Ihug will continue to compete in the pay TV market with its new shareholder Sky Television – but the deal between the two companies brings the prospect for a universal digital TV set-top box for New Zealanders much closer.
Sky was moved to take its 30% stake – with an option for a further 15% - in the Auckland-based ISP Ihug by its own need for an Internet offering and by Ihug's strong financial performance, says Sky chief operating officer John Fellet.
Ihug is preparing to launch its own digital TV service, IDTV, offering some of the same programming as Sky along with high-speed Internet service beamed out from Auckland's Sky Tower. Sky has in the past disparaged Ihug's ability to run a pay TV service, but Fellett says "we didn't buy them for their pay television expertise."
Neither side is yet ready to say how or whether their respective digital TV platforms will converge.
"If there's any decision on a [comon] box, obviously it'll have to be a joint issue," says Fellett. "Keep in mind you still have two independent companies. They may have some common ownership, but at the end of the day I wouldn't ask our shareholders to take a haircut just to help them out if it was a bad deal. Likewise, they're not going to do a deal just to benefit Sky.
All New Zealand broadcasters, and most of those outside the US, have agreed on the DVB standard for digital TV. Like its European sibling, BSkyB, Sky chose set-top boxes from UK vendor Pace Micro. But Sky's boxes currently only support DVB-S, the direct-satellite variant of the standard, and the company has rebuffed entreaties from TVNZ to add a demodulator for DVB-T, the terrestrial version being trialled by TVNZ subsiary BCL.
Ihug has already announced TV set-top boxes based on the Korean-made Teleman "set-top box on a card" which can also be used in PCs, but recently decided to delay release of the boxes in order to develop its own operating system for them.
Fellett agrees that the Ihug deal does make a universal set-top box for the New Zealand market more likely: "Obviously if we were totally compatible then it would be crazy to have two different boxes. The more people using one box the more likelihood it becomes a universal standard, but it wouldn't be something mandated by law."
Sky is one of a number of potential investors who came to Ihug when the company announced it was seeking capital to pursue its development plans early this year.
"We had a lot of interest and there were some pretty big people involved, but we chose Sky because they have obvious synergies," says Ihug director Tim Wood. "They're people we can work with, too – there are synergies of personality."
Both men say the two companies will continue to compete in the pay TV field, where Sky has more than 400,000 subscribers and Ihug is gearing up to launch its IDTV digital service, which will initially be delivered to TVs and PCs from Auckland's Sky Tower.
Given that Sky also has an option on a further 15% of the company, it is highly unlikely that any other investors will come in. Remaining shares are held by the Wood family, fellow director Bart Kindt and Ihug staff under a trust scheme.
Fellet says he has no problem with Ihug's plans for a public listing on an American stock exchange in the next two or three years.
The dollar value of Sky's purchase isn't being made public at the moment.
"We're still working out the details and as soon as the deal finalises we'll issue a formal press release within about three weeks," says Fellett.
Fellett says Sky has been looking at ways to address convergence issues ever since it made the decision to launch a digital TV service.
"There's this debate over whether the TV is turning in the PC or vice versa and I don't know the answer to that. All I know is that something's going to happen, and when it does, I just want to make sure that I have the biggest store on the best corner of that intersection. And that's why we're in Ihug.
"As someone who doesn't know a lot about that industry, it seems to me that New Zealand is pretty well served by ISPs," says Fellet. "But you'd have to argue that Ihug have been able to differentiate themselves more than anybody else. Not only just in subscriber growth but in positive operating cashflow. You don't find too many Internet companies who can say that."
Wood says that with Sky's investment "we can progress some of our major plans at a faster rate as well as increasing the growth rate on customer numbers both here and in Australias. There will be a great desire to cross-pollinate various products as well as roll out some pretty exciting new ones. It's business as usual round here, but at blur-like velocity."
Fellett says Ihug's telephony service, which seems to be away to a strong start and will soon be boosted by a major TV advertising campaign, was also appealing to Sky.
"Certainly their knowledge was. This isn't a field I have a great knowledge of and it's very complex. We could go out and hire people with that expertise but getting someone who's off and running is probably better for us."
Fellett says Sky does not want "the kind of relationship that's evolved between Television New Zealand and Sky, where they sit on the board and depending on who you're talking to they're either threatened or they're trying to help and there's always disagreements.
"I doubt if you'll see either the CEO of Sky or myself sitting on the Ihug board. It'll be either existing Sky directors or other people selected by Sky."