Unintended Consequences

Content is king, and will be the driving force behind any significant uptake of the UFB.

It’s a given – certainly among users – that without the content there can be no success story for UFB. Why would mums and dads in middle New Zealand bother upgrading given the current state of access to content?

Certainly in the UK the pressure for content has seen some remarkable changes to the telco landscape.

BskyB, the UK’s leading cable TV provider, has bought its way to number two in the ISP market and is now growing at an astonishing rate.

To compete, BT has acquired rights to major sporting events and given them away to fibre customers for free.  In less than a year it has added 1 million customers to its subscriber base.

Clearly, content is what will drive demand and if buying rights to the footy (or local variant thereof) brings in the punters, that’s the way to go about business.

But the flip side of this story is quite sobering.

I was at a Commerce Commission conference on Friday on a panel with Telecom CEO Simon Moutter when this issue came up. Moutter pointed out the big difference between BT and any telco in New Zealand – we have dis-integrated the telcos and in the UK they have not.

BT is a fully integrated player. It owns networks, it wholesales and it retails directly to customers, in competition with its own customer ISPs.

No telco in New Zealand in the fixed-line space can lay claim to that.

Moutter pointed out that BT offset the cost of buying the content against the profits it makes from the sunk-cost network, and that New Zealand telcos don’t have the same ability. Profitability in the fixed-line broadband market in New Zealand (let’s talk fibre as that’s the direct comparison with the UK) amount to only a couple of dollars per line, after you take into account call centre staff, buying backhaul and international capacity and so on.

But these are high value customers, right? They’re the future of the network, and BT was right to entice them over.

BT spent GBP1 billion on the rights to various sporting events and has given those rights away for free to its retail customers. Sure, it won 1 million new subscribers as a result, but that’s a purchase price of GBP1000 per customer. The payback period at even $10 a month is not insubstantial, let alone at the lower profit margins the telcos in New Zealand expect to make.

If we look at the landscape in New Zealand there isn’t a single fixed-line operator that could do to our market what BT has done in the UK. Instead, all our telcos can do really is look to partnerships with content providers in order to offer more to customers, and even then it’s more likely that the ‘over the top’ (OTT) providers will sweep in with a more comprehensive offer and scoop up most of the revenue that might be on offer.

This is one of those unintended consequences of market intervention. By splitting Telecom into two parts, we secured a more level playing field for the future, but the downside is a lack of cross-subsidisation for the telcos.

On the plus side, that’s probably a good thing for customers. I don’t want to find my content locked to a particular provider, and I’m ever hopeful that the whole model of distribution that the content makers are forcing on is eventually goes away. I don’t want to have to sign up to Telecom in order to get rugby but Vodafone in order to get rugby league, for example. Much better to sign up to the internet and get whatever sport or other entertainment I require when I require it.

But his does pose a problem for New Zealand UFB retailers. How will they entice customers to the shiny new network if sports and entertainment content are out of reach?

It could well be that the only telco able to deliver the content needed is already in the market today. It’s Chorus, the owner of the copper network.

It’s an interesting old world, isn’t it?