'

Vodafone NZ-Sky TV merger in doubt over competition issues

The NZ Commerce Commission has outlined broadband, mobile, and pay TV competition issues that could arise from the merger of Vodafone NZ and Sky TV.

In considering the merger of Vodafone NZ and Sky TV, the New Zealand Commerce Commission (ComCom) has published a Letter of Unresolved Issues, saying it remains unconvinced that the merger will not substantially lessen competition in both the pay TV and telecommunications markets.

The Letter of Unresolved Issues, sent on Monday morning to Sky TV and Vodafone NZ, said that while consumer prices might initially be brought down as a result of the merger, rival telco providers may then fail to compete, consequently enabling the merged entity to eventually raise prices and lower the quality of its service.

"On the basis of information gathered to date, the commission is not satisfied that the proposed merger will not have, or would not be likely to have, the effect of substantially lessening competition," the ComCom said.

"We continue to have concerns that the proposed merger may give rise to competition issues in the provision of telecommunications services as a result of vertical and/or conglomerate effects."

The ComCom is therefore continuing to consider the merger's impact on the retail fixed-line broadband market; the retail mobile market; the retail pay TV market; and the wholesale pay TV market.

In doing so, the commission is seeking further submissions from Vodafone NZ and Sky TV on the specific areas of whether it would have substantial market power for content; whether the merger would cause customers to switch to Vodafone in order to obtain a bundled service due to the Sky service alone being "relatively less attractive"; whether the merged entity would have less incentive to enter reselling agreements; and whether any rival providers would fail to achieve scale, causing the market to weaken materially.

The ComCom is accepting submissions by November 11, and cross-submissions by November 18.

The Letter of Unresolved Issues followed industry criticism in August, with the telecommunications industry accusing Vodafone and Sky of trying to squeeze the competition out of the wholesale premium live sport and entertainment content market, the retail residential fixed-line broadband market, the retail mobile broadband market, and the pay TV market.

A submission from rival telco Spark in response to the Statement of Preliminary Issues released the previous month identified the main issue as being premium sport, claiming that it is "essential" content for being able to attract telecommunications customers. Were the merger to go ahead, Sky's sport content ownership would extend into Vodafone NZ's mobile and broadband offerings, Spark said, and "distort competition" in those segments -- including to the detriment of the New Zealand government's Ultra-Fast Broadband (UFB) project.

Calling both Sky and Vodafone "reluctant wholesalers", it added that the two would "engage in exclusionary conduct". Before such a merger is allowed, there should be rules in place to ensure a competitive wholesale market for sports content, Spark said.

2degrees, the third-largest telco in New Zealand after Spark and Vodafone NZ, agreed, saying that the acquisition of sports and entertainment media content would give it an unfair advantage in attracting and retaining customers across the mobile and home broadband segments.

"The merged entity will have both the incentive and the ability to leverage its substantial market power in content markets to lock up premium content for exclusive delivery over its own platforms, foreclosing competition in the residential fixed-line and retail mobile markets," 2degrees said.

2degrees' ability to negotiate with Sky over mobile content would be impeded by the fact that a merged Sky-Vodafone entity would be its competitor, with 2degrees calling this situation "clearly untenable".

The Coalition for Better Broadcasting (CBB), meanwhile, called for the ComCom to defer making a decision on the merger until the New Zealand government has responded to the recent Convergence Issues Paper and addressed the gaps between the Telecommunications Act, the Broadcasting Act, and the Commerce Act. The CBB went so far as to suggest that Sky and Vodafone intentionally put forward their proposal during this time of regulatory uncertainty so as to take advantage of it.

Vodafone Group and Sky Network Television reached an agreement to form an integrated telco and media group in June, forecasting that it would make NZ$2.91 billion in revenue for FY17, and earnings before interest, tax, depreciation, and amortisation (EBITDA) of NZ$786 million.

If allowed by the regulator and approved by shareholders, the merger will occur via Sky acquiring all Vodafone NZ shares for a total purchase price of NZ$3.44 billion through the issue of new Sky shares, in return giving Vodafone Europe a 51 percent stake in the combined group, in addition to cash consideration of NZ$1.25 billion funded through new debt.

The combined group is predicted to have a net present value of around NZ$850 million, or NZ$1.07 per share.

Sky and Vodafone NZ already offer bundled deals of pay TV, broadband, and phone services to their customers. A combined entity would mean offering Sky's entertainment offerings across all smart devices on Vodafone's fixed-line and mobile networks.