Sky responds to investigation into its ISP and content contracts; shares dip sharply

This morning, the Commerce Commission dismissed complaints about Sky TV's igloo pay TV joint venture with TVNZ, clearing the way for the low-cost pay TV servcie to launch next month.

But the watchdog opened a new investigation, this time into Sky TV's content partnerships with internet service providers.

The Commisssion will also look at "whether Sky’s agreements for the acquisition of content harm competition by denying actual or potential rivals access to a critical mass of quality content."

Investors seemed spooked. In midday trading Sky TV shares [NZX:SKT] were down 8.26% to $5.00 [UPDATE: Sky shares closed at $5.08], eroding a run up over the past three months (the stock has a 52-week range of $4.92 to $5.92).

TelstraClear has labelled Sky TV's wholesale contracts restrictive. 

So it was telling that Dr Berry added today that the Commission’s investigation did highlight potential difficulties that any entrant would face in entering the pay TV market.

On April 17, TelstraClear CEO Allan Freeth told NBR ONLINE his company's contract with Sky TV, centering on its T-Box set-top boxes, “Prevents us charging for content not sourced through Sky TV."

It was a concern Commerce Commission chairman Mark Berry echoed today, saying “While this was not part of this [igloo] investigation, we are aware of concerns that access to content and Sky’s contracts with internet service providers may be hindering competition. As a result, we have now opened a separate investigation under sections 27 and 36 of the Commerce Act.”

Sky TV John Fellet was quick to respond to the proposed investigation this morning.

Essentially, he reiterated his long-held stance that no player has any special power to buy content - and that Sky shouldn't be punished for having already done the hard yards, and spending the money, to secure a good range.

"When Sky started back in 1990, it faced a range of entry conditions, including the need to secure new content. All content is owned by someone and you have to go out and buy it in a competitive market," Mr Fellet said.

"Once you buy this content you have to figure out to recover the costs. It took Sky 14 years to break even.

"New Zealand may be one of the most competitive television markets in the world, between Freeview and SKY there are more channels per capita than in any other market, and there is competition from new entrants, especially from overseas such as Quickflix.

"Competition for content in New Zealand is so intense that the price that content providers receive from NZ broadcasters for shows like Desperate Housewives, CSI, Downton Abbey and for the Rugby is probably the highest per capita in the world as well”.

Opponents maintain Sky TV's lock on content - through its own service and its igloo joint venture with TVNZ - will hinder competition as fibre is rolled out to New Zealand homes over the next few years under the Ultrafast Broadband (UFB) project. Some see the UFB as a potential launching pad for new pay TV platforms, which could partner with ISPs to offer bundled service that would help drive fibre uptake.

TelstraClear has yet to respond to a request for comment.

Telecom has a partnership with Sky TV at the same level, but has yet to take full advantage of it by releasing a T-Box-style set-top box.

Separately, Sky TV has arrangements with several ISPs to zero-rate data downloaded for its iSky on-demand service.

TelstraClear's Dr Freeth told NBR he was not calling for government intervention.

Neverthess, his company's relationship with Sky TV was reaching a commercial "pain point" that would make it worth striking out on its own.

This morning, a TelstraClear spokeswoman weighed in with: TelstraClear looks forward to a favourable outcome so that we may freely partner with the global content industry to provide our customers choice, control and fair value to enjoy the TV, movies and music when and how they want."