COMMENTS FROM SKY NETWORK TELEVISION LIMITED ON...

COMMENTS FROM SKY NETWORK TELEVISION LIMITED

ON SUBMISSIONS ON THE GOVERNMENT’S DIGITAL BROADCASTING REVIEW OF REGULATION

18 JUNE 2008

1. OVERVIEW

Purpose of this submission

1.1 This document forms part of SKY’s cross-submission to the Ministry for Culture and Heritage from

SKY on the submissions of TVNZ, TVWorks, Freeview and SPADA on the discussion papers

Digital Broadcasting: Review of Regulation: Volume 1 and Volume 2. It should be read in

conjunction with the summary document “Setting the facts straight.” SKY is aware that the

Government has not formally called for cross-submissions. However, the above submissions

contain inaccurate and misleading statements and assertions relating to, or potentially affecting,

SKY that SKY wishes to respond to.

1.2 The submissions from TVNZ, TVWorks and Freeview are effectively seeking self-interested

regulatory protection against fair competition from SKY. Their submissions are aimed at preserving

or enhancing their position through Government intervention, rather than having to compete fairly

with SKY.

1.3 These submitters seem to be using their submissions to the review as thinly veiled attempts to

attack SKY for their own ends. Few of their arguments are justified by reference to benefits for

consumers and are only very weakly linked to the review’s purpose of facilitating the development

of digital technology for the benefit of consumers and New Zealand society more generally.

1.4 SKY considers that it would not be sound for the Government to make decisions on the next step of

the review on the basis of those submissions. Sections 2, 3 and 4 of this cross-submission provide

officials with evidence to assess the accuracy and validity of these submissions.

1.5 As much as possible, SKY has not repeated the comments made in its submission of 4 April 2008,

but notes that many of the issues raised by the TVNZ, TVWorks, Freeview, and SPADA are

discussed in that submission.

Official’s approach to analysing the submissions

1.6 SKY considers that, before making any recommendations on the submissions, Government

officials need to:

• check the claims made in submissions to verify whether they are correct; and

• analyse the extent to which the issues raised, and any solutions suggested, are related to the

review’s purpose and benefit to consumers.

1.7 Such an approach would be consistent with the Government’s Code of Good Regulatory Practice,

which it has declared it will adhere to. In this regard, SKY notes the recent comments by the Hon

Lianne Dalziel on the need for Regulatory Impact Analysis, a Government requirement which

supports the Code of Good Regulatory Practice:

“Although there is no single model for a good RIA regime, it will always require thepreparation of proposals for decision-makers that follow comprehensive policy developmentprocesses.

These include:- clearly defining the particular issue or concern and why government regulatory action is

needed;• identifying the options for addressing the problem;• identifying and consulting with stakeholders;• undertaking an assessment of risks and opportunities and the costs and benefits of

the options; and• selecting the preferred option• setting implementation and review strategies” (Hon Lianne Dalziel, Speech to the

Regulatory Evolution Summit, 19 May 2008)

1.8 In announcing that the Government would consider the recent Commerce Select Committee’s

recommendation to establish a high-level expert taskforce to investigate ways of improving the

process for making and reviewing regulation, the Minister said “we will continue to work on finding

effective ways of ensuring that as legislators we make the best possible decisions so that proposed

regulation is high quality, appropriately targeted and that it doesn't have unintended

consequences”.

1.9 SKY understands that officials are required to report back to Cabinet on the results of the

submission process by the end of July, and advise on the next steps in the review. In this regard,

the Government has signalled that it would consult further on any proposals for regulatory change.

1.10 SKY supports the need for further consultation on any proposals for regulatory change. However,

before that stage, the claims and assertions made in the submissions need to be checked and

analysed.

1.11 SKY has been told that no decisions will be made without a thorough analysis of the submissions.

It is unclear whether this checking and analysis will be carried out now or after the further rounds of

consultation on the issues raised in the submissions are undertaken. SKY considers that the

analysis and checking of submissions should be carried out before further consultation.

1.12 In SKY's view it would be irresponsible and poor process to consult on the issues raised in

submissions without rigorously checking the evidence or assertions underlying the submissions.

That an issue or point has been made in a submission is not enough – there must be some

objective evidence that an issue exists or is valid before consultation is undertaken.

1.13 For example, Paul Norris’ submission questions why TVNZ6 and TVNZ7 are not available on

SKY’s digital platform and suggests the Government impose regulation depending on who is

responsible for the current situation: a “must-carry” rule on SKY, requiring it to carry all Freeview

digital channels or a “must-offer” rule on all Freeview broadcasters, ensuring that they offer their

channels to SKY. Without analysis of the background to this matter (provided in the submission

below) it would be difficult for options for regulatory change in response to this issue to be effective,

efficient or fair.

1.14 This is particularly important because of the potential impact that even consulting on issues such

as anti-siphoning or must carry legislation could have on listed share prices.

1.15 For its part, SKY would welcome a review of its submission by officials, and would be happy to

provide further evidence or detailed analysis of its assumptions, if that would assist officials.

Summary of submissions document inadequate

1.16 In light of these comments, SKY is concerned about how the Government and Ministers will use

the summary of submissions that has been prepared. The summary of submissions, in many

cases, simply records that there were submissions for and against issues. It does not have any

substantive description of the reasons given in the submissions for particular options or any

description of whether assertions in submission are substantiated. SKY is concerned, on the basis

of the summary of submissions, that the Government’s decision-making process could therefore

become a simple number counting game of submissions for and against particular options.

1.17 SKY is also concerned that the summary of submissions does not reflect many aspects of SKY’s

submission. These include its concerns over the process of the review raised in the submission,

and also its evidence that demonstrates that a number of potential problems mooted in the

discussion papers do not exist.

1.18 We understand that Ministers have been provided with a copy of the summary of submissions.

However, it is imperative that advice to the Ministers is based on sound analysis.

2. RESPONSES TO TVNZ SUBMISSION

2.1 This section sets out SKY’s detailed responses to the claims in TVNZ’s submission.

TVNZ submitted that “No other flagship public service broadcaster in any other country has to

compete against a dominant, vertically-integrated pay-TV provider”. (See pages 20, 25, 28 of

TVNZ’s submission)

2.2 Firstly, SKY is not the dominant broadcaster in New Zealand:

o TVNZ has the largest viewership of any broadcaster in New Zealand – 46.4% for February

2008.

o TVNZ had 18 of the 20 most viewed television shows in 2007.

o TVWorks is also a strong competitor, with good audience shares from TV3 and C4.

o TVNZ makes 233% more from advertising than TVWorks (which has the next largest FTA

viewership) makes from all sources of revenue1.

• In fact, TVNZ views itself as the dominant broadcaster in New Zealand. In its 5 year strategy

document “Inspiring on Every Screen”, TVNZ states:

o “TVNZ continues to be New Zealand’s leading broadcaster” and “ We [TVNZ] are the pre-

eminent television and online local video content propositions in the market”

• TVNZ receives or benefits indirectly from substantial amounts of Government funding and is

established by statute, giving it an implicit Government guarantee.

Broadcaster Channel Share AP 5+ 2005 - 2008

0

10

20

30

40

50

60

Jan-0

5

Feb-

05

Mar

-05

Apr- 0

5

May

- 05

J un-0

5

J ul-0 5

Aug-0

5

Sep-05

Oct-

0 5

Nov- 0

5

Dec-05

Jan-0

6

Feb-

06

Ma r- 06

Apr-06

Ma y-06

J un- 0

6

J ul-0 6

Aug -06

Sep-06

Oct-

0 6

No v-06

Dec-06

J an-0

7

Feb-07

Mar-

07

Apr-0

7

Ma y-07

J un- 0

7

Jul- 0

7

Aug-07

Sep-07

Oct-07

No v-07

De c-07

Jan -0

8

Feb-0

8

Mar

- 08

Apr- 0

8

Ma y-08

Sky Network

Canw es t

Prime

TVNZ

Other

Sky bought P ri me i n F eb ‘06

TVNZ’s channel share still remains dominant over all other competitors in the market. For 2008year to date, TVNZ’s average monthly channel share of 46.2% remains 37.1% higher than All SkyTV (including Prime) average monthly channel share of 33.7% .

