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Sunday 1st April 2001 |
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If you tried to escape Auckland's CBD on any weeknight last month, and found yourself cursing the grid-locked traffic, save your colourful language for the telecommunications company digging up the streets to lay its fibre-optic network - the one with the advertising campaign boldly saying "simplify".
The irony isn't lost on sweaty commuters. But the telco, TelstraSaturn, is getting used to upsetting folks. Why, back in January, it even stuck its nose into the national religion, rugby. All Blacks supporters I knew choked on their cornflakes the morning TelstraSaturn announced it had beaten the incumbent, Sky Television, to the rights to broadcast live tests against Argentina, Scotland and Ireland, plus the Six Nations competition and the European club-level competition, the European Cup. Okay, so TelstraSaturn's only got three matches with New Zealanders playing, as compared with Sky's 200. But those three are tests, and after finally getting around to paying their subscription, Sky TV's 400,000 fans were frustrated at finding a chink in Sky's wall-to-wall live rugby armour. Would they now need two pay-TV networks to get all their sport?
Actually, TelstraSaturn already had rights to some of the Australian Tennis Open and quite a bit of 2001 motorsport. But rugby, now that's quite another matter. The news got the telco off the business section and into the sports pages and editorial columns. "This new deal is terrible," stormed Listener columnist Bruce Ansley. "Is it too early in the season to talk about the downfall of rugby?" Even Deputy Prime Minister Jim Anderton entered the fray, promising to look at using tax-payers' money to give Kiwis their rugby back.
TelstraSaturn couldn't have got more free publicity if its entire staff had run naked across the pitch in the middle of an All Blacks game and kissed Todd Blackadder on the lips.
But then, the big Aussie-backed company with the big Aussie cheque-book likes it that way. In TelstraSaturn's revamped wharfies-shed offices behind the Wellington waterfront, American-born chief executive Jack Matthews grins at the thought of the year ahead. Sure, his plans are ambitious and, yep, there are plenty of challenges - you'd better believe they all wake up in the morning scared to death - "but I take great pleasure in the fact that if we'd been having this discussion four years ago you'd have thought I was a nutcase. Telecom and Sky were unassailable. We've come a long way."
Since the merger just over a year ago - which included Telstra, Wellington's pay TV outfit Saturn and internet service providers Netlink and ParadiseNet - the company has announced a $1.2 billion investment in a fibre-optic cable network built over five years, partly financed with a $900 million bank facility. The company has also linked up, then split with, high-speed Dutch ISP Chello and has coughed up $3 million for web design company Zivo. It has an agreement with mobile phone company Vodafone to provide wireless services, and has announced (though not completed) a joint digital TV deal with TVNZ that could see a digital set-top box offered (at a price) to every home. And then there's the rugby. This is just beginning of a big fight with Sky, company staffers say.
It all sounds like fun, but Matthews - nicknamed Telephone Jack by analysts - is deadly serious. He calls his task "a financial high-wire act" and says the gamble will only pay off if the company can pick up somewhere near the 35% share of household lines (on the telephony side at least) it has in Wellington. Overseas, a 20-25% market share is seen as healthy for a number two player. What's more, he's punting on the company being cashflow positive within two years and making money by 2006.
From the latest financial data available, for the nine months to September 2000, the company made an operating loss of $A52.5 million ($A18.5 million for the same period in 1999) on total revenue of $A66 million ($A11 million).
It's a big ask.
Telco meltdown
When the diggers come tearing up the verge in your street, try to have some sympathy for the people paying the driver. TelstraSaturn's spending binge is a risky exercise. In the past year, telco share prices have slumped worldwide as investors grow wary of their big spending on things like radio spectra, satellite networks, cable laying, ISPs, mobile phone companies and, of course, marketing, marketing, marketing.
