TelstraClear CEO Allan Freeth says the company will not be shutting its HFC cable and intends to compete head-on with Ultra Fast Broadband in Christchurch and Wellington, while using the network to carry its services in other areas. In part one of this Q and A, Freeth tells Sarah Putt that content will be key to UFB uptake and discusses the telco's relationship with Sky TV.
What is your TV offering going to be, because at that moment you just resell Sky?
Its part of the wider question. There has to be a reason for people to move to fibre. There has to be something different on their screen. That’s the first principle.
The second principle is the only way you’re going to win, as a Retail Service Provider (RSP), more customers than the other guy is either give it away or differentiate your service package bundle. The way we think that differentiation is going to occur is going to be content. And content is going to be the key for uptake on UFB.
Now how that gets addressed in a commercial or a regulatory sense is open for question. But our view is the pressure is building on organisations like TelstraClear, and our competitors, to find ways of sourcing content that can be unique to them or can be combined and bundled in ways that are unique to them.
I don’t want to talk about our TV offering because it’s going to be very exciting, but at the moment we have a very strong partnership with Sky. We value that, it’s important, but the world is changing as well and that’s part of our ongoing discussions.
Have Sky opened up negotiations with you?
We’ve had a number of variations with Sky over the years; we’ve got our re-negotiation coming up early next year. We haven’t stopped talking to them or to anyone else about the issue of content.
Can we look at some of those contracts between Sky and the ISPs? My understanding is that in those contracts the ISP is prevented from entering any kind of joint venture with any other company, yet Sky can partner with anybody it likes. Is that true?
That’s roughly right. It’s about accessing content for pay TV.
If you look at us today, we can’t source content from anywhere else and charge for it without going through Sky, but Sky has the same deal with Telecom, Vodafone, everyone else. It is very asymmetrical.
Some government ministers are correct in saying there is nothing stopping you doing that, but that’s slightly naive because we have a lot of money tied up with customers today that we would lose if we broke contracts. There are barriers to entry about making those sorts of commercial moves.
And the pain has to get intense enough before commercial organisations will make those types of moves and decide to break contracts and lose some money.
How many customers do you have on the Sky service?
Around 45,000 have TV with us.
Your assessment of the contract situation is about right. That was a very suitable arrangement in days gone by before the world and broadband and content and internet and everything’s changed on it. I think you have competition in services and products; eventually you are going to have to have competition in content.
John Fellet said in a conversation with Computerworld that if ISPs want to go and get extra content you have to engage Sky as your agent.
Yeah you do.
And you have to pay Sky a fee for it.
And if he likes it he can have it.
He can have it on the same terms as what you have it.
And if he thinks it is in any way going to interfere with programming he’s already acquired, or it’s going to put the price up, or he doesn’t want to do it, he doesn’t have to.
We have a little more freedom than that, because we have a headend we can create another channel for our customers and I can’t be absolutely precise with you if he could stop us. I mean we have some channels he doesn’t have. We’ve got a specialist channel, he does it for us. We have a couple of channels that are not in the Sky line-up that he’s secured for us. But effectively what you said is true and its part of a big ecosystem.
One of the barriers for entry is that it’s very expensive and very difficult negotiating with Hollywood if you’re a small outfit. Even a Telstra, which is big outfit, faces these issues. People have expertise and skill in it, like Sky, who have the rights, [and] it becomes much more cost effective to utilise those individuals. But there are other aggregators which we think we should be able to go to, and say we’d like some of that content please.
Now the other core thing is... the nature of the bundle and you can’t break the bundle apart. And of course what drives pay TV is the sport. I think Sky TV is a very fine company and I think it’s been a very fine business and it's run by an extremely clever and hard commercial business man who I really admire, who we have a really good partnership with, but as the fibre comes in, and as behaviours change, I think the flexibility is going to require some change.
I think he identified in your interview subscription Video On Demand (VOD), which is the real key to all this.
I understand that if any ISP that is signed with Sky wants to do its own VOD service it has to tell Sky exactly what it’s going to do and give it all its commercial terms first.
I don’t know about that, but what Sky won’t allow us to do is subscription VOD. Remember we have a pay per view service – but it’s not VOD because you have to wait until the time comes up. But I think Sky would be inclined or allow us to have pay per view VOD, the problem with that is people don’t want to do it. All the international research we’ve been looking at says you have to have subscription VOD, where it’s so easy.