Source: AGB Media/T VMap AP5+

1 The figure of 233% is calculated by dividing TVNZ’s advertising revenue as stated in its 2006 Annual Report (for year ending 30June 2006) by TVWorks’ total revenue as stated in its 2006 Annual Report (for year ending 31 August 2006)

2.3 Secondly, TVNZ’s claim that SKY is vertically integrated is a red-herring and its significance

completely overstated by TVNZ.

TVNZ suggests that SKY is a vertically-integrated media company because it is a content

originator, content and service packager, service provider, customer relationship management

services, consumer premises equipment provider and infrastructure operator. However:

• Some of the vertical functions ascribed to SKY are not accurate.

o For example, SKY is not, to any significant degree, an infrastructure operator.

Transmission of SKY’s signal is carried out by Kordia, over the terrestrial UHF network,

and by SingTel-Optus over satellite.

• Some of the vertical functions attributed to SKY have been classified misleadingly.

o For example, TVNZ suggests that SKY provides customer relationship management

services but TVNZ does not. SKY believes TVNZ does provide relationship management

services to advertisers - the customers that provide a substantial portion of its revenues. It

also provides customer relationship management services to its viewers. In this regard,

TVNZ states in its 2007 Annual Report that viewer feedback is a pivotal area of influence

within TVNZ. TVNZ manages relationship management with its viewers through its website

and by conducting surveys of public perceptions of TVNZ. (TVNZ Annual Report 2007).

• Some of the vertical functions would not be of any use to a FTA broadcaster, are functions that

are costly for SKY to perform, and do not give SKY any competitive advantage.

o For example, TVNZ suggests SKY is a customer premises equipment provider. However,

for analogue broadcasting, there is no need for TVNZ to provide such equipment to its

customers as television sets already include all the equipment necessary to translate an

FTA television signal into a viewable picture. For digital broadcasting, the Freeview

service is able to source a much cheaper box than SKY because it requires less

functionality and therefore no subsidy from the broadcaster is required. SKY also notes

that it is standard practice for overseas pay-television providers to provide a set-top box as

well as a subscription based broadcast service (for example, Foxtel and Austar in

Australia, BSKyB in the UK, DirectTV in the US).

o SKY could not be said to be any more vertically integrated than TVNZ and TVWorks, which

both now have an interest in the Freeview platform. At a broad level, the most vertically

integrated provider in the market is the Government through its interest in TVNZ, Kordia

and Orcon. TVNZ’s 5 year strategy document contains a diagram which illustrates that

TVNZ is also vertically integrated and aspires to further media and platform integration in

the future to combat audience fragmentation.

• SKY's business model has not enabled it to exercise substantial market power or given it any

advantage.

o Vertical integration by a business does not necessarily provide it with any sustainable

advantage. The strong movement in recent years by many businesses to outsourcing

demonstrates that vertical integration is not an automatic route to success. For example,

while SKY produces content it could not be said to have substantial market power as a

result. There are plenty of other content producers including TVNZ itself.

o SKY’s ownership of the set-top box does not prevent viewers from watching FTA channels.

They are able to do so either over the SKY DTH service itself, or tuning into the FTA

terrestrial broadcasts, or over the Freeview DTH service. There are also a wide, and

increasing, range of delivery platforms.

2.4 Thirdly, TVNZ’s claim to be the “flagship PSB [public service broadcaster]” is doubtful.

• Unlike genuine public service broadcaster’s overseas such as the BBC or ABC, TVNZ shows a

large number of purely commercial shows, and receives most of its revenue through

advertising.

• TVNZ has no special anointed status as the “flagship” public service broadcaster in

New Zealand (as opposed to Radio NZ).

• Other channels provide public service broadcasting, especially Maori Television and TV3 in the

form of NZ On Air funded programmes.

• SKY receives very little NZ On Air funding and does not claim to be a public service

broadcaster. However, many of the programmes it broadcasts could be called “public

services”. This includes a wide range of local content – without Government subsidy. In 2007,

SKY broadcast 16,488 hours of local content. This included documentaries, special features,

news, concerts, feature films, short films, sports, and locally produced music videos.

2.5 Fourthly, genuine public service broadcasters overseas compete in a mixed FTA/pay-television

environment. Most do so in a much more competitive environment than in New Zealand – with

pay-television levels in some countries at nearly 80% penetration and more than 1 other major FTA

broadcaster as competition.

2.6 Lastly, TVNZ could not be said to be failing. TVNZ’s viewership may be the very highest of any

broadcaster in the world. This includes both public service broadcasters and commercial

broadcasters. SKY could not find any broadcasters with a higher viewership share.

Public Broadcasters Share Of Viewing 2006

48.5%

47.9%

44.7%

43.6%

41.5%

38.3%

37.0%

34.6%

32.8%

32.4%

23.1%

NZ

Austria

Germany

Italy

Ireland

Sw eden

France

UK

Netherlands

Denmark

Spain

TVNZ

RAI

RTE

SVT

France 2, 3 & 5

BBC

NOS/NPO

DR

TVE

ORF

ARD & ZDF

Source: EBU Guid es Inf or mation Pack, Volume 2: EBU Members’ Audience Trends. Published by: EBU – Strategic Information Services, July 2007.Source: AGBNMRDataline/ TVmap

TVNZ's submission includes a graph that seems to show SKY’s all-day viewer share has increased

from 10% in 2000 to 25% in 2007. In the middle of the graph a statement is made that says “A

more level playing field is required in the future in order for Free To Air broadcasters to compete on

a fairer basis with their Pay TV rival”. (See page 13 of TVNZ’s submission)

2.7 SKY believes that TVNZ’s graph is misleading in its attempt to be simple:

• The graph purports to show SKY’s growth is unprecedented and unfair. However, a similar

graph could be shown of every industrialised country in the world (see UK example below). As

people make broadcasters more money in industrialised nations they want more television

options than what the FTA can provide. Pay-television gives them more options. For example:

• TVNZ’s graph assumes that there is competition for viewers only between SKY and FTA

broadcasters. In fact it is much more dynamic than this. “Traditional” broadcasting is under

threat from competing technologies and entertainment options like the internet, DVDs, and

gaming.

• AGB Nielsen data for 2007 shows that SKY subscribers are still watching approximately 12

hours of FTA channels per week, and are only swapping approximately 5 hours of FTA

programmes per week to watch subscription programmes. The growth of SKY, has not

proportionately taken viewers away from FTA.

2.8 Further, even if more broadcasting choice did mean less viewership of TVNZ – more choice is the

resulting benefit of a competitive environment – and what the review of digital broadcasting is

intended to encourage.

TVNZ claims that:

• “SKY’s subscription revenues exceed the advertising revenue of any single FTA

broadcaster. As a consequence, FTA broadcasters are finding it increasingly difficult to

compete with SKY for content.” (See page 31 of TVNZ’s submission.)

• “For example, TVNZ has to spend a substantially greater proportion of its revenue on

programming than SKY.” (See table on page 32 of TVNZ’s submission.)

2.9 Although SKY’s subscription revenues exceed the advertising revenue of any single FTA

broadcaster, when purchasing programme rights TVNZ can use all its sources of revenue –

advertising, on sale, Charter funding, NZ On Air funding, direct digital funding – all of which

considerably increase the amount of money available for purchase of content. By not including

these sources of revenue in its chart, TVNZ’s submission overstates the revenue differences

between SKY and the FTA broadcasters and is misleading.

UK Broadcaster Channel Share BBC versusCommercial Broadcasters

57 .5 56 .9 5 6.6 56 .0 57 .4 59 .3 60 .8 6 2.5 62 .8 61 .3 61 .7 63 .5 64. 2 65 .0 64 .5 65 .2

42 .5 43 .1 4 3.4 44 .0 42 .6 40 .7 39 .2 3 7.5 37 .2 38 .7 38 .3 36 .5 35. 8 35 .0 35 .5 34 .8

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1993

1 994

1 995

199 6

199 7

199 8

1 999

2 000

200 1

200 2

2 003

2 004

2 005

200 6

2 007

200 8*

BB C

Com merci al

Source: www.thinkbox.tv/

Nickable Charts

BBC Channel share is decreasing over t ime in the UK

2.10 SKY spends a smaller percentage of its operating revenue than TVNZ on content – but this is not

evidence of excessive revenue or unfair competition. This is the norm: the same difference in

programming spend/revenue exists between FTA and pay television providers worldwide. This is

because SKY – like all pay television providers – has to use a large part of its revenue to fund the

costs of its set-top boxes, installation, maintenance and other pay television specific infrastructure

costs. Last year:

• Depreciation of infrastructure totalled $85 million or 14% of SKY’s revenue.

