What happens when content providers and network operators merge?

In recent times, New Zealand has been the focus of international interest for its many ICT “firsts.” In the 1980s, it was the first country to experiment with communications markets ruled solely by competition law. More recently, it has attracted attention for its experiment with extensive government subsidies for a nationwide fiber-to-the-home network. Last week signaled that New Zealand communications markets may become the center of international attention again, this time for the position taken by its version of the FTC to the proposed merger between content provider Sky Television and communications giant Vodafone. The proposed merger is monumental.  New Zealand might be the first, but certainly not the last. Regulators in other jurisdictions will inevitably be called on to address similar mergers as the content business consolidates internationally, and as Internet Service Providers (ISPs) struggle to find a business model that works in the modern world.

Is Sky the limit?

Sky Television has dominated New Zealand’s pay broadcast media for decades. It holds the local distribution rights for almost all popular local and international sports content for the next few years – including for rugby and cricket; New Zealand’s answer to football and baseball. Furthermore, it has tied up the local distribution rights for almost all of the popular networked channels and their shows from both the United States and the United Kingdom. Its control of these content rights is one of the reasons why Netflix in New Zealand is a much paired-down version of its US counterpart. Sky has no regulatory obligation to make its content available to rivals – although it has voluntarily entered into many bespoke redistribution arrangements. Recently, Sky has also moved into the video-on-demand business, making much of its television content (including a substantial movie catalogue) available to subscribers over the (fixed) Internet infrastructure via its MySky application. It has also dominated customized delivery of content – predominantly, but not exclusively, live sports – to mobile devices via its SkyGo application. However, the company is vulnerable to competition from other content distribution networks when it re-bids for its current rights and new ones. There is no doubt that it is losing customers as new players such as Netflix enter the New Zealand market. Retaining customers (and revenues to bid for future content rights) takes deep pockets.

Vodafone: One ISP to rule them all?

Vodafone has been New Zealand’s dominant mobile operator (in a market of only two-and-a-half network operators) since the late 1990s. It owns New Zealand’s only cable network (which resells Sky content) and is the second-largest player in a highly-concentrated fixed line market – a position it acquired in 2012 by buying the former number two operator and cable owner TelstraClear – itself the product of earlier mergers. The problem that Vodafone and other ISPs in New Zealand’s rapidly concentrating market face is not dissimilar to that of US ISPs: How do you survive as margins erode in all relevant infrastructure sectors? The situation for ISPs in New Zealand is made more acute by structural separation. Motivated by concerns not dissimilar to those of net neutrality, separation prevents ISPs from engaging in technological means of differentiating their offerings from those of rivals. Their differentiation must occur in the way they sell access (contractual innovation) and in applications that utilize internet access. This makes it almost inevitable that New Zealand ISPs will migrate towards becoming major players in the content market if they are to remain participants in sector innovation. Vodafone is not alone in this – its major rival Spark owns content distribution network Lightbox.

The commission’s dynamic dilemma

The Vodafone/Sky merger seems both inevitable and the source of a substantial short-term lessening of competition in the New Zealand content distribution market (at the very least, the satellite and cable operators will become co-owned). However, the content world internationally is changing rapidly, and prudent merger analysis should consider dynamic as well as static effects. Sky’s market power over today’s Game of Thrones aficionados may not exist if another player – which may not even be a New Zealand firm - can bid for the future distribution rights. But if the merger is prohibited, what future options are there for ISP innovation? Those and other questions will be answered as New Zealand makes a decision on this mega merger and potentially claims another “first” in the global Internet economy.

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