In the first of a three-part series on rugby’s streaming wars, Gregor Paul explores the tense relationship between New Zealand Rugby and Sky TV - and how Spark Sport changed everything.
On December 16 last year, Spark chief executive Jolie Hodson confirmed that the telco giant was closing its content streaming platform.
Spark Sport, after three years, had failed to find a path to profitability and was transferring its relatively meagre portfolio of content rights - valued at $52 million - to TVNZ.
The Government-owned broadcaster wasn’t the only winner in that deal, as the decision to pull the plug on Spark Sport meant that Sky was once again the only viable player in New Zealand with the cashflow, infrastructure and expertise to seriously bid for sports content rights.
The collapse of Spark Sport looked like a classic case of an ambitious player underestimating what it would take to break the stranglehold of the market’s most dominant operator.
And partly that was true, but the rise and fall of Spark Sport was not as straightforward as it may have appeared, and while its life was brief, it was eventful and its legacy may prove enduring, particularly for New Zealand Rugby (NZR).
On a cold morning in Cardiff in November 2017, NZR chairman Brent Impey was roaming the sideline at the All Blacks training ground.
He was chatting to whoever he encountered, including the handful of New Zealand media in the UK covering the All Blacks’ European tour, and the conversation turned, perhaps intentionally, towards the state of media companies back home.
He suggested it would be wise to keep an eye on Spark, as he said the telco was serious about getting into sports broadcasting.
Impey was speaking from a place of knowledge. Once Spark’s then chief executive, Simon Moutter, had gained approval from his own board to build a streaming arm, he had, informally, shared his vision, through personal relationships with key members of NZR’s executive and governance team.
Steve Tew, who was chief executive of NZR between 2007 and 2019, says there was no strategic plan to actively support the formation of Spark Sport, but that there may have been an informal network of relationships that pushed the message that the national body would welcome competitive tension in the broadcast marketplace.
John Fellet, who was chief executive of Sky between 2001 and 2018, says he was aware that NZR may have been encouraging Spark Sport to launch. “And that I would have been disappointed if they hadn’t been. They had to do what was best for their business.”
NZR had enjoyed a long and mutually beneficial relationship with Sky since the two first partnered in 1995, when the latter bought 10-year rights to the All Blacks, Super Rugby and National Provincial Championship.
That initial deal was transformational for both parties: it saw NZR’s annual income jump from $13m in 1995 to $38m in 1996, and Sky go from losing $1m a week to becoming the most profitable media company in the country.
There were three subsequent renewals of that initial contract, all of which saw NZR either retain or increase its broadcast revenue - the last of which would enable the national body to bank $73m a year between 2016 and 2020.
But despite the consistent growth, NZR had come to feel increasingly vulnerable and to a lesser extent, short-changed.
About 50 per cent of its total income was tied to one contract, in a broadcast market that was devoid of competition.
Other major international rugby markets such as the UK and France have the populations to support multiple pay TV operators, while in the former, the two major free-to-air channels - BBC and ITV - have protective legislation and deep enough pockets to be high-quality sports broadcasters.
New Zealand, however, had not seen any serious competitor emerge to challenge Sky.
And while the numeric values of each renewed broadcast contract had increased, so too had the costs - as each deal had offered more content by expanding Super Rugby and shoe-horning-in additional tests.
By late 2017, Super Rugby was collapsing under its own weight, and NZR knew that when it came to renegotiate its next deal, it would have to offer less content, not more, and Sky would be able to dictate the price safe in the knowledge that there was no competition.
The emergence of Spark Sport could hardly have been better timed for NZR and when the new broadcaster used its substantial war chest to successfully secure the 2019 and 2021 Rugby World Cup rights in April 2018 with a $12m bid, champagne corks popped at the national body’s Wellington headquarters.
New Zealand finally had a competitive broadcast market for sports rights, and NZR was determined to leverage the rise of Spark Sport to strike a transformational deal for the 2021-2025 cycle.
As much as competition drives the value of a broadcast rights deal, so too does the process.
Sky was smart enough to write into the initial contract in 1995 that it should have an exclusive window in which to negotiate an extension.
This meant that NZR could get a sense of what rival bidders might be able to offer, before entering a closed negotiation with Sky.