• Subscriber management totalled $42 million or 7% of SKY’s revenue.

• Broadcast and infrastructure costs totalled $51 million or 8% of revenue.

2.11 More importantly, there is no evidence that FTA broadcasters are finding it hard to compete against

SKY for premium content. Recent evidence shows exactly the opposite. SKY dropped out of the

bidding for Twentieth Century FOX programme rights, leaving TVNZ and TVWorks to compete for

this package. Furthermore, TVNZ has secured the large Disney, Warner, and Granada packages

since SKY acquired Prime.

2.12 Despite this, when calculated including all revenue, TVWorks revenue/content ratio is close to SKY

– demonstrating if anything, that TVNZ spends more than it needs to on securing content.

2.13 FTA broadcasters need to show programmes that attract the largest possible audiences to

increase or maintain viewership and advertising revenue. Showing premium first-run programmes,

commonly sold as part of output deals, in primetime are one way of achieving this. TVNZ, in

particular, strongly pursues this strategy. This content is inherently more expensive than most of

the content pay-television broadcasters purchase. Pay-television providers’ business model is not

about attracting single large audiences:

• TVNZ spent $229.8m on programming for 2 channels in 2007, or $114.9m per channel.

• SKY spent $204.6 million on 79 channels (excluding the audio and radio channels SKY carries,

but including 19 PPV channels as these channels also have programming costs and

revenues), an average of $2.59m per channel.

• Prime spends $15.7 million on programming.

• TVNZ spends around 10 times more per hour in primetime than SKY does on general

entertainment channels such as Vibe and the Box.

• TVNZ spends $4.9m per viewership share point on programming versus Prime’s $2.7m –

i.e. TVNZ spends 80% more than Prime.

2.14 It may be possible that FTA broadcasters are finding it harder to afford such content packages.

However, any increases are not as a direct consequence of SKY’s actions or competition from SKY

for the content, let alone a consequence of the fact that SKY’s subscription revenue is higher than

any single FTA broadcasters advertising revenue. If anything, TVNZ has been driving up content

costs through its actions, particularly in purchasing content ahead of TVWorks. In this regard:

• TVNZ seems to be pursing a strategy of purchasing higher cost, high rating US dramas over

lower cost foreign programming (e.g. from the UK). Examples are its purchase of Big Love,

Criminal Minds, The Closer and Cold Case for TV One, instead of UK productions (which

Prime is targeting because they are more cost effective). The US shows give TVNZ greater

reassurance of commercial success, given their high US ratings which often lead to strong

media coverage before the shows even air in New Zealand.

• TVNZ has purchased a number of programmes and studio output deals at prices far in excess

of what SKY, and apparently TVWorks, was prepared to pay. For example, TVNZ is estimated

to have spent NZ$15 million on the Disney programme rights.

• SKY never put in a bid for the Warner Bros, CBS Paramount or NBC Universal packages, so

any increase in price of those packages was through no direct impact of SKY.

2.15 TVNZ also claims that local content costs are increasing and again implies that this is due to SKY.

This is not correct:

• It is true that local content is generally more expensive than foreign content in that it costs more

purely on an hourly basis. On the other hand, it can be purchased without the need to

purchase other content, such as movies or other series, as often occurs in relation to foreign

content. It also ignores the fact that the broadcaster can commission programmes, thereby

targeting programmes to audiences and reducing risk.

• Moreover, much of the increase in the costs of local programmes, especially for TVNZ, is

because of the kind of programmes commissioned. TVNZ has moved from

factual/documentary programmes to commissioning more entertainment programmes. These

programmes, such as Stars in their Eyes and Dancing with the Stars are far more expensive to

produce. The commissioning of these programmes is a deliberate choice by TVNZ, in order to

obtain higher-rating programmes.

2.16 Another important factor is the programming strategy adopted by TVNZ. For example, the locally

made Wheel of Fortune has a significantly higher per-episode cost at 5.30pm than previous foreign

shows which have inhabited that time slot, such as Masterchef. This is outside of primetime

(defined in New Zealand as 18:00-22.30) so the channel has substantially raised advertising costs

in that slot to help pay for the show. However, Wheel of Fortune fulfils a strategic role in TV ONE’s

schedule which has nothing to do with public service:

• It gains audience to lead into TV ONE’s news programme at 6.00pm.

• It simultaneously damages TV3’s popular Home and Away, which also leads in to their news

programme.

• This gives a big advantage to TV ONE in the battle of the 6.00pm news hours, where ratings

and revenue are critical.

2.17 Another example is TVNZ’s decision to outbid rivals for certain shows or to play shows off-peak,

simply to deny them to the competition. Examples include:

• The HBO series Entourage, a cable hit in the USA which TV2 plays outside of primetime.

Although two other channels in New Zealand have offered to buy this series and screen it in

primetime, TVNZ will not release the series.

• The BBC series Torchwood, which is a spin-off from Doctor Who. TVNZ outbid Prime for this

programme in 2006 and has apparently shelved it since. Two series of Torchwood have gone

to air in the UK, but as yet it has not screened in New Zealand.

• The BBC series Jekyll, which TVNZ outbid Prime for in 2007 and which is now screening on

TV ONE outside primetime, at 11.00pm at night.

• The USA series The Contender, which TVNZ outbid other networks for in 2005 and which is

now screening at midday Saturdays.

2.18 SKY believes that the main reasons for the increase in content costs, especially for TVNZ, is

TVNZ’s choice of programmes, its willingness to spend large amounts for shows it does not really

want or cannot use (e.g. Torchwood, Entourage), and by competing over-aggressively for deals it

does not need if it is to fulfil its charter purpose (e.g. Disney).

TVNZ stated “there are relatively fewer first-run series and films targeting a mass audience” (See page 20

of TVNZ’s submission).

2.19 This is demonstrably not true. If anything, the proliferation of channels in Australia, the UK and the

USA has ensured there is more commercial English-language television product available than

ever before.

2.20 Again the issue comes down to TVNZ's decision to pursue a particular strategy. TV ONE has

moved away from UK dramas in favour of American dramas such as Big Love, Criminal Minds, The

Closer and Cold Case. If a UK drama does make it to the TV ONE schedule, it is likely to be

screened late at night, like the critically acclaimed Bleak House. The logical consequence of this is

that two channels, TV ONE and TV2, are now dividing the American product that once would

almost exclusively have gone on TV2. But this is a voluntary programming decision, not a decision

driven by necessity.

2.21 If it were not for Prime, there would be a far smaller range of quality UK programming available free

of charge to New Zealand viewers. Such popular UK series as Planet Earth, Life in Cold Blood, Oz

and James' Big Adventure, Top Gear, Antiques Roadshow, The Seven Ages of Rock, Rick Stein's

Mediterranean Odyssey, Midsomer Murders, Lewis and Wild China, have either played or will play

FTA on Prime this year.

2.22 TVNZ’s claim that there is a shortage of foreign product also seems at odds with comments made

by TVNZ’s Head of Acquisitions and Commissioning Andrew Shaw in December last year, when he

was discussing potential effects of the writers’ strike in the USA. These comments stress the

robust nature of TVNZ’s product library.

Acquisitions and commissioning chief Andrew Shaw says if the strike becomes a long-termissue, it will have significant implications because there will be less first-run US TV to screen.

“What does this mean for us? Firstly, we're fortunate we have quite a good bank of verygood programming that we can deploy.

Secondly, we have got very good New Zealand producers who can extend and vary whatthey're producing for us.