In TelstraSaturn's case, the size of the market makes it even scarier. Spending more than $1.2 billion in a market with only 1.4 million households comes out at $850 per household, in case your maths is bad. Plus, there's the cable thing. Why spend all that money digging up the country for a new cable network, when TelstraSaturn could lease the lines from Telecom? Or piggyback off Clear? Or buy Clear? Or wait until a government regulator forces Telecom to sell its lines business to a third party? Or go for the cheaper satellite route, like Sky or Ihug? TelstraSaturn argues that this way it gets a higher-quality product and maintains control, but it's taking a big gamble that it can get enough customers.
None of the analysts and industry insiders Unlimited spoke to doubts there's room for a major cable-based carrier like TelstraSaturn. Most overseas markets have at least two. Trouble is, TelstraSaturn isn't the only new game in town. Clear Communications, which initially relied almost totally on interconnecting with Telecom, has since spent the best part of $500 million on two fibre-optic loops in the North and South Islands and extensions in major centres. Clear's main focus these days is away from residential tolls and on the high-tech business market. Capital expenditure this year alone will be $209 million, and it is rumoured to have recently wrested two major corporate customers away from TelstraSaturn. Walker Wireless and other wireless network operators are spending money and gaining credibility and customers in the voice and data transfer market. Electricity company UnitedNetworks' recently launched $30 million high-speed fibre-optic network in the Auckland and Wellington CBDs is in direct competition to TelstraSaturn's basic infrastructure.
In its favour
Still, if anyone can do it, Matthews can. Telephone Jack is respected for his experience, his energy and the fact that by attracting more than a third of Wellington residential phone customers he's already pulled off a market share coup no one believed was possible.
The company has other points in its favour. For those of you sick of the screech and boing of your low-speed, dial-up internet connection, Telstra-Saturn could be for you. More so if you need to download large quantities of data. Once the cables reach your house, the company offers a superior, permanently-on internet service, including the ability to transfer large chunks of data into - and out of - your home. Though Telecom's JetStream can do that too, it's expensive and doesn't come as part of a larger package.
TelstraSaturn has achieved significant reach, too. Already, it has lines into more than 30,000 homes, with each household taking 2.2 TelstraSaturn services on average, spending nearly $110 a month. Grunt of a different kind comes from its backers. Behind the network roll-out is a $900 million loan from 16 major international banks - including four of the big five New Zealand banks and overseas giants like ABN Amro and Chase. If these guys looked at the business plan and thought TelstraSaturn would survive, maybe it will.
Its shareholders provide clout too. TelstraSaturn is 50% owned by Telstra, Australia's version of Telecom. The other half is owned by Australian cable company Austar. Between them, Telstra and Austar have already put $500 million in to the joint venture and have to find another $200 million apiece over the next five years. This shouldn't be a problem for Telstra, which made $A3.7 billion profit in the year to June last year, although the company also has significant Asian commitments. Austar's operating losses for the nine months to September 2000 totalled $A154 million. Leading Australian telecommunications analyst Paul Budde says there's no indication it's looking to pull back from its New Zealand investment, however. In a worst case scenario, it might one day look at selling its stake, he says, but in the meantime Austar brings a wealth of broadband cable expertise to the partnership. Moreover, with both Telstra and Telecom increasingly fighting on an Australasian playing field, Telstra will be looking at New Zealand as part of its competitive fight at home. "It's the game theory," says a telecommunications analyst. "As the incumbent operator in Australia watching the New Zealand incumbent move into Australia, Telstra will want to have and maintain a presence in New Zealand to counter that threat."
Cable versus satellite
Another question the jury's out on is whether TelstraSaturn would have been better to choose satellite, rather than cable. US figures show that, in the pay television market at least, 81% of houses are supplied by cable rather than satellite. But satellite is projected to grow significantly over the next five years at the expense of cable. John Fellet, head of Sky Television, is an American with an intimate knowledge of both sides of the cable-satellite debate. (Is it a coincidence that our communications players are so often headed by energetic, up-front, smooth-talking North Americans? George Newton, the first boss at Clear; Peter Williamson, former boss of Saturn; Matthews himself - but we digress.)
