July 29, 2016
By Malcolm Webb
OTT competition: the case of Sky TV
This article considers the question of whether Sky may possess market power in pay TV and in particular the degree to which OTT rivals are infringing on Sky’s patch.
Sky TV (Sky) is a New Zealand pay TV operator, delivering its content to subscribers via satellite and via an online service. Sky has been in the news recently, as it has announced a merger with leading telecoms operator Vodafone NZ, subject to merger clearances.
Sky has approximately 860,000 subscribers in New Zealand, with revenues of over NZ$900 million per annum and ARPU of approximately NZ$80. These are at or near record levels for the company. Sky offers a suite of basic and premium channels, with sports, movies, quality drama and a range of general programming.
The media sector in New Zealand is certainly not unique in the splash that OTT subscription video on demand/pay per view (SVOD/PPV) services have had and similar themes are playing out in different markets all over the world. In a different sector, a close analogy is perhaps telecoms, where traditional providers of voice and messaging services are impacted by OTT communications services (such as WhatsApp, Viber, Skype, etc.). They’re analogous in the sense that they are both quality, managed services, facing upheaval by unmanaged services, delivered over the internet.
Sky has recently announced that it expected to lose about 5% of its core residential pay TV subscribers this year – Sky estimates that about half of these are shifting from Sky satellite to Sky OTT services Neon and FanPass. Neon has movies and general programming content for about $20 per month and FanPass has sports content for about $56 per month. In comparison, Sky’s basic satellite package is about $50 per month and the sports package an additional $30 per month.
Netflix launched in New Zealand towards the end of 2015 and, while it does not release its subscriber numbers, Roy Morgan research estimated that there were approximately 165,000 local Netflix subscribers at the end of 2015. It’s probably a lot more now. Netflix has a basic package for $10 per month and a premium package for $16 per month. There are other OTT players in the market, including Lightbox, provided by Spark (the other leading telecoms provider).
The growth of OTT SVOD/PPV services has reduced barriers to entry in the pay TV market, as firms no longer have to invest in full pay TV platforms. With high-speed broadband being widely deployed around the country, CDNs being used to deliver a higher quality OTT experience and HD and Ultra HD TVs being available, it has all of a sudden become much easier for OTT rivals to attract paying subscribers.
The big question is: to what extent are they competing?
The sparkling jewel in Sky’s crown is rugby, New Zealand’s national sporting obsession. We are the current World Champions and the SANZAAR Super Rugby championship has produced some of the most breath-taking matches that I can ever remember by New Zealand teams.
Sky built its business on rugby. Sky has held the rugby rights for the major championships since the time the company was established nearly 30 years ago. It recently renewed its SANZAAR rugby rights for 2016-2020, including the online rights. Neither SANZAAR nor Sky disclose the price paid for these rights, but it is described by Sky as an "eye watering number" and an "eye watering increase”.
Sky keeps its numbers close to its chest and we don’t know for sure how important live sports is for pay TV subscribers. Helpful evidence would include the amount Sky spent on sports rights as a percentage of its overall content costs, the percentage of Sky subscribers taking the sports package, etc. But it is probably a reasonable hypothesis that live sports content, and particularly rugby, stands out from other content genres in its importance to pay TV subscribers.
Who are Sky’s competitors for the rugby rights? There is undoubtedly a benefit in having a large existing subscriber base over which you can monetise these rights, which provide bidding advantages, but Sky is not the only company that has a subscriber base.
Telcos also have large subscriber bases, paying substantial amounts each month. And we have seen the telcos in other markets step up and acquire premium sports rights, with BT being the best current example (although the unrelated Sky UK is unable to acquire all of the English Premier League rights and a tranche must be available to another party, which BT acquired).
Although BT has had some success in the UK, telcos face some uncertainty about their ability to monetise investment in sports content. At the end of last year, the view of the UK regulator, Ofcom, was there is not yet strong evidence to suggest telco subscribers have a proven willingness to pay for sports content in the same way as Sky UK’s established pay TV subscriber base.
Currently, sports don’t feature heavily for global OTT players. Netflix has stated it has no ambitions to get into live sports. Twitter, however, has acquired live streaming rights for NFL games and, in the US, approximately 16% of broadband households are said to have a sports OTT subscription (Park Associates 2015). There is some question, however, whether sports content is compatible with the low-cost OTT business model.
Nevertheless, the fact that Sky paid an increase for the rights may suggest that there was competition. If Sky was not facing effective competition for the rights, then why would Sky have paid more than it would otherwise have had to? We don’t know the answer to this, because we don’t know what competition Sky faced for the rights, or whether Sky was exercising a renewal right for example.
Australia is different to New Zealand, with anti-siphoning laws that are not a feature in our market. But in March 2016, after considering potential constraints from OTT providers, the competition authority (the ACCC):
“… concluded that Foxtel will ultimately continue to exercise considerable market power when negotiating to acquire sports rights. This is particularly so for premium sports, given its ability to pay significant sums to sporting bodies for these rights compared to alternative acquirers.”
But if the same thing applied in New Zealand, why would Sky be unbundling their sports content and making it available online through FanPass? If you were a rugby nut, you don’t have to subscribe for Sky’s full satellite service and could just take FanPass for about $56 per month. So, you’re not trapped into buying the full satellite bundle to see sport. You could take FanPass for no minimum commitment and take Netflix, Lightbox or Neon for all your general content. But, that adds up to about $70 per month, which is not all that much less than Sky basic plus sports package at $80 per month. Plus, you get a managed service with sports over satellite – if you really care about your sport, a high quality managed service may matter to you, as compared to an OTT service.
Perhaps in fact OTT is a weak substitute for Sky’s service, with low cross elasticity of demand. If Sky’s prices went up 5% (actually, Sky did recently put up its sports package by 5%), what would happen to demand for OTT services? There probably would be an increase in demand, but it may not be a strong increase. Expert evidence would be required to have a clearer idea of the answer that question.
The Roy Morgan survey at the end of 2015 found that “… the rate of Netflix uptake among households with Sky has been virtually identical to the national norm of just under one in ten”. This is similar to the UK evidence, where most consumers take OTT services as an add-on to other TV services, rather than substituting their existing pay TV service (e.g. 61% of UK homes with Netflix also have a Sky or Virgin Media subscription).
Regulators overseas have looked at this issue recently. At the end of 2015, Ofcom reached the conclusion that OTT SVOD/PPV in the UK should not be included in the same market as satellite delivered pay TV. And earlier this year, the Brazilian regulator, Anatel, reached a similar conclusion, deciding that OTT services were not substitutes for now.
It’s interesting to compare telco services. Telco’s voice and messaging revenues have been decreasing substantially for some time now, attributed largely to the impact of OTT services. But there’s no equivalent to the premium sports catnip in telco. It’s a communications service. There is a difference in quality between a managed voice service provided by a telco and a poorer quality unmanaged VoIP alternative, although those differences are decreasing and for many people the quality difference is not a critical issue. Telcos have responded to OTT intrusion by bundling voice and messaging into large bundles including data and it can be difficult to use up all your voice minutes or text messages in your bundle. It might be argued that telcos are facing greater levels of competition from OTT players than Sky is.
These issues may, or may not, play out in detail in consideration of the Sky and Vodafone merger. But it is an open question that deserves further analysis and which has parallels in other markets (where football is likely to be the relevant obsession rather than rugby).
Disclaimer
This article is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this article.