TVNZ plays on as Aussie telcos shrink-wrap budgets

Friday 3rd August 2001

A strong smell of burning bridges emanated this week from the revelation Telstra Saturn is "shelving" its digital deal with TVNZ "to examine other opportunities."

Media and politicians predictably zeroed in on what this means for TVNZ.

Act New Zealand's Penny Webster blamed the government for hobbling TVNZ with a charter that would see profits "plunge." "No company wants to be shackled with the baggage Labour has forced on TVNZ," she fulminated.

Telstra Saturn spokesmen insisted the deal might still go ahead but analysts were doubtful. When have you ever heard, one asked, of a company effectively saying to a partner, "excuse me, can we put our deal on the back burner while I go away and try to stitch up a better one with your competitor?" - and then coming back and completing the original deal?

The real reason Telstra Saturn is walking away has more to do with its parents' straitened circumstances than with the alleged shortcomings of TVNZ as a commercial partner.

The decision to put Telstra Saturn's pay TV plans on ice is understood to have been taken at a board meeting last week.

Directors of Telstra and Saturn's owner Austar apparently made it clear to their Kiwi subsidiary that the funds necessary to support a nationwide roll-out of set-top boxes would not be forthcoming. From now on the company was to be managed for profit, not for expansion.

Austar was earlier this week insisting it would have no problem raising the $A150 million ($187 million) it has already committed to pay into Telstra Saturn.

But it's in the midst of negotiations with its banking syndicate, headed by Citibank and J P Morgan, to restructure its debt and it's clear the banks have effectively put a padlock on its chequebook.

Telstra itself, for all its size, has been feeling the effects of the global slowdown in the telecommunications sector.

Analysts say the carrier, like Telecom, has "gone ex-growth." Its ability to raise fresh equity is hampered not only by its low share price but by the fact the Australian government is still sitting on the share register and it may not be diluted.

As a result, Shoeshine hears, the board has ordered management to cut all but the most essential capital expenditure.

One obvious area of attention has been Telstra's suite of joint ventures, where equity-accounted losses are forecast to reach $A250 million ($312 million) this year.

Telstra Saturn last year contributed an operating loss of $118 million. Foxtel, Solution 6, and Station 12 are all losing money these days.

The problem is Telstra Saturn's aspirations in New Zealand pay TV depended on both its parents having deep pockets.

Securing top programming would be crucial to getting sufficient sign-ups to pay the bills. But a bidding war against News Ltd-backed Sky for key rugby and cricket rights, for example, was going to be a very expensive business.

Sky last year reported 377,000 subscribers and now has more than 400,000 but getting them has not been cheap.

Sky subsidises the cost to customers of acquiring the equipment needed to receive its UHF and digital services. As a result the June 2000 balance sheet showed $201 million of capitalised installation costs and $207 million for decoders and associated equipment, even after depreciation.

Telstra Saturn planned a much cheaper rollout, initially at least, but analysts still reckon the two would have had to come up with $500 million to $600 million in fresh equity.

While Sky - assuming Sky is Telstra Saturn's "other opportunity" - will be rubbing its hands with glee at the disarray in the ranks of its only competitor, Telecom's position is more ambiguous.

On the one hand TVNZ's contribution to the partnership of a satellite platform threatened to push Telstra Saturn's bundled telecommunications/pay TV package out to the masses far faster than could have been achieved wiring up the streets.

In fact Telstra Saturn's plans to wire Auckland have apparently hit a brick wall as local councils object to its intention to use overhead cabling as it has in the Hutt Valley.

So Telstra Saturn's walkout has dissolved the immediate threat of a nationwide bundled competitor.

On the other hand Telecom is keen to use Sky for its own bundled service, and to prevent anybody else from doing so - that's the point of its 10% Sky shareholding. The prospect of Telstra Saturn and Sky talking to each other will be an uncomfortable one - Telstra already has a relationship with News Ltd through the Foxtel pay TV joint venture in Australia.

While media and politicians suggest Telstra Saturns' about-face tolls the deathknell for TVNZ's digital plans, that's not actually the case.

TVNZ chief executive Rick Ellis and Saturn's Jack Matthews came out of a Wednesday morning meeting proclaiming the TVNZ plan remained intact.

TVNZ, after all, never proposed to use the same "set-top boxes" Telstra Saturn was to deploy - it is still casing the market but intends to use all-singing, state-of-the-art boxes that will offer, for instance, email on your TV screen.

Nor does it need Telstra or Austar's balance sheets to depreciate the boxes; it plans to charge customers full cost.

All it needs from Telstra Saturn, according to spokesmen, is Telstra Saturn's Lower Hutt "head-end" to take its signals up to the satellite.

What remains to be seen is how many consumers will want to pay for a box that will only allow them to get the same channels they already have with a better picture, and with a few frills to which they probably already have access. TVNZ says its research shows plenty will.

Shoeshine suspects TVNZ doesn't really care how many people take up its service, just so long as it can tell the politicians it's there for the taking.

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