At first glance, Sky Network Television Ltd. looks good sitting in its position as the largest pay-TV operator in New Zealand. However, when you look closely at the company, you get an interesting perspective on what it means to hold that leadership position. When most think about a market leader in the pay-TV space, it is reasonable to assume that there would be subscriber numbers in the millions. But for Sky, the company counts 40 percent of the country as subscribers, but that only translates to about 600,000 subscribers, the majority of which receive services via digital satellite.

And while it is the market leader, the company does not rely on its pay-TV subscription revenues alone. It has also delved into the online DVD rental business to help supplement revenues (and has learned some valuable lessons it hopes to apply to its pay-TV business going forward).

In an interview with Satellite News International Editor Mark Holmes, Sky CEO, John Fellet talked about when services such as PVR and HDTV (High-Definition Television) will be available to consumers in New Zealand and how the operator will look to extend its leadership position in the market.

Satellite News: How many subscribers do you have in New Zealand? How are you looking to develop PVR services? What kind of business model do you think will be effective here?

Fellet: We have around 591,000 subscribers right now. That seems pretty small, but you have to consider that is 40 percent of the country. It is a pretty small market here. We think the appetite for the PVR will be pretty strong. We intend to launch that in December. We are still working on the potential business model. We want to be cash flow neutral on the subject. So, we are not interested in saying that if you have this it is going to cost you more per month. I think what we will do is keep our normal monthly rates and then give the subscribers an option to pay the difference of what the STB cost us to have that in their house, rather than the standard digital receiver. I think if we had 10,000 in the first year, this would be good.

There is a great deal of expectations on the PVR in the sense that it will revitalize everyone’s [pay-TV platforms] business. While we certainly think it will help, I am not sure that revitalize would be the proper term to use for it. I am hearing stories that people with PVRs are churning less, they take a higher ARPU (Average Revenue Per User), more PPV (Pay-Per-View) and more tiers. I am not so sure that what they are really seeing is the early adopters churn less and take higher ARPU. But, I hope they are right. I hope the excitement is completely justified. If that were the case, Sky would definitely not be hesitant to start subsidizing the box, if it makes the subscriber more valuable.

Satellite News: HDTV is a big subject in Europe with operators such as BSkyB and Premiere launching initiatives? What are your plans in this area?

Fellet: We tend to be about 18 months behind the curve. We are in the process of rebuilding our studios. One of the things we want to make sure of is that we have the capability of HDTV. I think around 18 months from now would seem a reasonable timeframe.

Satellite News: How are you looking to sell and market services in New Zealand over the next 12 months? How are you looking to boost Digital take-up in New Zealand?

Fellet: We will continue the things we did on day one, and that is go out there singing the praises of subscription TV, emphasizing the choice, uninterrupted movies, live sports etc. That was the message we started 13 years ago and it is the message now. There has never been a silver bullet with it. We spend a great deal of time with non- subscribers trying to find out what it is they want. We do not buy in to the fact it is a certain demographic in the market that is interested. There may be a certain demographic that is easier to knock-off. We have got a firm belief that everyone with a TV set is potential pay-TV customer. That was the approach in the United States in the 1990s. Penetration of pay-TV, whether cable or satellite has definitely proven that case there, and we do not see why that would not be the case here.

Satellite News: What are your views on telcos offering TV services? Would this be a competitive threat to Sky? What role could IPTV have in New Zealand? Would you look to get involved?

Fellet: In New Zealand, we work very closely with Telecom New Zealand, the dominant telephone company. We think that perhaps the way to go on that is to stream the channels over satellite, as the best alternative, with maybe using some kind of modem to download library titles, PPV and that sort of thing into the set-top box. So, a hybrid set-top box, is where we see it going in the next few years. Keeping in mind, you are talking to someone who has the largest collection of 8-track cassettes, so I have not called every technology move correctly.

Satellite News: Could you give us an update on your DVD online business joint venture with Telecom New Zealand?