And there is a significant, unaffected English and American independent market.And, of course, there's always a growing and healthy supply of reality/non-scriptedcontent... I think we're well placed to ride it out. I feel confident we have a programmingstrategy that can survive it, that we've got choices we can make that will maintain the qualityof the output, and we've got good supply chains that mean we can work around it.” (OnFilmmagazine December 2007.)

TVNZ stated that “Uneven competition in a multi-channel FTA and Pay-TV environment is

contributing to audience fragmentation”. (See page 20 of TVNZ’s submission.)

2.23 SKY disagrees that the basis on which it is competing with FTA broadcasters is "uneven".

• TVNZ is doing more than just vigorously competing in this so-called “uneven” environment – it

is the dominant broadcaster with a 46.4% share of all television viewing in February 2008 and

18 of the 20 top most viewed television shows in 2007.

• TVNZ is leveraging off its viewership levels to extract a premium from advertisers – TNVZ

secures 65% of all advertising revenue but only has 45% of viewership.

2.24 The evidence does not show that SKY’s competition with FTA broadcasters is contributing to FTA

audience fragmentation.

• AGB Nielsen data for 2007 shows that SKY subscribers on average watch more FTA

programmes than SKY programmes and that SKY subscribers are swapping approximately

only 5 hours of FTA programmes per week to watch subscription programmes.2

• TVNZ in its own 5 year strategy document “Inspiring on Every Screen” envisages that by 2011

fragmentation will not be a problem for TVNZ – “we have learnt how to manage redirection of

audiences from our mass-appeal analogue channels to our digital channels on Freeview and

other digital media outlets”. TVNZ clearly believes audience fragmentation is largely

attributable to different media platforms rather than a result of an unfair playing field – and can

be addressed through smart business practice rather than Government intervention.

2.25 SKY believes that audience fragmentation is almost entirely due to the greater and ever increasing

range of broadcasting platforms and media content, which is good for consumers. This is a

consequence of digital technology and is not driven by SKY. Both SKY and FTA broadcasters’

audience shares are under threat from competing entertainment options like the internet and

DVDs. For example:

2 Non SKY subscribers watch 17 hours, 17 minutes of FTA channels per week (on average).

• On Tuesday night 3 June 2008 at 9pm, the home page of Trade Me had 74,330 individuals

logged on. Assuming the information is accurate and the count represented only one individual

per computer screen then if “Trade Me” had been a channel, it would have been the 5th most

watched channel at that time.

• The Online DVD rental industry (a small subset to the total DVD industry) has about 12,000

customers who on average watch a DVD once a week. Typically about 2.3 people watch each

DVD. If the viewing is spread out over the week in prime time then it is possible that on

Thursday night 5 June, over 4,200 individuals were watching a DVD from an Online Rental

service making it the 20th most watched “channel”.

• There are also DVD Box sets of television series like Lost or CSI, hundreds of web sites like

YouTube, legal and illegal downloading site for clips, movies or television series.

2.26 SKY assumes that the reference to “uneven competition” is, at least in part, a reference to SKY’s

ownership of Prime. If so, TVNZ’s assertion is completely contrary to the Commerce Commission’s

decision to grant a clearance for the acquisition of Prime, where the Commission decided the

acquisition of Prime would not substantially lessen competition in any affected market.

TVNZ claims that “[u]nlike other countries, the lack of marketplace rules in New Zealand has

allowed SKY to secure nearly all premium sports content”. (See page 30 of TVNZ’s submission.)

2.27 This claim is simply not supported by the facts. TVNZ and TVWorks are able to secure premium

sports content, as evidenced by the following purchases:

TVNZ TVWorks

Beijing Olympics Rugby World Cup 2007

America’s Cup V8 Supercar Series

Rugby World Cop 2003 Golf: NZ PGA Championship

Athens Olympics A1GP Motor Racing

Rights to NZ netball internationals

IRB Rugby Sevens (2008 jointly with SKY)

Last Commonwealth Games

FIFA World Cup 20076 (jointly with SKY)

Formula 1 from 1995-2005 inclusive

Motorsport such as NZ V8 Series andToyota Racing SeriesTennis: ASB Classic, Heineken Open

• SKY does not disclaim that it tries to secure premium sporting rights. Sports content is the

main driver of SKY’s subscriptions and it devotes 6 full time channels to sports coverage.

• However, SKY purchases the rights in competition with other broadcasters, and where it does

secure rights, SKY also aims to provide delayed coverage to high interest events on FTA. Part

of the reason for purchasing Prime was to facilitate this, given TVWorks and TVNZ’s

unwillingness to utilise such rights. Indeed, SKY has made extensive amounts of premium

sports available over FTA for the benefit of viewers (e.g. 170 hours of delayed rugby on Prime

in 2007). This is a significant increase in the amount of rugby shown on FTA prior to SKY

acquiring rights to such content.

• TVNZ has acquired sports rights and only showed them on a limited, selective and delayed

basis. For example:

• Auckland America’s Cup: TVNZ did not show all the races and refused SKY’s offer to

broadcast them.

• Beijing Olympics: TVNZ will produce eight channels of content, but intends to only show

two of these channels. Additional channels are being sold to pay-television operators

overseas, but not to SKY.

• 2003 Rugby World Cup: TVNZ did not show all games and refused to sell rights to SKY.

This is detrimental to consumers.

• SKY also differentiates itself from its FTA competitors by showing sports live and uninterrupted.

By doing so, it ensures a competitive broadcasting market – which should be encouraged,

rather than stifled.

• One of the reasons SKY’s 2010 Winter and 2012 Summer Olympics bids were successful was

because SKY is able, through its pay-television channels and Prime to make better use of the

Olympics programming than any other broadcaster by providing multi-channel and substantial

FTA coverage. This was recognised by the IOC. Compare TVNZ’s 2004 coverage of 12.5

hours per day to Prime’s 22 hour Olympic coverage commitment for 2012.

• TVNZ lists a number of sports events in its submission as “premium” that it would never

normally have bid for or broadcast. It is over-claiming the extent to which SKY has acquired

sports rights.

TVNZ claims that “the lack of marketplace rules has allowed a variety of other anti-competitive

behaviour to develop in the New Zealand market, including bundling, hoarding, cross-

subsidisation and gate-keeping”. (See page 30 and 34 of TVNZ’s submission.)

2.28 These claims are demonstrably wrong. SKY does not engage in anti-competitive behaviour and

sets out below the evidence that proves this.

Bundling/Hoarding

TVNZ claims that “SKY can use its purchasing power to secure total rights to sports events and

thereby deny access to others e.g. cricket”.

TVNZ also claims that SKY is using Prime “to secure both pay-TV and FTA rights to sporting

events” and refers to the 2010 Winter Olympics and 2012 Summer Olympics.

TVNZ alleges that SKY “seldom utilises any improvements to the FTA rights via Prime except on a

limited, selective and delayed basis”. (See page 34 of TVNZ’s submission.)

2.29 These claims are not true:

• The claim that SKY shows sports only on a limited, selective and delayed basis on Prime is

simply not supported by the facts: Prime broadcast a total of 804hrs of sports from 672

individual programmes between January 2007 – June 2008.

• SKY, TVNZ and TVWorks purchase so-called “bundled” FTA and pay-television broadcasting

rights simply because this is commonly the only way in which the rights are sold. They are sold

this way worldwide to obtain maximum value for the rights seller as well as to gain the

maximum benefit to sports bodies.

• The purchasers of the rights (broadcasters) have better information than the sellers as to the

optimal split of rights between pay and FTA television, so purchasers are in the best position to

maximize the broadcast-related revenue that can be derived from those rights. The issue for

the purchaser then becomes how best to utilise the rights. In SKY’s case, the optimal value is

obtained in most cases by broadcasting the sports event live over pay-television and, in many

cases, showing the event delayed on FTA (whether Prime or another channel). There is no

anti-competitive purpose by SKY and no unfair exercise of market power.

2.30 Where SKY purchases broadcasting rights for FTA channels as part of a bundle, SKY’s preference

is to provide a FTA broadcasting package. This makes commercial sense for SKY as it sells rights

it would otherwise not see a return from. SKY’s purpose is not to deny access to other

broadcasters for anti-competitive ends.