Ten years ago, Fellet was working for US telecommunications giant TCI, which came to New Zealand to investigate buying a pay-TV network. With the US market practically 100% cable at that stage, TCI was initially interested in Kiwi Cable (Saturn's predecessor) but in the end picked Sky. One of Fellet's first tasks was to convert Sky from three-channel UHF to cable. "They told me: 'Those crazy Kiwis have an over-the-air system, go and convert it to cable like God intended'," Fellet remembers. However, as he investigated the proposition, Fellet changed his mind. "I believed it would be very expensive. There was volcanic soil, there were lots of front easements [where a driveway feeds four or five houses, so additional cabling is needed]. I said: 'It's crazy to build a super-information highway - let's follow the Kiwi plan. They have four or five frequencies. Let's fill that with product and then let's look at cable'."
Sky never did, opting to stay with satellite, and then going digital via that route. While one of the main arguments against satellite at present is that you can only have a one-way feed (information can come into your house, but you can't send stuff out again), the US's biggest satellite pay TV operator, DirecTV, began offering two-way satellite feed in December, as part of a data package.
"If pay-TV had been outlawed until now in the US, I believe companies would opt for satellite, not cable," Fellet says. The problem with cable is cost. US operators estimate it costs around $US40,000 per mile to lay cable, Fellet says. New Zealand analyst David Wallace at JP Morgan works on an estimate of $1000 per home passed here. Even if a company penetrates 50% of the market, it still pays for the cable laid passed houses that don't take its service, hence doubling its cost per house. "Satellite allows us to put antennae and decoders only into houses where they want it," Fellet says. "And I can recover my assets later if I want."
True to form, Telephone Jack is confident he's on the right route. Waiting for Telecom would have left TelstraSaturn at the mercy of a regulator and Telecom's previously fantastically successful delaying tactics. And Matthews isn't convinced by the satellite versus cable argument. "In the US, cable systems are old and tired and satellite systems are new," he says about the US numbers. "Satellite is good technology, but no one will tell you it's better technology than broadband digital."
Theresa v Jack
But what's the biggest risk for TelstraSaturn? Telecom, says Paul Budde. Telecom, says David Wallace. Telecom, says Jack Matthews. "You should never underestimate Telecom," says Bell Gully telecommunications expert Malcolm Webb. "They are still in a very strong position in the local market. It's always difficult to topple an incumbent fixed-line operator and Telecom is far better than most. It's an innovative, onto-it incumbent, in global terms."
Take the battle for Wellington customers. TelstraSaturn won its 35% in three ways. First, it lured disaffected Telecom customers over to the opposition. It will be able to do that elsewhere, though Telecom says it won't be so easy next time. A strong focus on customer service over the past 18 months has seen customer satisfaction levels rise 20% for residential customers and 15% for business customers, says Kevin Stratful, Telecom's group general manager of sales and service. The company's aiming at getting the anti-Telecom vote down to 10% from (others estimate) nearer 20% previously.
TelstraSaturn's second strategy involved cunning pricing. It won over many Kapiti residents, for example, by offering free Wellington calls.
The third group was tempted because TelstraSaturn was different. Customers were given innovative packages - two home phone lines, 20 hours of internet and 31 channels of pay-TV for $69.95 a month, for example. Telecom's response was reactive and price-driven, moving behind the new competitor and matching its pricing street-by-street. This didn't provide its customers with any extra value, and served only to annoy consumers who weren't offered the good Telecom deal because they were outside TelstraSaturn's coverage.
That reactive strategy has changed, Stratful says. From now on Telecom will concentrate on beating TelstraSaturn not on price, but on content, he says. The company recently did a deal with Sky TV, backed up by taking a 12% stake in the company, allowing it to on-sell Sky's programming with other Telecom services. At the beginning of March it launched its Sky-Fi package, offering phone, Xtra's unlimited internet deal, Call Connect (a joint phone and mobile message box service) and 22-channel digital Sky basic for $99 per month. For an extra $36 you get a permanently open low-speed DSL connection, too.