For $8 a month I can get all the movies I want…
Yes, [without that] then you’re not going to be successful. Again, Sky TV knows that and that will be a bastion he [Fellet] will defend to the hilt I imagine.
It’s happening anyway, the business models are changing and they’ve been changed by the consumers. And our big argument around IP – the movie studios and recording industry - their business models are done. They’ve got to work out how they’re going to change it all in this world where all our research shows – and we’ve done a lot of research of these consumers – is they don’t mind paying, but they want it now. They aren’t that happy about it going through an intermediary, they’d much prefer to give the money to the struggling artist, but if they don’t have an English or an American credit card they can’t get BBC content, they can’t get this other content, so they’re not going to wait. They’re going to find it another way.
Our view has been that the intellectual copyright act was largely protecting a business model and really shouldn’t have involved us.
The government has said we are not going to create a joint regulator. In fact they’ve said Sky will have the biggest threat with UFB because you can get the sport direct, and you can go to Netflix direct.
But you can’t and that’s where… I’m a business person so I’m not in favour of regulation per se. I think markets should work in general. But the type of arguments they’re putting are just naïve at best. Because the whole point about technology is convergence has occurred and there is no real difference between content and TV and broadcasting. They can pretend all they like but the biggest problem that will make UFB a white elephant is if they don’t fix what people can see and can have access to and have the ability to get it in an unconstrained and competitive forum. And customers should be able to do that, customers should be able to say I want to see that and I want the best offer I can get. They can’t get that today.
John Fellet says Netflix is coming, they’ve just got to negotiate rights in every single territory, they just haven’t got around to NZ yet because we’re so small.
I just think it’s an argument of the current time. Netflix isn’t coming, I’ve never met them. At the moment none of us can access that without losing important revenues and other aspects to the rest of the bundle. Netflix doesn’t have rugby.
You’ve got to have rugby?
I’m afraid if you look at our stats for Sky usage, sport is the key. Followed then by movies, but sport is the big one.
The ideal scenario from a TelstraClear perspective would be – you continue to buy the sport from Sky, but you’d want to buy movies from…
I’m very happy in our partnership with Sky, but I’d like to have some more partnerships with a lot of other people.
It’s true that if we wanted to we could do that, but the barriers to entry of doing that, plus the core crown jewels content is sitting locked up there.
I understand the only way you can break the contract is if Sky itself becomes an ISP?
There are lots of different ways the contract can be terminated, but I can’t recall if that’s one of them.
If they did, become an ISP like Sky did in Britain, and you decided to break the contract, those subscribers belong to Sky, don’t they?
If today we did something that contravened the contract, then we have to move all the customers back to Sky. So that’s a barrier to entry. John Fellet is right in one respect, we signed a contract, we knew what we were doing, and that contract has changed over the years. But as in every commercial relationship we’re adapting to the market and we’re expecting more flexibility, as indeed our customers expect more flexibility from us.
I just think it’s inevitable, it’s just a question of how long and at what point the government will realise that part of the problem of uptake on the UFB is because people don’t have a need or a use for it at the moment.
The thing that would shift it is if the government looks at regulation in this area?
Yes they could force unbundling, and they could force more competition.
Unbundling would mean you could buy the sport separately?
They could force them to do that. It doesn’t seem that they have too much concern about private property rights because they destroyed a lot of value in the telco sector. It’s very hard for John Fellet to say ‘you’re taking away shareholder value’. Ask Telecom shareholders about that.
What about bringing an action under section 36 of the Commerce Act, when you say it’s anti-competitive.
I don’t know enough about that to know whether that can be applied. As I say, more than likely that these types of issues will be worked out commercially. What’s Telecom going to do with its content play? It’s now a retail player, it’s got to have differentiated content as well.
You started this conversation saying that in the next six months you will have some compelling content offers.
I said we would be bringing something different to market.
But your contract with Sky is not up for another year.
But as I say, I don’t really want to talk about that in detail, other than to say watch this space.
Where do think the Commerce Commission’s demand side study will end up?
I think they understand the issue quite well. I think they are clearly restricted in their mandate from what they are allowed to do as a body.
*This is the fourth article in a series about Sky TV and its relationship to telecommunications in New Zealand that will run this week. Tomorrow we conclude our Q and A with Allan Freeth and discuss datacaps, peering and the Copyright Amendment Act.
See also: What is in the contracts between ISPs and Sky TV?, Is video on demand a telco service?, Is there a case for content become a telco service? and How will copyright notices, datacaps and peering affect content delivery?