The Shoeshine Column: Digital TV marriage hell for Telecom

Thursday 12th April 2001

Those with reasonably functional short-term memories will recall the outburst of speculation prompted by TVNZ-Telstra Saturn's digital TV alliance when it was announced last November.

The whole thing, it was claimed, was doomed to failure. At fault were the set-top boxes, which, it was said, were ancient gadgets that would be be pulled out of Saturn parent Austar's Australian pay TV network.

The charge list was long. They didn't meet New Zealand emission standards. They interfered with other channels' signals. They weren't DVB (digital video broadcast)-compliant. Their lack of two-way interactive functionality would rapidly render them obsolete.

The propaganda met short shrift from most journalists, who accepted the partners hadn't yet decided which boxes they would deploy. In any case, the partners said, we're not stupid. Whatever boxes we choose will be legal and compliant and they will have as much functionality as we need them to have.

So Shoeshine was somewhat surprised to see the same allegations surface after last week's announcement the joint venture partners had signed an agreement.

Austar DGT400 boxes were "widely expected" to be deployed. It was "well-known" they interfered with Australia's Channel 9. They had been cracked by hackers trying to get free services.

And, damningly, Telstra Saturn hadn't yet got a declaration of compliance from the Ministry of Economic Development's radio spectrum management group.

This last isn't surprising as it hasn't applied for one.

For the record, DGT400 boxes will be deployed but they will be reconditioned and refurbished.

Boxes aside, the agreement got a pretty good run despite revealing almost nothing we didn't already know.

The crucial details for consumers, investors, and competitors are how much will the equipment and services will cost and what programming will be offered. Those won't be announced until the services are rolled out in the last quarter.

Meanwhile, the fixation with boxes has distracted attention from the big picture corporate stuff.

Since the original Telstra Saturn-TVNZ announcement, two events have subtly tilted the transtasman field on which the converging communications and entertainment game is played.

First Saturn's parent, Austar, is going quietly bust.

After losing $A230 million ($283 million) in 1999 it blew $A320 million ($395 million) last year, or $940 per pay TV subscriber. It has only a few thousand more customers than Sky Network Television, but Sky lost only $19.6 million or $49 per subscriber.

Plainly this can't continue. Austar is raising $A200 million of additional debt and has announced a three-for-seven rights issue underwritten by its 73% owner, United GlobalCom.

Given the issue is priced at 95Ac and the share price on Monday sank to a new low of 60Ac, participation by minority shareholders is a bit unlikely and UGC is liable to end up with about 80%.

Given the level of annual losses it's doubtful the cash injection will be enough to shore up the balance sheet. Austar spent $A488 million ($602 million) last year, leaving it with only $A190 million in cash.

The talk in Australia is that UGC will either take out the minorities or wash its hands of Austar. If it does get rid of Austar, likely buyers are Kerry Packer's Publishing & Broadcasting Ltd and Foxtel, the joint venture between Telstra and Rupert Murdoch's News Ltd.

And that's where it gets interesting.

Here in Godzone, Telstra Saturn is pitted against Telecom in telecommunications and against Sky in pay TV. The addition of TVNZ to the alliance is likely to push Telecom and Sky even further together.

But Sky is part of the Murdoch empire. In Australia Telstra, as far as its pay TV ambitions are concerned, has thrown in its lot with News Ltd, in opposition to Austar.

So Telstra Saturn board meetings must be interesting events. In Australia Telstra, through Foxtel, is out to do its New Zealand ally. And in New Zealand Austar is out to do Telstra's Australian ally.

It's a situation that needs some sorting out. Were Foxtel to buy Austar that would remove the Australian leg of the conundrum.

That's where the second significant change comes in.

The market noted well February's influx of Murdoch heavy-hitters Ken Cowley and Tom Mockridge on to the boards of Sky and its immediate parent, INL. Both have strong pay TV experience and the perception is they were put in to develop a strategy for integrating Sky into the News Corp empire.

Telstra Saturn and TVNZ have been making much of having an "open access" environment for digital networks. They appear to be close to persuading CanWest to include TV3 and TV4 in their digital "bouquet." They argue it would be "in the best interests of New Zealanders" for Sky to allow its programming to be accessible through TVNZ's boxes, and vice versa.

Will Sky play along? As things stand that's unlikely. It has a 400,000 subscriber advantage and all the best programming. Why should it accommodate the upstarts?

But put Austar in Foxtel's hands and the situation changes. Sky is now part of one big happy telco/pay TV family. There would be little point in Sky and Telstra/Saturn (read News) cutting each other's throats to buy sports and movie rights. Open access? Not a problem.

Of course, the theory would be perfect only if News took 100% of Sky, freeing directors of the tedious necessity of looking after the interests of minority shareholders. But that would be liable to attract the scrutiny of the Commerce Commission.

The loser in all this would be Telecom, which in Australia would face bundled telecommunications/pay TV competition from the two largest players but would have no opportunity to put together a mirror package here. Sure, it's got a 10% stake in INL. But money can't buy you love.

Comments from our readers

No comments yet