The Shoeshine Column: TVNZ joins the big boys in the battle to box in set-top boxes

Friday 24th November 2000

Shoeshine is saddened by the news Prime Minister Helen Clark doesn't watch television. That presumably means she missed out on watching David Tua being pummelled by Lennox Lewis two Sundays ago or the All Blacks being pummelled by the French one Sunday ago.

Such sights serve as a useful reminder to politicians that in business as in sport there are winners and losers.

As those politicians are the custodians of our national treasure, TVNZ, they need to bear this in mind when examining the broadcaster's memorandum of understanding with Telstra Saturn.

At first blush the deal, short though it is on detail, looks like bad news for Sky Network Television, whose shares fell sharply. It has the potential to create a deep-pocketed competitor in the market for key content, a battle Sky can't afford to lose if it's to keep its 400,000 subscriber advantage.

What's been largely missed is that it also has big implications for Telecom, speeding up as it does the penetration of its telecommunications arch-enemy.

Details are still being thrashed out and in their absence some odd stories are doing the rounds.

What we do know is TVNZ is contributing its two channels on a free-to-air basis to anyone who has the right equipment installed. That takes care, for an outlay of next to nothing, of its obligation to offer a universal free digital service.

In fact it's hard to see too many people buying boxes on that basis. Some 99.8% of New Zealand households can already get TV One and TV2 and only a handful will be willing to buy a box just to get better reception.

The plan is to market the old, cheap boxes Saturn's parent Austar has pulled out of its Australian network to that handful and those willing to pay for Telstra Saturn's basic pay TV service.

Those wanting more advanced, interactive services, when they become available, will be issued with all-singing, all-dancing boxes. The key questions are who will pay the costs of hooking them up, and how successful the partners will be in putting together an attractive content package.

The intention seems to be to start out with a "nuts'n'cola" service. Analysts reckon the WW2 boxes could cost $50. Installing them would cost around $150 taking the total to $200.

Rolling out the upmarket version is where Telstra Saturn's deep pockets come in.

Sky subsidises the costs to customers of signing on to its UHF and digital services. It reckons it costs $330 (ex-GST) to install UHF and $695 for digital.

As a result its balance sheet shows $201 million of capitalised installation costs and $207 million of decoders and associated equipment. Depreciating these and its satellite transponder leases last year cost it $78 million.

Programming cost it $124 million. Although its operating cashflow is growing fast, figures of that magnitude mean it isn't expected to show a profit at the bottom line until 2003.

With an inferior content package likely to appeal to the lower end of the consumer market, the joint venture is unlikely to get too many sign-ons unless it also subsidises heavily.

But the government almost fainted with fright when TVNZ unveiled its $200 million go-it-alone digital venture. So it seems likely Telstra Saturn will provide the lion's share of the financial muscle needed to acquire and depreciate a subscriber base, and will own most of the joint venture's equity.

Given the limited attraction to subscribers of getting TVNZ's free-to-air channels digitally and the relative puniness of its balance sheet, you have to wonder why Telstra Saturn even bothered cutting the broadcaster in on the deal.

The answer seems partly to be its ownership of the lease on the last available transponder on the Optus B1 satellite. Having access to this allows Telstra Saturn to put its footprint across all of New Zealand, pushing its presence out way ahead of the slow construction rate of its landbound broadband network.

Using the posh decoders, it will be able to bundle pay TV, internet access and email with mobile calling through its reselling agreement with Vodafone and even local service through its agreement with Telecom.

When the landlines reach customers it will be able to add long distance calling.

For Telecom that's a scary prospect and one that's likely to make it keener than ever to develop its trial joint-marketing agreement with Sky so it can offer a competing bundled service.

The payback for TVNZ is that it can piggyback on Telstra and Saturn's balance sheets to get access to the two-way digital bandwidth that will enable it to diversify and grow its revenues by offering as-yet-unspecified interactive services.

The crucial undecided detail is how the venture's joint bidding for content will be run.

Sky's "killer apps" are its rights to rugby and cricket coverage and to the output of six of the seven major movie studios.

The venture partners have raised the possibility of pooling their resources to bid for content. Again TVNZ will be the junior partner, paying presumably only for delayed free-to-air broadcast rights, as TV3 does now with Sky sports content.

The partners' combined buying power could conceivably outgun Sky in some instances. But the key rugby rights, and one-off pay-per-view events such as boxing matches, will be bid for on a global basis by Sky's ultimate parent, Rupert Murdoch's News Corp. And that's a foe not even Telstra can contemplate taking on.

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