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Sky to become NZ’s next ISP

By Brendan Ritchie
Tue 26 May 2020
FYI, this story is more than a year old

Sky NZ has been looking for a way out of its earnings and valuation spiral for some time. In a period of rapidly changing consumer behaviour, both in terms of purchasing and viewing patterns, Sky has been forced to innovate.

Recent efforts to adapt to the changing landscape have seen the purchase of the entertainment streaming service Lightbox from Spark, launching online streaming services, and then allowing those services to cast to large screen TVs (cannibalising existing revenue streams).

Despite these efforts, Sky’s share price has continued to plunge as earnings have dropped and the awarding of key sport broadcasting rights to Spark has seen Sky’s grip on the sporting public loosen.

The announcement that Sky will be entering the broadband market is no surprise.

There are a number of clear precedents that made this move an obvious one:

  • In Australia, Telstra partners with Foxtel, of which it owns 35%, to provide a combined bundle of pay per view, voice and internet services.
  • Trustpower (North Island electricity retailer) runs as a loss leader in the NZ broadband market, seeing it gaining a significant share of the fixed-line telco market, now surpassing 100,000 connections and aiming at mobile and fixed wireless service launches.
  • Spark ran the streaming service Lightbox until it sold it to Sky.
  • Stuff Fibre was a diversification play by the media company that connected 20,000+ connection before selling to Vocus last week.
  • There are dozens of other such examples locally and internationally.

It makes sense.

Much like Stuff, Sky has a great platform to advertise their offering from, and customer base to market to, making the marketing play low cost and likely very effective.

In my view Sky is not looking to make money from this new service line, they are looking to limit customer churn, give existing clients a reason to retain the status quo, and to buy time to right the ship. As the churn decreases (not helped by COVID-19 and the need for many to cut discretionary spending) Sky will have more time to adapt to new market norms and innovate further.

Sky has said that the company would partner with an as-yet-unnamed existing provider to minimise new investment. (As an aside Devoli – formerly Vibe – would do well to get that business, given the sale of Stuff Fibre to Vocus will see their largest client stop using their ordering and provisioning platform). Regardless of the partner Sky runs with, this strategy will require minimal capital expenditure, and allow them to focus on the sales and marketing engine, which is a comparative strength.

What’s next?

A residential focused mobile play would make sense. Still, it would rely on a compelling mobile virtual network operator (MVNO) agreement with an existing NZ telco, and NZ does not have a competitive MVNO market. Spark and Vodafone will not be jumping at the chance to make a key competitor’s life easier; perhaps there is a chance for 2degrees to get creative here?

P.s The $157 million rights issue also announced today is interesting in a whole bunch of ways, particularly how it impacts the NZ rugby union, and what it means for long term share valuation prospects. But, it’s best that I stick to something I at least know a bit about, so will leave that the share rights issue for others to provide commentary on.

Article republished with permission from Brendan Ritchie at Lightwire Business.

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