"I'm not interested in TelstraSaturn's offers," Stratful says. "I'm interested in my offers. It's a question of offering the best suite of packages and people will come and choose." How many will choose Telecom? A pilot link-up with Sky already has 7000 customers, Stratful says, and the companies are hoping for "hundreds of thousands" of interested customers over the next 12 to 18 months.
A Telecom-Sky combination is a powerful force. Already Sky has 400,000 customers, including 225,000 taking the digital service, and numbers are still growing. Getting these early adopters to switch - or take a second box - may not be so easy when TelstraSaturn's isn't the only alluring package available.
There is no reason why TelstraSaturn can't offer Sky programming, or vice versa - Sky and TelstraSaturn have signed the same deal as Sky and Telecom, allowing the telco to market Sky programming. While this sounds like a great deal for customers, who wouldn't need two set-top boxes, don't hold your breath for any joint package. Sky insists its interactive TV capabilities are greater than TelstraSaturn's (and making it good money), so will only allow its partners to sell Sky's programming using Sky's own technology. While this might work for Telecom, which doesn't already have digital television capabilities, it probably doesn't make sense for TelstraSaturn.
Dirty tricks
With competition taking a step up in the telco scene, you'd expect to see prices fall. Well, think again. Combine TelstraSaturn's announced five-year $1.2 billion infrastructure plan with Telecom's historical $800,000 or so annual spend and you get $5.2 billion being invested in New Zealand by these two companies alone over the next five years. Take an estimated New Zealand population of four million: that's $1300 apiece. At that rate, each member of the population needs to be spending $21 a month just to cover these two companies' capital expenditure - before you take into account the operating expenses of them or any other telecommunications companies.
There won't be price wars like we saw with Clear and Telecom. Telecommunications industry margins have already fallen from an estimated 70-80% five years ago to between 40% and 50%. Telecom is struggling with falling profits - down to $300 million in the first half of this year, from $406 million the year before - and TelstraSaturn's heavy-spending overseas investors will be looking for a payback. In a market that's growing, cut-throat pricing just doesn't make sense.
In the meantime, a dose of competitive paranoia is always a sign of healthy, customer-benefiting competition, and TelstraSaturn versus Telecom is no exception. Listen to this and judge for yourself. Asking Wellington friends about TelstraSaturn's service levels, Unlimited's reporter was told of frustrations over listing TelstraSaturn numbers in the Telecom White Pages. One friend's number was listed incorrectly the first year she switched, then pulled altogether the following year. When she asked why her number wasn't in the book, she was astonished to be told her number was now on the private and confidential list. When we asked Matthews what was going on, his brow furrowed - funnily enough, his home phone number somehow didn't get listed either. "When my wife called Telecom asking why our number wasn't in the White Pages, a customer service person told her: 'We don't carry TelstraSaturn listings.' Later a supervisor said that wasn't right, and I should certainly hope not - I pay Telecom a lot of money to carry my [TelstraSaturn] numbers."
An unscientific Unlimited survey of the 2000-2001 Wellington White Pages reveals that on the dozen or so pages we picked at random, TelstraSaturn numbers (the ones beginning with "9") made up a maximum of 14% of the total. TelstraSaturn's audited market share figures, provided to its bankers, show a 33.6% market share as of December 31 2000. Why the discrepancy? Telecom's Stratful laughs at any suggestion of dirty tricks allegations. First, he says, TelstraSaturn's market share figures seem high; Telecom puts it closer to 20%. Any other shortfall comes from TelstraSaturn not providing the correct information to White Pages staff. Unlimited is in no position to judge which reason is correct, though Matthews takes it as proof that competition is never going to be easy. "I can't say it's intentional, but I can't say it isn't. It's just a little thing, but it's important to our customers. And that's why it's astonishing we've got this far."