Fellet: It has gone really well. It is moving along. It is a brand new market here. It works like the Netflix business. You go online to set up an account with us. You comb through our DVD library and select the movies you want to watch. We send you 3 DVDs. As soon as you watch them you send them back to us by mail and we send you the next one on your list also by mail. You can watch as many DVD’s as you wish but only can have three out at a time. We are learning quite a bit here. It seems somewhat ironic to me that all the talk of IPTV, downloading, huge breakthroughs and Microsoft being here in this space, the most efficient way to download a movie is with a first class postage stamp. I suspect that will change.

But, we are learning quite a bit about this business. If you fast-forward five years and look at the online DVD rental business, I think what will take its place is more of a download capability. But there are other things we are learning in this business. We have the exclusive rights to the All Blacks rugby union games here in New Zealand. There is a certain amount of demand, even though we have shown a game two to three times during the week, and people come back with our DVD unlimited service wanting to get a copy of the last All Blacks test match and bask in its glory.

You also have the popularity of TV series, which I would not have picked up on. So, things like “CSI” have had a huge demand in the DVD business. Originally, you think it is going to be mainly movies. The fact is it is not “Shrek 2” and “Troy” that are the top DVD [rentals] each week. It is more about the second tier movies. You may have seen the [first tier] movies either on a plane or you may have bought them when they initially came out. Those things become overexposed. Whereas movies such as “Super Size Me” has a huge demand. A film like that has [more popularity as an online] DVD rental, probably because it was not over-exposed in the rest of the cycle.

The National Geographic special “Secrets of the Pyramids” was one of the biggest requests we have had. We are finding all things like that very fascinating. If and when it goes to an online downloadable-type thing, we hope that expertise and the subscriber relationships that we have built up will continue.

Satellite News: What percentage of overall revenues do programming costs account for?

Fellet: About 38 percent of our revenues are programming costs. One third of those costs will be on sports. We have a very strong sports line-up. One third will be movies and one third will be the basic channels.

Satellite News: How are you looking to boost ARPUs?

Fellet: If you look at every satellite platform around the world, there is a direct correlation for ARPU with numbers of channels, transponder and satellite space that you can devote to your project. That makes sense, as with a movie like “Troy,” if you had a huge platform, you could show it every five to 10 minutes, so it almost looks like on-demand PPV. We will never have that luxury, just because it costs me as much as it costs BSkyB to get a transponder, and yet with their transponder they can spread over millions of people. Even if I signed up everyone in New Zealand, I could only get to 1.4 million subscribers. We will always have that continuous struggle to maximise ARPU on a limited platform. We view this as a pipeline going into the house and we have a model that takes all the components that we give to help us make decisions on what the next channel to add is. Sometimes it is a basic channel that may attract more subscriber or advertising revenues. Sometimes it is a tier channel where there is tier revenue. Sometimes, it is PPV, which is like a tier channel. We have also had people who wanted to lease space on our satellite. So, our goal is to continually evolve that model and to try and maximise the value throughout what we are putting into the home. We view the satellite as a big pipeline into the home and it is our job to put the most valuable content down it and to extract the greatest demand and ARPU.

With the upgrade of our studios, we will have a 30 percent increase in channel capacity, as we step up to brand new compression equipment. In December, a new satellite launches to replace the satellite we are on now. In February and March of 2006, we will take responsibility for it and we will then be able to use more transponder space.

Satellite News: What level of subscriber growth are you looking for in the next 12 months?

Fellet: We are looking for 40,000 net ads throughout the next 12 months. We have been doing this for the last 7-8 years. We could certainly go up faster but then we would have to invest a lot more in subsidies of getting the box into the home or programming or marketing dollars. We could certainly grow it a lot less and make much more money on a short-term basis. The 40,000 net gain a year, we view as the sweet spot to drive economic value for the organization.

Satellite News: Is the company profitable? What levels of revenue growth are you looking for in 2005 compared to 2004?

Fellet: Revenues were up 13 percent last year and we expect the future to be the same.

Satellite News: Finally, how do you see the digital television landscape changing in New Zealand in the next 12 months?

Fellet: There will be increasing options in the markets. There is a race between the consumers increasing appetite to buy equipment and absorb monthly fees. You have to offset that with the technology improvements of television sets, as well as the software side of it. So, there is a three-way race. One segment is always winning and the other two segments are always behind. We can only handle one third of that (software) and make sure we are in the proper space based on the other two.

(Tony O’Brien, Sky Television New Zealand, [email protected])