If NZR liked the number put forward by Sky, that was the deal done and in 2004, 2010 and 2014, Fellet slipped a piece of paper across the desk to his NZR counterpart, and the number was high enough on each occasion for both parties to agree terms.
But in October 2019, the negotiation for the 2021-2025 All Blacks rights was shaping up differently.
Fellet had retired, and his successor Martin Stewart took over a company that had a declining satellite subscription base, a relatively unsophisticated digital offering and a share price that had fallen to less than 91 cents, from a historic high of $8 in 2014.
NZR could see that Sky was in a battle to survive, and its precarious existence was exposed on October 10, when Spark Sport won the six-year rights to broadcast New Zealand Cricket’s domestic programme.
Again, the timing was incredible for NZR, as Sky’s exclusive window on the rugby deal was closing the next day.
This was the moment NZR had waited for and on October 11, the national body told Sky that if it upped its current offer of $80m a year, to $100m a year, they would have a deal.
The figure was close to the maximum Sky could afford, but it agreed. The next day, NZR came back with an additional demand of a 5 per cent equity stake in Sky, which was worth about $22m.
NZR had played a canny hand of quietly encouraging Spark Sport to launch and then leveraging its presence to extract a massively improved deal from Sky.
It may appear that the secret to winning, maintaining and successfully monetising sports rights simply lies in writing the correct value on the cheque.
But Fellet, New Zealand’s most successful broadcast executive in the last 20 years, says that relationships matter just as much, if not more than dollars.
He had that confirmed in early 2006 when NZR chief executive Chris Moller and All Blacks coach Graham Henry came to him to say that they were planning to keep 22 elite players out of the first seven rounds of Super Rugby in 2007.
“This clearly contravened the contract I had, but I didn’t want to be that guy who said no and have everyone say, ‘that bloody Fellet, he cost us the World Cup’.”
Fellet knew the value of playing the long game: of compromising here and there to generate goodwill and mutual benefits.
Sky, he felt, was in partnership with NZR, and while he never saw the relationship as transactional, every five years both parties had to negotiate a contract extension.
NZR tended to view the renegotiation process through a narrow lens of victory or defeat depending on the final price offered, and mostly it came out of each deal with a sense that Sky had won.
Fellet admits he could be a tough negotiator and that his objective was to agree a content rights fee that was high enough to give NZR the income it would need to keep the best players in the country so as not to devalue what he was buying, but not so high as Sky couldn’t make a profit.
He had the luxury of operating without fear of being outbid, although he says: “They (NZR) would say that there was competition and I had to believe that there was.”
It was nothing more than good business strategy by NZR to hit Sky hard in October 2019 when it was vulnerable, but a well-placed source says the broadcaster felt like the request for an equity stake “was a bit like kicking a man when he was already down”.
Whatever relationship had been built between the two companies through the respective tenures of Fellet and Tew, much of it was damaged by the nature of the 2019 renegotiation process and subsequent decision-making of both entities.
NZR is believed to have been unhappy that six months after taking its 5 per cent equity stake, Sky completed a $157m capital raise, which - because the national body hadn’t protected its stake from such an outcome - diluted the value of its shares.
The national body is also believed to have been unhappy that Sky continued to write down the value of RugbyPass, the global content site that it had bought in 2019.
It was also concerned that Sky had an ageing audience and was failing to connect with younger viewers - a key demographic the national body wanted to engage.
Sky, for its part, was miffed that NZR unilaterally blew up Super Rugby in June 2020, without a rock-solid idea as to what the new iteration would look like.
The broadcaster felt that the $100m a year it would be paying for NZR’s content rights in 2021 was based on Super Rugby being a 15-team tournament featuring the South Africans.
And so too, say those with knowledge of the situation, was there some indignation at Sky, that throughout 2020 and 2021, stories appeared in the media suggesting that a strategic priority for NZR, should it agree a private equity deal with Silver Lake, would be to build its own content streaming platform.
It’s understood that it took a boozy lunch at Auckland’s SPQR restaurant between two NZR board members and Sky’s newly-appointed chief executive Sophie Moloney and her offsider, Johnny Errington, to patch things up and get the two back to some kind of working relationship.
