Vodafone NZ-Sky merger accused of trying to monopolise market

The Vodafone NZ-Sky merger is facing criticism from the telecommunications segment, with submissions accusing the two 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.

The New Zealand Commerce Commission (ComCom) on Tuesday published submissions from Spark, 2degrees, the Coalition for Better Broadcasting, Trustpower, and the Telecommunications Users Association of New Zealand (TUANZ) it received in response to the Statement of Preliminary Issues released last month.

Spark 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.

"Sky/Vodafone will bundle a further, competitive, product (broadband and/or mobile) with its monopoly sports rights, and in doing so will reduce competition for that product. There is likely to be less innovation and less digital distribution of pay TV content; increased barriers to entry and expansion, and reduced switching between broadband suppliers; and lower uptake of UFB," Spark argued.

"Sky has used its acquisition of Prime TV to foreclose competition for free-to-air premium sports rights, and will use its acquisition of Vodafone to do exactly the same for digital and mobile premium sports rights."

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.

"We believe if the Commerce Commission blocked the proposed merger, Sky would be forced by commercial realities to make all of its sports content available online and on-demand -- and via wholesale arrangements with lots of parties that help distribute this content to New Zealand consumers," Spark New Zealand general manager of Regulation John Wesley-Smith said.

"A merged Sky/Vodafone will be able to leverage its monopoly power in the sports market, to the detriment of consumers. That's why we're asking the Commerce Commission to reject the proposed merger in its current form."

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.

"The long-term interest of the public is not served by permitting the merger to proceed before the future shape and direction of government policy on telecommunications and content regulation has been determined, because the respective areas of legislation could (and, in the CBB's view, should) be significantly revised," the CBB said in its submission.

"Indeed, it would seem naïve to suppose that the timing of significant media market merger proposals (including Sky-Vodafone and also NZME-Fairfax) submitted to the Commerce Commission during a period of regulatory deliberation is entirely coincidental."

Overall, however, the CBB said the merger should be blocked because Vodafone and Sky "have no natural right to entrench a position of market dominance as part of a dual-sector duopoly", which would occur despite the entrance of Netflix and Spark's Lightbox into the streaming market primarily thanks to Sky's ownership of premium sports content.

Lastly, the CBB suggested that since there are no net neutrality requirements in New Zealand, Vodafone could use the opportunity to prioritise and unmeter Sky content on its fixed-line and mobile networks and through proprietary apps.

"The potential for a de facto 'walled garden' to arise increases when proprietary devices and 'apps' are available ... the restrictions on mobile device bandwidth and data limits are also far more substantial than in the fixed-line broadband retail market, raising the prospect of zero-rated content and 'fast lanes' being used to disadvantage rivals or (less obviously but more insidiously) the deployment of proprietary 'apps' architectures and formats which function optimally when the merged entity's own content is accessed via preferred devices," the CBB said.

TUANZ and wholesale internet, gas, and electricity provider Trustpower also focused their submissions on the lack of mobile and fixed-line competition that would result thanks to Vodafone being able to offer the sports that Sky has locked down for the next four years.

"In its current proposed form, the merger does not guarantee a strong wholesale offering of premium content to service providers other than the retail arm of the merged entity, and this is enough to raise serious concerns about the risk this proposed merger places to competition in the telecommunications market that currently exists in New Zealand today," TUANZ concluded.

Vodafone Group and Sky Network Television announced reaching 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 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.

"The merger brings together Sky's leading sports and entertainment content with our extensive mobile and fixed networks, enabling customers to enjoy their favourite shows or follow their team wherever they are," Vodafone NZ CEO Russell Stanners said at the time.

"The combination with Sky will bring greater choice, enhances viewing experiences, and will better serve New Zealanders as demand for packaged television, internet, and telecoms services increases."

Vodafone NZ is the number one mobile provider in New Zealand, with more than 2.35 million mobile connections, and the second-largest broadband provider with around 500,000 fixed-line connections. Sky is the most popular pay TV provider in the country, with more than 830,000 subscribers, although its shares have declined by 28 percent over the past year thanks to increasing competition from video-streaming services such as Netflix and Lightbox.

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.

The ComCom is due to make a decision by November 11.