Sky TV would need to be sure of what it wanted to achieve in broadband market

Monday, 6 May 2019

Sky Sport is under siege from Spark, but that alone may not be a good reason to go on the offensive.

OPINION Speculation is running high that Sky Television will at least consider making a move into the broadband market, with First NZ Capital analyst Arie Dekker seeing the potential.

There's no guarantee anything will happen, however, and whether such a move would make sense might depend on Sky's motivations.

The obvious reason for Sky to get into broadband might not be the best one.

Sky might want to return serve to Spark for launching Spark Sports, sending a signal to Spark that the incursion into its pay-television market would not go unanswered.

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But Spark already faces plenty of rivals in the broadband market and Sky's arrival would probably only be a significant annoyance to Spark if Sky triggered a price war by undercutting current market pricing.

The home broadband market is worth well over $1 billion a year and Spark is the company with the deeper pockets, so there would probably only be one outcome if the two businesses really went to war.

There would also be the impact on Sky's existing partnership with Vodafone to consider.

A less dramatic motivation for Sky getting into broadband would be to diversify its business and to reduce customer churn.

Customers who bundle more than one service from a company are less likely to change providers, and one of Sky's challenges is to stop satellite television customers from jumping ship.

Electricity companies including Trustpower and Nova have decided to move into broadband for much the same reason.

Like them, Sky has an established local call centre with a good reputation that could prove a competitive advantage in the broadband market.

While it may be hard to make much money from broadband, it is hard to lose much either, unless companies deliberately sell plans at a loss.

One industry source has suggested it is possible to reach break-even selling ultrafast broadband to as few as 10,000 customers.

But there are still risks.

Internet providers sometimes appear to under-staff their call centres to ration technical support in order to keep their costs down.

They can get away with that because broadband is a necessity for most people.

Sky TV may plug into the broadband market.

Sky Television, on the other hand, is arguably a luxury service, which means Sky needs to provide a high level of customer service and be readily contactable by phone.

If existing customer service staff started to receive lots of calls about broadband modems dropping out or similar, then that could prove tricky to manage.

While there are many Sky TV customers who are techy savvy, it is possible a disproportionate number may be older and living in rural areas with worse broadband network infrastructure.

That poses the risk that Sky might have higher support costs than other internet providers, which is the sort of scenario broadband companies really want to avoid.

Sky TV chief executive Martin Stewart is putting sports front and centre, including when it comes to creating new, original content.

A third reason for Sky to get into broadband is that the company needs to persuade sporting bodies it can remain the 'home of sport' and continue to attract young audiences to watch their codes.

Sky has served rugby well in the past, for example, no question. But can rugby remain tied to a distributor that relies so heavily on satellite television?

These are the kinds of difficult questions that can test old loyalties.

Moving into the broadband market and recasting itself as a full service consumer technology services provider might be one way for Sky to demonstrate it is getting with the programme.

Sky is taking other sensible steps to achieve the same goal, such as revamping its FanPass streaming sports offering.

As a general observation, Sky's new chief executive Martin Stewart appears to be putting a lot of Sky's eggs into the sports basket.

Presumably that is based on the company's intimate knowledge of its customer base and its need to corral its resources as Spark lays siege.

But I wonder if Sky might do well to consider quickly ramping up the production of some other local content, in the areas of premium drama or even news and current affairs, to generate more excitement around its product.

Whatever, if any, conclusions Sky comes to, Stewart has a tough choices ahead and will need to spend Sky's declining profit streams very wisely.