• From 1996, SKY entered into agreements first with TVNZ, then with TVWorks for delayed

transmission of rugby. Both broadcasters, however, showed a growing disinterest in the

delayed rights. As a result, SKY has most recently used its FTA channel Prime, to broadcast

major rugby games in full on a delayed basis. SKY also sells FTA broadcasting highlight rights

for rugby and rugby league to other FTA broadcasters.

• SKY purchased the exclusive New Zealand broadcast rights for New Zealand cricket in April

1998. After long and extensive negotiations for the renewal of the rights, TVNZ had withdrawn

from the bidding process at the 11th hour. New Zealand Cricket believed that TVNZ was only

interested in “cherry-picking” coverage of matches (see letter from Justin Vaughan, Chief

Executive of NZ Cricket).

• SKY will broadcast twice as much FTA Summer Olympics coverage in 2012 than TVNZ

showed in 2004 (12.hrs delayed and live coverage) and nearly twice as much than TVNZ is

intending to show in 2008 (12.5 hrs on TVNZ vs 22 hrs on Prime). One of the reasons SKY’s

2012 Olympics bid was successful was because it was better able to meet the IOC’s Olympic

mandate than any other broadcaster. SKY’s acquisition of rights to the 2010 Winter Olympics

and 2012 Summer Olympics is an example of healthy competition for bidding rights as

envisaged by the Commerce Commission in clearing the Prime acquisition.

2.31 Where possible SKY attempts to show its FTA rights on Prime, though of course it is not possible

to show all this content on the single Prime channel. SKY, therefore, has tried to make

arrangements with other broadcasters for some of this content to be shown (e.g. Stratos for the

England/New Zealand Cricket Tour). Furthermore, SKY has worked together with TVNZ to jointly

buy programme rights, such as the IRB Rugby Sevens and the FIFA World Cup.

2.32 SKY also notes that TVNZ has been extremely aggressive in the negotiation of production

agreements over the past three-to-four years in terms of capturing local digital rights for out-

sourced, NZ on Air funded programmes. By not granting local producers the ability to ‘on sell’ their

titles to pay-television and having lengthy licence captures on funding agreements TVNZ is able to

hold on to local content, to the detriment of local production industry, and have restricted the

availability of local content to a wide audience.

TVNZ suggests that “a la carte rules” is one method that will “promote diversity and guard against a

lessening in competition”. (See page 46 of TVNZ’s submission.)

2.33 TVNZ has not provided any evidence as to why SKY’s bundling of packages is anti-competitive or

detrimental. There should be no presumption that programme bundles are necessarily anti-

competitive or welfare-detracting. Bundling of products is widespread in the economy generally

and in many instances pro-competitive. Indeed, in highly competitive pay-television markets

overseas, there has been no major instance of a la carte pricing by multi-channel pay video

providers. This shows that a la carte pricing would not benefit consumers generally or multi-

channel pay video providers.

2.34 While a la carte pricing may benefit a few customers it would be harmful to the majority of

consumers and a major imposition into SKY’s business. The potential detriments include that

mandating a la carte pricing for pay-television would reduce the diversity and quality of

programmes offered by SKY, increase programming, equipment and marketing costs, and reduce

revenues to SKY. It would also directly conflict with many programming contracts, i.e. SKY could

be in breach of existing contracts if it were required to provide a la carte subscription packages.

2.35 In any case, competition in the provision of multi-channel services is increasing – both worldwide

and in New Zealand. Options for downloading video content via the internet have emerged and/or

likely will soon emerge. This competition may create pressure for SKY to re-package its channel

offerings, if in fact it is needed. There is no need to mandate unbundling.

Cross subsidy

TVNZ claims that SKY cross-subsidises the operation of Prime. (See page 34 of TVNZ’s

submission.)

2.36 TVNZ’s claim seems to be made at two levels:

• Prime, as a business, is being operated at a loss.

• When SKY acquires both pay-television and FTA rights, it cross-subsidises the FTA rights from

its pay-television revenues.

2.37 The first claim is true. For the first two years that SKY has owned the Prime channel, but that does

not mean that SKY is acting anti-competitively - SKY and TVWorks also made losses in their first

years. The costs for operating the Prime business are accounted for by SKY separately from pay-

television operations. While it has made a loss over the first 2 years of SKY ownership, this does

not prove anything. SKY’s intention in purchasing Prime was, and continues to be, that it operates

profitably without support from the rest of the business.

2.38 TVNZ has provided no evidence to back-up the second claim, and simply makes a bald assertion.

Prime has not used SKY’s “deep pockets” to outbid other FTA broadcasters for content – in fact,

Prime has failed to secure premium FTA content after being outbid by TVWorks and TVNZ.

2.39 There are a number of elements that TVNZ would need to prove to support its claim, not least that

SKY has some anti-competitive purpose and that Prime is the means of giving effect to that

purpose. Prime’s share of viewership (6% last year) versus TVNZ & TVWorks joint share of 65%

of viewership means that neither of these elements exists. Furthermore, Prime’s viewership share

has remained largely consistent since being purchased by SKY.

2.40 Ownership of a FTA channel by a pay-television provider is not unusual, either:

• In NZ - at one time TVNZ was SKY’s largest shareholder.

• Overseas – Consolidated Media Holdings owns shares in Australia’s leading pay-television

provider FOXTEL and also PBL Media, which owns FTA Channel Nine, one of the major FTA

channels in Australia. Also, in Australia Win Corporation owns the FTA channel Win Television

as well as the pay-television provider: Selec TV. There are also other overseas examples.

Gate-keeping

TVNZ claims that SKY has a virtual monopoly on live sports coverage and many New Zealanders

are effectively paying a “sports tax”. TVNZ also claims that a number of channel owners in New

Zealand have nowhere to go but to SKY, and consumers have to pay SKY even to watch FTA

channels on SKY. (See page 34 of TVNZ’s submission)

2.41 This is discussed and refuted exhaustively in SKY’s submissions:

• The claim that channel owners can only go to SKY ignores the development of Freeview and

broadband and the range of other transmission vehicles that have always been available.

• SKY has a history of successfully working with NZ entrepreneurs who want to set up their own

channels and broadcast them on SKY (for example, the 100% NZ owned Documentary

channel, Arts channel, Food TV, Living channel, Juice TV).

• The claim that consumers have to pay SKY to watch FTA channels on SKY is misleading and

does not recognise that most consumers can receive FTA channels by other means and SKY

only charges a minimum basis for the FTA only package to cover the cost of the set top box

and broadcast infrastructure.

• SKY carries or tunes into every national FTA channel – with the agreement or blessing of

broadcasters. The only exception is TVNZ6 and TVNZ7.

• It is TVNZ, rather than SKY, that is preventing the availability of TVNZ 6 & 7 on SKY. TVNZ’s

lawyers threatened to sue SKY if it tuned into these channels – despite one of TVNZ’s key

strategies being to “broaden the accessibility of [local] content to all New Zealanders through

whatever screen device attached to whatever platform they choose” (Chief Executive

Overview, Annual Report 2007).

• Other Freeview broadcasters have welcomed SKY tune in – including Parliamentary TV,

Stratos, Cue and Maori TV.

• By allowing SKY decoders to tune in to the Freeview channels, SKY subscribers do not have to

buy a Freeview decoder for $100 plus. This is a significantly saving for the community.

• TVNZ has commandeered Freeview. Its original purpose was to encourage viewers to switch

to digital in order to free-up analogue spectrum. But by releasing new channels on Freeview

and warning SKY off tuning them in, TVNZ has effectively restricted the availability of local

content and wasted tax payer subsidies. They have also punished viewers who have made

the move to digital but did not choose Freeview.

TVNZ claims that there is no easy path for the growth of FTA satellite transmission. (See page 34

of TVNZ’s submission)

2.42 This is not correct. SKY believes satellite transponder space is obtainable, and queries whether

TVNZ has tried to discuss this with Optus.

2.43 TVNZ had opportunities in the past to acquire transponders on the Opus D1 satellite but decided

not to take up these opportunities. These included the opportunity to bid for transponders which

SKY ultimately acquired and options over other transponders which TVNZ decided not to exercise.

TVNZ have chosen not to do this. These were commercial decisions made by TVNZ. SKY should

not be blamed for the consequences.