That lunch is also believed to be where it was agreed that NZR would return $16m - $4m per annum between 2022 and 2025 - to Sky, to reflect the impaired value of Super Rugby Pacific.
Well-placed observers say that they felt NZR’s interactions with Sky between 2020 and 2022 reflected the national body’s confidence that it had, in Spark Sport, a genuine alternative broadcast partner as a stick with which to beat the incumbent rights holder.
Several sources say that NZR has been forced into a major strategic re-think now that Sky is once again the only viable, domestic sports broadcaster, but it wasn’t possible to put that question to the national body.
NZR rejected the opportunity to be interviewed for this series or to answer specific questions via email, opting to send this statement from chief executive Mark Robinson: “The ability to connect with fans by using content as the entry point gives us the opportunity to improve all our revenue streams.
“A move into the content space isn’t a content play per se, rather an opportunity to get closer to our fans, thus being able to put them at the centre of all our experiences. This is an exciting and new focus which will take time but is necessary.”
While Spark Sport’s acquisition of New Zealand Cricket’s domestic rights nearly broke Sky, it turned out to be a deal with greater negative consequences for the victor.
Winning the cricket rights was a grave tactical error by Spark Sport. It didn’t so much grossly overpay by offering $26m a year, as fail to realise the true extent of production costs and likely returns.
One analyst, with experience in acquiring sports rights, says: “Spark Sport should have used their superior cash reserves to blow Sky out of the water to get the rugby rights and not bothered bidding for the cricket.”
Spark Sport had indicated to NZR where it would pitch an offer should the chance come, and it was less than Sky had tabled.
If it had thrown the $26m-a-year it offered NZC into its indicative rugby bid, NZR may well have rejected Sky’s offer and taken on the risk of converting satellite viewers into digital viewers.
The problem for Spark Sport’s executive team was that Moutter, who was the streaming arm’s champion, had stood down in April 2019 and his replacement, Hodson, never appeared to have the same passion for the project.
If Spark Sport had been launched with a licence to overpay to win rights contracts, by August 2019, Hodson suggested in an interview with the Herald that the focus would be on ensuring content acquisitions delivered a profit.
“We’ve entered sport because we can see a commercial return there,” she said. “We’ll look at other content as it becomes available - as long as we can get a commercial return.”
One acquisition that would certainly have enabled Spark Sport to make money was that of the NRL.
But it was outsmarted by Sky when the rights came up for renewal in June 2021. Spark Sport made the higher financial offer, but Sky put together a compelling package to partner with the code to help grow the sport at grassroots level.
When Spark Sport then failed to retain the rights to the English Premier League football in February last year, its future was bleak.
Forsyth Barr was hired to help identify potential content partners, but this was read by market analysts as the investment advisory firm having been tasked with finding a way to transfer the liability of the existing rights deals to a new owner.
The final blow came in June last year when the Herald broke the news that Sky had won the rights to the next four Rugby World Cups.
Whether Spark Sport had failed, as the incumbent rights holder, to put in a clause to secure first dibs for the 2023 tournament, or whether World Rugby was simply determined to strike a deal with what it saw as New Zealand’s premier rugby broadcaster, is not clear.
World Rugby, having initially engaged with Spark Sport, TVNZ and Three in late 2021, went silent on all of them, negotiating exclusively with Sky.
World Rugby was in the market for a vehicle with a ready-made audience that could promote the game, particularly women’s rugby, and Sky offered RugbyPass plus a competitive cash bid.
Spark Sport was shut out without even the chance to make a bid.
“No new venture is without risk, and we recognise that this news will be disappointing for our valued customers and partners and dedicated Spark Sport team,” Hodson said in delivering the news that the short-lived app would be closing.
Most disappointed of all, however, that Spark Sport had collapsed, was NZR, which had taken full advantage of its brief existence.
And NZR is now a year away from having to begin talks to renegotiate a content rights deal with just one serious player in the market - and it’s a player that won’t have forgotten how things played out at the last transaction.
“In New Zealand, Sky is the only partner who can reach all New Zealanders in ways that work for them - satellite, streaming, free-to-air and free-to-access,” says Moloney.
“Of course, for Sky, what we value is what our customers value. We know this from what they spend their time watching: this viewership data is vital in determining value. Sky is in a very different place to what it was in 2019.”