It could work because ...
... but it might not if:
The difference is Clear
So TelstraSaturn has a central phone system backbone, a pay-TV company, two ISPs and a web design company. What's missing? A lot more customers, particularly in the business sector. The sort of customers that number-two phone and data company Clear has at present, perhaps?
Almost everyone seems to think Clear would be a good fit with TelstraSaturn - including people from both companies. Both have developed innovative ways of taking market share from Telecom, both have experience of the New Zealand regulatory system, both are struggling with size and profitability. Clear's owner, British Telecom (BT), has announced it is keen to sell extraneous international operations.
Whether the deal will happen is anyone's guess. Media reports earlier this year suggested that Telstra offered BT $600 million for Clear at the end of 1999, but BT wanted more. BT's argument is that Clear's network alone is worth close on $500 million, and it's putting in $209 million more this year, not to mention the value of the brand, its growth potential and the spectrum Clear bought at the government auction.
TelstraSaturn boss Jack Matthews won't comment on whether there are any discussions going on at the moment, though he says he'd like there to be and that Clear is a good fit. Clear says (though not on the record) pretty much the same thing. Clear's focus on the business side of the market, plus TelstraSaturn's residential growth would be a "fucking devastating combination", says one source. There were no official talks going on, he said, but "people are sort of talking all the time".
Rugby questions
So, you're one of the rugby fans who had just got around to investing in a digital Sky subscription when you heard TelstraSaturn was hijacking rugby coverage. Here are the answers to the questions you are too afraid to ask
Will I need two set-top boxes?
If you are a true fanatic, yes. TelstraSaturn has rights to only three major New Zealand games, compared to Sky's 200, but they are All Black tests. And don't write off the Six Nations competition as irrelevant European stuff, says the NZRFU. Ireland's coach, Warren Gatland, was an All Black, and the Leslie brothers now play for Scotland. Even if you aren't yet in TelstraSaturn's cable coverage area by the time the tests are played later this year, the joint venture deal with TVNZ, if it goes ahead, means you should be able to get access, at a price. (If you aren't a fanatic ... well, it's up to you.)
Will TelstraSaturn get more rugby?
TV rights for most New Zealand rugby, including the Super 12, the Tri-Nations, domestic competitions like the NPC and inbound tour matches, are tied up until 2005 with Rupert Murdoch's News Ltd. Since Sky is also tied up with Murdoch through its shareholder INL, don't expect TelstraSaturn to get a look in before then. On the other hand, overseas stuff - next year's All Black tours of Wales and France, for example - are up for grabs, and TelstraSaturn boss Jack Matthews knows a segment of his potential audience really wants rugby.
Does the New Zealand Rugby Football Union have any loyalty to Sky?
No way. The NZRFU, interested in getting maximum dollars for its TV rights, is rapt to have a bit of competition in the market. Though NZRFU commercial general manager Trevor McKewen would be concerned if a deal shut out too many New Zealanders and therefore reduced interest in the game, a TelstraSaturn-TVNZ deal would avoid that.
Is live, free-to-air rugby gone forever?
Probably. The only possible saviour would be moves by the NZRFU to get overseas rugby boards to share the profits from All Black tours with New Zealand. At present, all money from a tour is taken by the local rugby governing body, but the NZRFU argues that the All Blacks are a major drawcard overseas. A recent test in Paris brought capacity crowds to the stadium and was watched on TV by six million people in France; the Wallabies test the week before was only two-thirds full and had only two million TV viewers. However, because of the size of our stadiums and the time difference between New Zealand and major TV audiences in Europe, the NZRFU gets much less revenue than its counterparts overseas. McKewen argues that if it got a share of overseas revenues, it might be able to look at deal that made live rugby available to a wider audience. Unlimited wouldn't count on it.
Nikki Mandow
nikki@unlimited.net.nz
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