2.44 Further, TVNZ or anyone else can seek space on new satellites by making contractual

commitments to use transponders on the satellites – just as SKY contracted for satellite space on

the Optus D1 satellite before launch at its own risk and cost.

2.45 Further, satellite transmission is not the only transmission path. Other transmission vehicles

include digital terrestrial transmission, cable and broadband. This range of different transmission

vehicles was recognised by the Commerce Commission in its clearance decision for the Prime

acquisition.

TVNZ’s submission refers to its public funding as a percentage of revenue and states that "TVNZ

receives one of the lowest levels of public funding (as a % of revenue) of any public service

broadcaster". (See pages 11 and 16 of TVNZ’s submission.)

2.46 This figure is misleading, as it is not appropriate to simply compare TVNZ’s public funding to that of

other public service broadcasters.

2.47 TVNZ is one of the few - if not the only - major public service broadcasters to receive any direct

advertising revenue whatsoever. Therefore, TVNZ's revenue stream is naturally differently

weighted to such public service broadcasters as ABC Australia, the BBC in the UK or PBS in the

USA, who are not required to bring in any such direct commercial revenue. Accordingly, these

broadcasters are proportionally more heavily publicly funded than TVNZ with two different revenue

streams; public funding and advertising revenue.

TVNZ’s submission contains a table purporting to compare New Zealand’s policy environment to

other OECD countries. The table gives the impression that all the types of measures and policies

exist in other countries. (See pages 26 and 27 of TVNZ’s submission).

2.48 The TVNZ table is incorrect because New Zealand does have legislation or other measures in

many of the areas mentioned.

Objectives for policiesand measures

TVNZ’s position: SKY’s position:

Plurality of voices in themedia

NZ has the draft digital strategy, NZ OnAir policies and funding, and Charterfunding

Cultural diversity andnational identity

NZ has an effective voluntary localcontent quota, TVNZ charter funding,establishment of Maori TV

Programme diversity NZ has policies and monitoring inplace on programme diversity, NZ OnAir policies and funding, Charterfunding

Efficient allocation ofspare spectrum

NZ’s current radio spectrum allocationpolicies provide for efficient allocationof broadcasting spectrum and theCommerce Act applies to anyacquisitions

Universal coverage of afree broadcastingservice

NZ has no policies orvery limited policies

NZ has a long-term strategy to ensurenationwide FTA coverage, includingprovision of subsidies by NZ On Air,funding of TVNZ directly by MCH,development of the Freeview platform

Objectives for policiesand measures

TVNZ’s position: SKY’s position:

Restriction onadvertising

NZ has no policies, verylimited policies, or is selfregulating

NZ has restrictions on advertising onSunday morning, and some publicholidays, a prohibition on tobaccoadvertising, self regulation of alcoholadvertising and advertising aimedtowards children (but with potential forregulatory intervention)

2.49 The TVNZ table is also misleading because the extent to which each other country has the

measures identified differs. The TVNZ table should have identified which country or countries

New Zealand is being compared against.

2.50 Furthermore the TVNZ table fails to refer to the competition law requirements under the Commerce

Act and compares policies and measures to ensure plurality of voices in the media while ignoring

that New Zealand has a plurality of voices without specific policies or regulatory measures – for

example, the Hindi channel, and Mandarin channels on SKY and Maori TV.

TVNZ claims that New Zealand has paid little attention to the broadcasting and media competitive

environment (See page 25 of TVNZ’s submissions).

2.51 This statement is not correct. The Ministry of Economic Development, the Ministry for Culture and

Heritage, and the Commerce Commission all play an active role in ensuring competition in the

broadcasting and media environment through regulation, investigation, investment and resource

allocation. Some examples are: the review and regulation of the telecommunications industry, the

creation of Freeview digital platform, the allocation of spectrum licences, the allocation of

competitive content funding through NZ On Air, Commerce Commission oversight of mergers and

acquisitions, the draft digital strategy, to name but a few.

3. RESPONSES TO TVWORKS

3.1 This section sets out SKY’s detailed comments in claims on TVWorks’ submission.

TVWorks states in its submission that “the public is not well served by having a Pay TV monopoly

in New Zealand. As with any monopoly, there are few controls on pricing and New Zealanders are

charged fees in excess of what would be likely in a competitive situation.” (See page 5 of

TVWorks’ submission.)

3.2 Firstly, SKY competes with TVWorks and TVNZ for content, advertising and viewers. SKY

(including Prime) last year had a 33.7% share of viewership, which is less than TVNZ with 46.4% of

viewership.

3.3 Secondly, SKY’s fees are directly comparable and consistently lower than those earned by pay-

television providers in Australia, the UK and US. This is demonstrated by the following broad

comparison of prices for comparable packages between Europe, BSkyB, SKY and Foxtel:

Sports package Movies Package Sports & Movies

Euros

European Average 42.64 43.10 53.52

BSkyB 47.08 47.08 56.77

SKY NZ 35.87 34.06 54.24

Foxtel 34.32 41.08 52.10

Note: European coverage and BSkyB figures taken from PWC report 29/2/2008 prepared for BSkyB on outcomes forconsumers in relation to pay TV in Europe (see www.ofcom.gov.uk). SKY NZ and Foxtel prices (over the same period)have been converted to Euros on the average exchange rate for November 2007.

3.4 Furthermore, SKY’s channels are packaged in a similar way that most, if not all, pay-television

providers sell their rights. TVWorks provides no evidence of overcharging by SKY.

3.5 Thirdly, and most importantly, SKY offers a service that appeals to the New Zealand public and

meets the needs of viewers. If SKY is to secure subscribers, SKY must provide a better service

and more choice than FTA channels – 730,000 subscribers believe SKY is value for money.

TVWorks states in its submission that “there is [on SKY] a huge quantity of sport available, and

SKY has seven channels and sometimes more devoted to sport of various types. For the sports

aficionado SKY is a good bet, and 99% of the sport that is on SKY should remain there for those

who are interested and willing to pay.” (See page 7 of TVWorks’ submission.)

3.6 SKY agrees.

TVWorks also states, “[h]owever, when it comes to a few key events such as the Olympics,

Commonwealth Games, All Blacks Tests and ODI Cricket there is a strong case to be made that all

New Zealanders should have free access to these events”. (See page 7 of TVWorks’ submission.)

3.7 Since 1996, the key events listed above have been broadcast on FTA, with the exception of One

Day International Cricket (for the reason stated in paragraph 3.9 below).

3.8 TVNZ or TVWorks have won the rights to broadcast many of these events in the past (for example,

the Rugby World Cup, Olympics, Commonwealth Games). Where FTA channels have won these

rights, many of the events have been shown delayed, highlighted, interrupted for advertising or not

at all.

3.9 Where SKY has won the rights to these events, it has recognised the importance of these events

for all New Zealanders. SKY has mostly showed these events in their entirety in real-time and

often ensured delayed coverage of these events has been available on FTA. In the case of some

One Day International Cricket matches, it has been FTA channels which have not been sufficiently

interested in events to broadcast full coverage of the events because of their length and impact on

viewing schedules.

3.10 For more evidence on sports broadcasting and FTA requirements for key sporting events, see

SKY’s submission of 4 April 2008, paragraphs 6.1.8 - 6.1.30, which provides a detailed,

substantiated response to this issue.

TVWorks states that “Pay TV cannot create the same sense of “event” and excitement that Free to

Air, with its virtually 100% reach, can… Without full coverage Free to Air TV screening of major

sporting events, a sport will find it more and more difficult to grow”. (See page 7 of TVWorks’

submission.)

3.11 SKY is committed to ensuring sports are shown live and uninterrupted – SKY believes this is a

crucial part of ensuring the excitement of a sports match is retained. Due to scheduling constraints

and advertising incentives, FTA channels have often shown key events (such as the Rugby World

Cup or the Olympics) delayed or interrupted. This detracts from the sense of “event” and

excitement.

3.12 Pay-television has been responsible for creation of events such as the Super 14 and the trans-

Tasman netball. Without the revenue that pay-television has provided these competitions would

not have existed.

