity and saying time is running out for New Zealand's unique laissez-faire system, which provides no protection for free-to-air television.

In April last year broadcasters made submissions to the early stages of review introduced by the Labour Government, in the first real regulatory challenge to Sky.

Officials were given the job of looking at possible changes to broadcasting regulation, to reflect the huge upheavals in the world of television, and wider technological changes. Among the issues for the review - since cancelled by the new National Government - were the convergence between broadcasting and telecommunications.

For Television New Zealand and MediaWorks - owner of TV3 and C4 - the review was a chance to publicly ring alarm bells about Sky's growth, and to call for it to be regulated before it undermines free TV.

One obvious way in which the free-to-air channels can combat Sky's seemingly relentless growth is by offering more choices themselves.

TVNZ is focusing a lot of attention on its on-demand services and websites, and its investment in TiVo - which allows viewers to tailor their viewing - will edge it into the Sky market.

The new free-to-air digital platform, Freeview, will allow more channels, and TVNZ says its new media ventures have been a success.

But the concern is that as Sky passes 50 per cent penetration, the relationship between pay TV and free-to-air will reach a tipping point.

Sky has dominated sports rights for more than a decade. Now the free channels fear that Sky could use its buying muscle to outbid them, by doing joint deals with Sky's own free-to-air service, Prime.

That might shut Sky's free-to-air rivals out of obtaining Hollywood shows that deliver big audiences - and the advertising revenue they attract.

Apart from the obvious fact that it is attractive to many viewers, there are two keys to Sky's relentless growth.

The first is its exclusive control of the Sky set-top box. Now that nearly 50 per cent of homes have one, that gives Sky a lot of power to prevent the establishment of any new pay TV operator.

The second is Sky's approach to obtaining all of the rights to programming - including internet and mobile phone rights - then selling them to other pay networks.

Sky's chief executive John Fellet says Sky is being platform-agnostic, selling content to other new pay outlets such as internet protocol television and mobile phones.

He dismisses calls for regulation, and comparisons between Sky and Telecom, which eventually proved too big to escape regulation.

"It is a huge jump to make that comparison," says Fellet.

"You have Telecom which had a huge monopoly as a state-owned enterprise, sold off privately, where we have made every single programme available in the marketplace.

"We have not been anti-competitive, we have given viewers options. The only way that you can really regulate is to limit the number of options for the public."

Anyway, he asks: "Does the public really care whether Sky grows or not?

"What we will do [for clients such as Telecom and TelstraClear] offering pay TV services is take away all of the headache of producing [content].

"I don't care who owns the subscribers. I just know that I have the rights to Transformers 2 and want to amortise it by selling it on."

Fellet says that free-to-air competitors' fears of joint bidding - Sky getting the pay TV rights and Prime getting free-to-air - "cannot happen".

The Hollywood studios who sell output deals giving access to their top shows have no interest in providing special deals for Sky, he says.

Nor does Fellet believe that the advertising-funded free-to-air broadcasters will be hurt by Sky's growth.

Even in the United States, where about 95 per cent of households have pay TV, some 30 per cent of viewing on pay platforms is for free channels, Fellet says.

But a free-to-air source says the issue comes down to revenue. While the studios might not offer special deals for Sky, they are not altruistic and will sell to the highest bidder.

As Sky gets bigger, so does its revenue, and thus its ability to outbid other broadcasters for free-to-air rights.

But Fellet argues that TVNZ, not Sky, is restricting the market.

For example, he says, the state channel is buying the pay TV rights for its shows like Scrubs, as well as free-to-air rights, simply to keep them off Sky channels like Vibe and The Box.

Storms have been brewing between Sky and free-to-air broadcasters - mainly TVNZ - for a couple of years. So far, Sky seems to be on a winning streak.

TVNZ was forced to hand over digital channels TVNZ 6 and TVNZ 7 to Sky. And the Government has instructed state-owned transmission company Kordia to give Sky - a highly profitable company - a special deal to join Freeview.

After National won the election, nobody was surprised when Broadcasting Minister Jonathan Coleman and Communications and IT Minister Steven Joyce scrapped Labour's review.

National opposes further regulation and has clearly stated that it would be unfair to impose new rules after Sky has spent so much building the company.

Which, you could argue, is a generous interpretation for any company whose business plan is built around heavy capital expenditure at the start.

Submissions to the broadcasting review - including calls for Sky to be banned from bidding for some sports rights and creation of a combined broadcasting and telecommunications commission - were always unlikely to proceed. One well-placed source says those proposals guaranteed that the review would not go ahead.

Even if TV3's calls for limits on sports rights had been considered, Sky would have enlisted sporting codes to lobby against change.

But some believe the issues behind Labour's review will make it back to the agenda. Rick Friesen is chief executive of the Television Broadcasters Council, representing TVNZ and MediaWorks, and says the unregulated status quo is dangerous.

Free-to-air broadcasters will keep pressing for a review and for the playing field to be levelled, says Friesen.

The chairman of the Shareholders Association, Bruce Sheppard, says Sky should still be prepared for the worst after the review revealed "sabre rattling and criticism that it had too much power".

