Voting with remotes

By Karyn Scherer

To sports fans watching helplessly from the sidelines, it is a childish tit-for-tat spat.

Miffed at TVNZ's reluctance to discuss its plans for pay-TV, Sky went behind the State-owned broadcaster's back this week and struck a deal with TV3 over free-to-air rugby and cricket coverage.

TVNZ retaliated by pulling its news from Sky's satellite service. Sky responded by replacing it with TV3's news. It then claimed it planned to dump TVNZ's news anyway. Nya nya nya nya-nya.

The way Sky boss Nate Smith tells it, he wanted to teach TVNZ some manners. "It wasn't out of concern, we're just trying to teach them some civility," he insists.

It doesn't appear to have worked. As TVNZ boss Rick Ellis sees it, war has been declared. "It's gloves off with respect to the television business," he admits.

But hold on a minute. Wasn't it just a few weeks ago that TVNZ was insisting the two players needed to stay on-side?

Its assurances followed criticism from a group of institutional investors who were furious that TVNZ agreed to sell its stake in Sky to three other shareholders at a discounted price. The investors claimed they had offered TVNZ an extra $7 million for the shares, but their offer had not been seriously considered.

One of those involved in the bid, Spicers' investment manager Simon Botherway, is still furious about the deal. The amount foregone by TVNZ, he notes, could have kept Work and Income New Zealand in charter flights for the next 400 years. "One has to question the commercial nous of the board," he says.

Mr Ellis disputes this as "unacceptable and mischievous". According to him, the sum involved in a recent deal between TVNZ's transmission arm, BCL, and Sky was more than worth the grief it got for the share sale.

Unfortunately, but somewhat predictably, Sky laughs at this explanation. Sky needed TVNZ as much as TVNZ needed Sky for the deal, says Mr Smith.

So much for mates. Rugby and cricket, it would seem, are the pawns in a much bigger game.

Since launching in New Zealand nine years ago, Sky, which is now part of Rupert Murdoch's global media empire, has signed up around 350,000 customers for its pay-TV service. Of those, around 65,000 take its new satellite service.

Unlike most overseas pay-TV operators, it has no significant opposition in this country, other than Wellington-based cable operator Saturn. In total, around one in four households now subscribe to Sky and it has publicly stated it wants to get that up to one in two.

For obvious reasons, including customers' frustrations at having to keep two remote controls on their coffee tables, it has been trying to persuade both TVNZ and TV3 to join its satellite service. To its chagrin, both have resisted - until now. As part of the rugby and cricket deal, TV3 has finally agreed to hop on board.

TVNZ remains unconvinced. "Why should we transfer the taxpayers value in this business across to a foreign-owned company?" Mr Ellis argues.

Eventually, of course, all Sky's customers will be forced to install satellite dishes. It does not intend to keep the UHF service forever. But in the meantime, it is having to spend some big bucks on the service. Obviously, its bottom line would be greatly helped if TVNZ agreed to use its satellite as well, not just for its analogue service, but for its transition to digital.

At this stage, it would appear TVNZ is keeping its feet on the ground. Its new service, which will be progressively rolled out across the country, will - initially at least - be terrestrial rather than satellite based.

Before Mr Ellis joined TVNZ early last year, the broadcaster was cool on the idea of digital TV. Like many others in the industry, it was suspicious that digital broadcasting was a plot by television-set manufacturers to boost sales.

The former head of Ansett New Zealand and Wang has, however, come to see digital as a blessing.

The advantages, as Mr Ellis sees it, are many. As well as giving broadcasters the ability to tailor programmes and advertising for particular areas, it will also enable interactive services, such as home banking, video-on-demand, internet access and so on, to be introduced.

According to a report commissioned by the Government last year, TVNZ expects pay-TV and/or new media revenue to reach similar levels to its free-to-air advertising income by 2005. It has spent the past few months testing and acquiring content for the new service and is close to announcing a strategic alliance with an overseas partner.

In Britain, digital broadcasting is already a reality, with two main rivals emerging: Murdoch's SkyDigital and ITV's ONdigital. The BBC has proposed a major hike in the licence fee so it can also offer digital services and there is talk of terminating analogue services as early as 2006. In Australia, plans are underway to convert to digital by 2001.

"The arguments and the value uplift of pursuing our proposed digital strategy are very compelling. The analogue world is rapidly becoming a dead duck," Mr Ellis insists.

But according to one local expert, Bob Cooper, there is no need for TVNZ to rush. Mr Cooper, who has nearly 40 years' experience in the industry in America and New Zealand, points out that the technology is still evolving.

"All the implementation that's been done to date in the United States and the UK is first-generation stuff and they're making a lot of mistakes. We would be much better off waiting a couple of years," he believes.

In the meantime, one practical issue could prove crucial. A major advantage TVNZ has over Sky is that most viewers will not need a special aerial for its service. However, they will need a separate set-top box.

A year ago, TVNZ was insistent that viewers would baulk at the idea of needing a separate decoder. It has since changed its tune.

"It became clear to us, probably in parallel with the thinking in other countries, that just securing access to somebody else's box for our content was not going to secure any material new revenue stream for us," says Mr Ellis.

Ironically, one option TVNZ is considering for funding its move into digital is taking out a loan. It is ironic because earlier this year, its piggybank was overflowing, thanks to the sale of its shares in Sky and Clear. Of the $162 million it pocketed from the sales, the Government has since taken back $100 million.

According to one rumour doing the Wellington circuit, the politicians' nervousness about TVNZ taking on the might of Murdoch could see the remaining $62 million confiscated as well.

The minister responsible for overseeing TVNZ, Tony Ryall, declined to comment. A spokesman would only say the Government was concerned the move was a sizable and risky investment, and it did not want to be rushed into making a decision.

Much to TVNZ's frustration, there is some logic in the Government kicking for touch. If National returns to power, it will almost certainly sell TVNZ, provided coalition politics allow it. It would then be up to a new owner - which could mean either Rupert Murdoch or Kerry Packer - to determine its next move.

A Labour-led Government, on the other hand, is committed to keeping TVNZ in public hands. But it is not unsympathetic to its pay-TV ambitions.

The most crucial issue, however, is whether anyone will actually pay for the TVNZ service. The received wisdom in the pay-TV industry is that sport and movies drive subscriptions.

"As we know, sport is now tied up between Sky and ourselves, and Sky is pretty strong on contractual arrangements on movies," says TV3's managing director, Graeme Hunter. "[Rick Ellis] apparently sees this as a big business expansion opportunity and it is possible it will introduce some fresh vitality into the market. But the question is: will it deliver more viewers?"

Mr Ellis is confident viewers will vote with their remotes. But Mr Cooper is another who is sceptical. It was not that long ago that TVNZ decided to scrap regional TV, and then music channel MTV, because they were losing millions, he says.

"To me, the travesty of all this is not only do we end up with two set-top boxes, but we are creating a have and have-not world in terms of the national television service and the commercial television service. Either way, the consumer pays. I find that criminal," he says. "But at the end of the day, it isn't the damn box and it's not the delivery system. It's the programme content, and I hope we're not headed for a repeat of the MTV fiasco."