3.13 More importantly, broadcasting rights are an essential source of revenue for sports codes to retain

top talent from moving to more lucrative contracts overseas. Without top players competing at the

major sporting events, the appeal of the events is reduced – for sports players, television viewers

and fans attending live matches.

3.14 In their submissions, sporting codes or sporting representative bodies have emphasised the value

that SKY's broadcasting brings to their sporting codes. They believe this would not be delivered by

FTA. For example – the New Zealand Rugby Union emphasises that “the number of rugby

matches broadcast has dramatically increased since agreements were entered into with SKY, from

38 in 1995 (including 5 live) to over 200 in 2007”. SKY’s contribution has helped, rather than

hindered, the growth of sport in New Zealand.

TVWorks suggests that “NZRU, NRL and many others are exclusive providers of sport to the

country…these codes [should] be legislated to unbundle their sporting packages for both the good

of the sport and the benefit of the consumer.”

“In Europe, football has been the object of unbundling legislation to the benefit of all.” (See page 7

of TVWorks’ submission.)

TVWorks suggests that “[a]n alternative to unbundling would be to enact anti-siphoning legislation.

That could be phased in over a number of years, and would only apply to a very limited number of

high profile sporting events”. (See page 8 of TVWorks’ submission.)

3.15 Forcing sporting codes to unbundle their sporting packages would:

• Be harmful to the sporting code:

o Because regulation would diminish the value of sports rights for sporting codes, it would

reduce the funds available to support re-investment in sport at lower levels. Justin

Vaughan (Chief Executive of NZ Cricket) acknowledges how:

“[a]ny move towards anti-siphoning regulations would significantly decrease the value

of any future [broadcasting rights] agreement – and this reduction in value would have

direct consequences on the amount New Zealand Cricket can invest into all levels of

the sport.”

• Be detrimental to consumers:

o This can be illustrated using an example of the European football unbundling referred to by

TVWorks. In the UK, the compulsory split of the Premier League rights between pay-

television providers Setanta and BSkyB, by dividing games into a large number of

packages, has meant that audiences cannot be sure of viewing comprehensive footage of

their home team without purchasing two subscriptions. Because coverage of all games

cannot be guaranteed, the expectation is that subscription levels will drop, which will mean

that there will be no incentive to purchase the rights in subsequent seasons. This will

affect the money the content provider receives, which in turn affects the sport’s revenues.

It also means that consumers will get less choice in the programmes they watch.

TVWorks claims that “[t]he unlevel playing field caused by the cross-ownership of Pay-TV and Free

to Air television is possibly the biggest medium term threat to the future of Free to Air television in

New Zealand”. (See page 6 of TVWorks’ submission.)

“The solution is to enact legislation requiring SKY to divest itself of Prime TV. This is consistent

with Cabinet’s objectives by ensuring diverse platforms and ensuring the operation of effective

markets.” (See page 6 of TVWorks’ submission.)

3.16 SKY’s ownership of Prime has not given it any “dominance” in the broadcasting market. Prime

currently has a viewership of 6% versus TVNZ & TVWorks joint 65% of viewership. The

Commerce Commission cleared SKY’s purchase of Prime on the basis that it would not

substantially lessen competition in any of the affected market. This is convincing evidence, as

opposed to TVWorks unsupported assertions.

3.17 Prime has not used SKY’s “deep pockets” to outbid other FTA broadcasters for content – in fact,

Prime has failed to secure premium FTA content after being outbid by TVWorks and TVNZ. An

example of this competition, with no evidence of an “unlevel playing field” in SKY’s favour, can be

seen in the competition over the Granada package. Although SKY was able to bid competitively

when the package came up for renewal, its bid was unsuccessful. If anything, TVNZ and TVWorks

have been better able to secure exclusive deals with studios than SKY has. For example, TVNZ

holds the rights to the Disney, Warner, Sony and Granada packages, while TVWorks has rights to

the Fox, NBC Universal and CBS Paramount packages.

3.18 In any case, SKY’s ownership of Prime is not unusual and certainly not “one of a kind”, as

discussed in paragraph 2.40 above.

3.19 SKY also notes that TVWorks’ suggestion is inconsistent with the Government’s objective of

ensuring diverse platforms for broadcasting. When Prime went up for sale, no one but SKY was

realistically interested in purchasing it. If SKY had not purchased it, it is possible that Prime would

have ceased business, and it certainly would not be able to compete as well as it now does. SKY’s

acquisition of Prime has ensured greater competition in FTA, for the benefit of viewers.

TVWorks states how in the past, “[v]irtually all the VHF frequencies available in the country were

used by TVNZ and TVWorks for television networks owned by those companies… This meant that

TVNZ and TVWorks were able to attract large audiences due to the advantage of their ‘reach’ ”.

(See page 2 of TVWorks’ submission.)

TVWorks states that “[o]ne of the primary goals of this legislative review must be to ensure the

continued health of those broadcasters [TVNZ/TVWorks] in the face of all the new challenges that

the digital world will bring”. (See page 3 of TVWorks’s submission.)

3.20 SKY disagrees that the continued health of existing television broadcasters should be the focus of

the review. This is not the stated purpose of the review and there is no evidence of the “poor

health” of TVWorks or TVNZ3. The focus of the review was clearly intended to be on the

development of digital broadcasting for the benefit of all New Zealanders. Focusing on protecting

3 See paragraph 2.2. The viewership figures above suggest TVNZ and TVWorks are in great health.

specified broadcasters is not only unjustifiable, but any attempt to protect the “continued health” of

FTA broadcasters may mean that many of the benefits of digital technology may not be realised

and large inefficiencies created. The result could be larger costs for tax payers, less choice for

viewers and a lesser contribution from the broadcasting sector to New Zealand society than would

otherwise be the case.

TVWorks claims that “[i]nstead of the current scenario where only four television channels have

access to VHF frequencies, dozens of channels will have access to digital frequencies on an equal

basis to TVNZ and TVWorks. …It could be argued that a loss in viewing to TVNZ or TVWorks will

be compensated for by growth in other channels… but many of these new channels are simply

rebroadcasts of foreign content that add nothing positive to the production community, but take

fees from subscribers out of the country to fund international operations”. (See page 2 of TVWorks’

submission.)

3.21 SKY does not agree that growth in other channels will add nothing positive to the production

community. SKY believes that the digital environment will allow further competition not only in

digital broadcasting, but broadcasting from other platforms.

3.22 TVWorks’ seems to be trying to protect its market position through regulation, and appears to be

afraid of the competition digital technology will bring.

3.23 It appears TVWorks is referring to SKY when it refers to channels that simply provide foreign

content, and takes fees from subscribers out of the country to fund international operations. This is

completely untrue. To the contrary, SKY carries a lot of local content (see latest NZ On Air survey)

and a large number of its shareholders are New Zealanders. This assists the local production

community. Furthermore, and ironically, TVWorks is almost 100% foreign owned – as opposed to

SKY which has a substantial New Zealand shareholding base.

3.24 SKY also considers that TVWorks’ comment is inconsistent with TVWorks’ suggestion elsewhere in

its submission to have additional funding for its Freeview channels. TVWorks appears to be saying

that viewers should not have more content choice, unless that content choice is tax payer funded

and provided by either TVWorks or TVNZ.

4. SKY’S RESPONSE TO OTHER SUBMISSIONS

4.1 This section sets out SKY’s response to claims in Freeview’s and SPADA’s submissions.

Freeview

Freeview stated that “With the exception of sports and music, the pay-TV sector typically has avoided

local content as this content does not fit into its subscription-based pay-TV model.” (See page 3 of

Freeview’s submission)

4.2 This is not true. SKY broadcast 16,488 hours of local content in 2007, which included

documentaries, special features, news and concerts, feature films, short films, sports and locally

produced music videos. In 2007, SKY showed 17 NZ feature films, 83 NZ short films, and 27 NZ

documentaries – a total of 1305 hours of premium NZ content, other than sports and music.

(Source: NZ On Air, Local NZ Television Content 2007). Furthermore, every year local content on

SKY increases without Government subsidy or intervention. SKY would like to broadcast more

local content but much of this content is tied up by TVNZ7.

One “asymmetric” regulatory option considered by Freeview is:

• Broadcasters should be free to choose whether they wish to broadcast their channels on the SKY

digital platform.