"Sky needs to look ahead five years and put itself in the same position as Telecom is now - dismembered, broken, smashed up. Sky is buying a fight," says Sheppard.

But Coleman and Joyce are not about to regulate Sky anytime soon.

"Who knows what is going to happen in technology - 20 years ago nobody would have predicted the internet," says Coleman.

"We have to look at the future as we see it now ... focus on the immediate challenges."

As Government officials pointed out, there was no evidence of any anti-competitive practices; Sky's critics were just warning of what might occur. The Government indicated it will keep an eye on the issues, but stuck with the market rules status quo.

Coleman and Joyce will be aware that the "do nothing" option is also an outcome. In refusing to look at the issue, National is backing one commercial interest - Sky's monopoly pay TV operation - over another, free-to-air TV.

The cast list

The ideologue: Sir Roger Douglas
Often forgotten as the early instigator of New Zealand's laissez-faire broadcasting system, which opened the door to Sky TV, his "more market" approach as Broadcasting Minister in the 1970s was an early hint of the Rogernomics revolution to come. While Rogernomics has suffered a few tweaks, the market-led recipe for media has survived untouched for two decades.

The magnate: Rupert Murdoch
While often regarded as fixated on expansion, Murdoch's News Corporation took some convincing to buy into Sky. Ultimately the biggest beneficiary of our unregulated media market, Murdoch controls Sky through News Corp's 43.65 per cent stake. Murdoch is loathed by some on the left who view him as politically motivated and wielding huge power. Others say his empire - which includes BSkyB in Britain, 25 per cent of Foxtel in Australia, the US Fox Network and film studio 20th Century Fox - has grown from opportunism, not a grand strategic plan.

The entrepreneur: Craig Heatley
In many ways the father of Sky Television, Heatley led founding shareholders Terry Jarvis, Trevor Farmer and Alan Gibbs to launch their original three-channel pay TV service using UHF frequencies. The high-flying entrepreneur had a big profile in the heady days of the Rogernomics revolution in the late 1980s, until News Corp entrenched its direct shareholding in Sky. Highly focused - some might say abrasive - as chairman of Sky, he sometimes clashed with representatives of other investors.

The chief executive: John Fellet
Sky's canny chief executive had worked for Sky investor Tele-Communications Inc in Britain and Arizona before signing up for just 18 months in NZ, and staying on for 18 years. Entrenched as Sky's leader, Fellet is succinct but affable and polite in an unmistakably American way. Fellet points to the US - where 95 per cent of homes have pay television - as an example of a successful unregulated market. Sceptics say the much larger US market is not comparable and has more regulatory oversight than we do. Industry insiders say Fellet is regarded within News Corp as running a tight, trouble-free offshoot of the empire.

The lobbyist: Tony O'Brien
An assiduous and remarkably effective lobbyist (see Pg 17) who has worked to stave off the only threat to Sky's dominance: regulation. Even his critics say O'Brien has been a tireless advocate for the company, keeping politicians on board. Sky was caught off guard last year when the Labour Government introduced its regulatory review, but O'Brien regrouped and poured extraordinary energy into convincing politicians that regulation was a bad idea. In promoting these arguments he was ably assisted by Sky's law firm, Buddle Findlay, whose consultants include Jim Stevenson, architect of the 1989 deregulation.

The sceptic: Steve Maharey
Former Labour Broadcasting Minister who belatedly blew the whistle on the laissez-faire system, calling for the broadcasting regulatory review and creating the first-ever threat to Sky. A former media studies lecturer with a left wing academic's wariness of Murdoch, Maharey took a genuine interest in the lowly broadcasting portfolio but became absorbed in his other responsibilities and the ill-fated charter. His main aim was to build an edifice of public TV to counter Sky's dominance, but the strategy failed due to fundamental problems in the structure of state TV. The review by the Ministry for Culture and Heritage and the Ministry of Economic Development was backed by TVNZ and TV3, but had scant support politically.

The ambitious minister: Jonathan Coleman
Intelligent and ambitious, Coleman has been a breath of fresh air in broadcasting after nine years focused on the ill-fated TVNZ charter and slow progress towards an analogue switch-off. He displays the National Party's philosophical bent against damaging Sky's private property rights, as would occur under anti-siphoning laws. Initially said the review would be completed, but when Communications Minister Steven Joyce became involved, there was a decision to stop it in its tracks.

The high flyer: Steven Joyce
A National Party fundraiser who masterminded two election campaigns, the new list MP rose immediately to Cabinet rank as Minister for Communications. The broadcasting review sought to deal with the growing convergence between television and telecommunications, and its suggestion of expanded powers for a combined Telecommunications Commission assured its fate from a Government seeking to turn back, not increase, regulation.

The bureaucrat: Jo Tyndall
A rare example of a broadcasting bureaucrat, Tyndall is Director of the Broadcasting Unit at the Ministry for Culture and Heritage. She ran the broadcasting regulatory review in its early stages, drawing brickbats from both Sky and the free-to-air channels. Cautious and thoughtful, she has a background in programme production and funding. In an environment with limited independent intellectual analysis, she has been dismissed by media companies unused to independent outsiders.