• All near national FTA analogue broadcast licence-holders are required to broadcast their channels

digitally i.e. on Freeview. (See pages 9 and 10 of Freeview’s submission).

4.3 The first comment is not correct. Broadcasters are already free to choose whether to broadcast

their channels on SKY’s digital platform. In the past, TVNZ and TVWorks reached agreement with

SKY to broadcast their channels on SKY. Other broadcasters have welcomed their channels being

decoded by SKY set-top boxes (e.g. Parliament TV, Maori TV, Stratos, Cue). However, last year,

TVNZ chose not to broadcast TVNZ 6&7 on SKY’s digital and warned SKY off tuning in or

broadcasting these channels.

4.4 Freeview’s position also seems inconsistent with its approach of encouraging viewers to use SKY

funded infrastructure (namely SKY installed satellite dishes and/or UHF aerials which were

installed by SKY at its cost and which under SKY’s subscription agreement are owned by SKY) for

the reception of Freeview, and to make use of the SKY decoder to power the LNB (Low Noise

Block Down Converter), which amplifies the signal received by the dish.

4.5 In relation to the second comment, SKY would be in breach of its contractual obligations with

SANZAR and the NRL if it was required by legislation to broadcast Prime over the Freeview

satellite service. Prime broadcasts delayed rugby and rugby league footage in NZ over UHF – any

unencrypted satellite transmission of this footage by Freeview may allow viewers in other countries

(e.g. Australia, Pacific Islands) to tune into the footage, instead of locally transmitted footage.

Freeview’s suggestion would therefore create contractual issues for SKY.

4.6 SKY notes that this problem would not arise with Freeview’s DTT service. The cost to SKY in

doing so would be $2.2 million a year - $1.625 million per annum transmitter, transmission and

linking to Kordia for HD services, plus annual Freeview costs and capital costs for infrastructure

upgrade at Prime’s Albany’s Studio. Accordingly, once Freeview DTT viewership numbers reach

an appropriate level, SKY intends to transmit Prime on the DTT platform.

4.7 Because the cost is considerable, (Prime’s entire revenue was only $22.09 million last year) SKY

believes that it should be up to broadcasters to make their own decision about whether the move to

Freeview is commercially viable. Otherwise the imposed cost may affect the viability of small FTA

channels, actually reducing content choice in the long run. SKY should not be forced to transmit

over Freeview especially when it would be at their cost.

Freeview stated that:

“For Freeview to maintain its relevance and attractiveness in the face of competition, its broadcasters will

need to have a clear expansion plan and route for obtaining more spectrum. During the process of

creating the initial licence sets for DTT transmission MED designed a five set plan, subject to further

spectrum clearance work. To enable the allocation of these sets therefore requires nothing more than a

definitive Government policy to that effect.” (See page 11 of Freeview’s submission.)

4.8 There is no impediment to additional licence sets for DTT transmission under current spectrum

structures. The Freeview partners have already been given plenty of spectrum on concessionary

terms.

4.9 Further, there is no reason or need for intervention in the allocation of spectrum in favour of

Freeview. Freeview should compete for further spectrum fairly with other broadcasters. Any

concession terms or preferences for Freeview could result in the inefficient allocation of spectrum

and its inefficient use.

Screen Production and Development Association (SPADA)

SPADA states that “…New Zealand is unique (and it is suggested, not in a positive way) by international

standards in allowing Pay TV operators to “free ride” due to the lack of obligations around local content in

return for licences”. (See page 12 of SPADA’s submission)

4.10 SKY has not had a “free-ride”:

• SKY is New Zealand’s first pay-television provider. When SKY was set up in 1990, demand for

pay-television was uncertain. SKY took considerable risks and invested heavily to develop

new and innovative broadcasting and digital services, a total of $1.0396 dollars to date. SKY

also made substantial losses for a number of years - $237 million from 1990-2002).

4.11 SKY broadcast 16,488 hours of local content in 2007 which included documentaries, special

features, news, concerts, feature films, short films, sports, and locally produced music videos.4

4 NZ On Air, Local NZ Television Content 2007.

SPADA claims that as opposed to nearly every other Western country, pay-television operators in New

Zealand are able to retransmit free-to-air channels without paying a cent to copyright owners.

4.12 This is incorrect and shows an astounding misunderstanding of the Copyright Act. SKY’s current

retransmission of the FTA channels is by agreement. Without this agreement, SKY would not be

able to retransmit the FTA channels. In New Zealand only cable retransmission is permitted as of

right under section 88 of the Copyright Act. If retransmission is carried out under section 88,

copyright owners could establish a licensing scheme under which a charging regime could be

established.

SPADA states that SKY acts as both a network and a content aggregator.

SPADA submits that “Depending on the market penetration of Freeview, SPADA believes this issue may

need to be addressed through separating operations, as undertaken with TVNZ and Telecom; potentially

offsetting the growth of market dominance by sole operators.” (See page 26 of SPADA’s submission)

4.13 The argument that separation has been pursued in other industries is very weak. The competitive

circumstances and other factors in those industries are very different than the television industry in

New Zealand.

4.14 The rational given for split of TVNZ and Kordia by Michael Cullen at the time the separation was

announced was that given the different natures and objectives of the two parts of TVNZ's business

it was more appropriate that they operated completely separately, not within the same company

structure: "A different mix of skills is needed for the governance of each business and this can best

be achieved by having separate companies" – not to address growth of market dominance.

Therefore the split does not create any kind of precedent.

SPADA submits that New Zealand audiences should have access to events of national importance and

cultural significance, by giving priority to free-to-air television broadcasts in acquiring the broadcast rights

to premium content. (See page 23 of SPADA’s submission.)

4.15 Most of the “premium content” referred to is related to major sport events. SKY agrees with the

sentiments expressed by Sport and Recreation New Zealand (SPARC) in its submission - such as

questioning whether FTA broadcasters could provide comprehensive coverage of major sporting

events.

4.16 Also, TVNZ has previously “cherry-picked” only the most high-profile events and shown little

interest in buying (and essentially sponsoring) an entire sports package. This has negative flow-on

effects, particularly harmful to sport at its grass roots.

4.17 SPADA’s membership does not include sports bodies and most of its members are not directly

involved in producing sports coverage. SKY therefore queries how much knowledge SPADA has

of these issues. Further, the sports bodies (e.g. NZRU and NZ Cricket) have a different view than

SPADA.

5. NO JUSTIFICATION FOR VERTICAL SEPARATION OF SKY AND/OR “OPEN ACCESS” TO

SKY’S PLATFORM

5.1 Finally, SKY wishes to briefly comment on call for separation of SKY or open access to SKY’s

platform that TVNZ and other submissions have sought.

5.2 All national FTA channels are available on SKY other than TVNZ6 and TVNZ7 (due only to TVNZ’s

stance on this). According to figures provided by TVNZ, the FTA channels retain about three-

fourths of the share of the audience for television in New Zealand (with TVNZ alone accounting for

well over half of the FTA share).

5.3 There does not appear to be any “competition problem” that would justify mandating the substantial

regulatory changes sought by TVNZ and others.

5.4 Quite apart from there being no justification for such claims, there would be serious detriment to the

broadcasting environment in New Zealand:

• Any such separation or open access regime would place significant costs on SKY and on

consumers and lead to a reduction in revenue to sports bodies. These costs and affects have

not been taken into account by the submitters who support such policies for self interested

reasons.

• No evidence has been provided for how vertical separation along the lines suggested (or “open

access”) would benefit broadcasters or competition more generally. It is difficult to see how the

changes would achieve any of the review’s aims.

• The argument that separation has been pursued in other industries is very weak. The

competitive circumstances and other factors in those industries are very different than the

television industry in New Zealand. The separation of Kordia and TVNZ does not create any

kind of precedent, particularly as it separated the broadcaster from the provider of transmission

services and both were Government-owned.

• Requiring SKY to provide free access over its facilities, after the investments it has made in

those facilities, and the risk it took in doing so, interferes in its commercial decision-making and

would set a precedent that would generally work to discourage future investments, both by

SKY and other companies considering to invest in broadcasting and other digital services.

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