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Vodafone New Zealand’s merger with Sky shows continuing pressure to provide a full suite of services

The merger was not approved by the New Zealand Regulator (6/2017).

During the last decade there has been considerable merger and acquisition activity in the telecoms sector across global regions. Where these processes are not possible, for regulatory or commercial reasons, operators have found ways to share resources in a bid to provide improved services for customers. The underlying stimulus is competition, which has led to cut-throat pricing eating into operator revenue. Where pricing cannot be pushed down further the only recourse for operators is to differentiate themselves through the services they offer.

Vodafone has been a leader in this process. Some years ago it toyed with the idea of offloading fixed line assets to concentrate on mobile services alone (as in Germany, where it once considered selling its Arcor unit). Instead, Vodafone has become one of the key telecom players in Europe, with considerable fixed-line assets in Germany, Portugal (where it has a 13% share of fixed-line accesses), Spain (where it acquired the leading broadband cable TV network operator Ono, and where it also has a joint fibre network with Orange covering 50 of the largest cities), and Italy (it now has about 25% of the fixed-line market there). In all, Vodafone has more than 12.33 million fixed broadband customers across its European footprint.

In Australia the operator has rebounded from its disastrous network difficulties of a few years ago. In late 2015 it partnered with TPG Telecom in two new deals worth in excess of A$1 billion. Under the first deal TPG has embarked on a major dark fibre transmission network expansion for Vodafone, connecting around 3,000 Vodafone cell sites across the country (accounting for two-thirds of the Vodafone Australia network) and boosting its current fibre footprint by about 4,000km. Through this measure Vodafone is able to use TPG’s fixed-line infrastructure as backhaul for its mobile data services. Under the second deal TPG is migrating its 320,000 MVNO customer base from Optus to Vodafone.

The recent merger affecting Vodafone New Zealand with Sky is in line with these developments. Under this NZ$3.4 billion agreement Sky will acquire all shares in Vodafone NZ and issue new shares amounting to about half of the purchase price, with some NZ$1.25 billion to be paid in cash. Vodafone Group will retain a 51% stake in the merged company, which will become a consolidated subsidiary.

At the time of the deal (which is expected to close by the end of the year, subject to regulatory approvals) Vodafone had about 2.4 million mobile and 412,000 fixed connections (as of March 2016) while Sky, which provides wholesale services to Vodafone, had about 830,000 pay TV subscribers. The merger will create the country’s largest operator in the converged services sector. As a result of the merger, Sky will be able to deliver content to subscribers through Vodafone’s fibre infrastructure while content will also be made available to Vodafone’s mobile subscribers. This presents a fresh opportunity for Sky, which has been under pressure from OTT videostreaming services delivered over upgraded broadband networks: Sky reported in May 2016 that it had lost some 45,000 subscribers since the end of 2015, partly due to the competition from Netflix and Spark’s Lightbox service, as well as to natural attrition after customers moved away from the sports-centered service after the Rugby World cup ended in October 2015.

The deal will create additional pressure on both Spark and 2degrees, which will now be at a further disadvantage in terms of content for their subscribers.

Further afield, it is noteworthy that there is existing co-operation between Vodafone and Sky in their respective UK operations: for some years Vodafone has had a content arrangement with Sky Sports by which it provides three Sky Sports Mobile TV channels (Sky 1 and 2 as well as Sky Sports News) with certain phone bundles.

In an era of converged services where content is becoming king, operators such as Vodafone are following a logical path, wherein they first build out infrastructure (through their own investments in network builds or through acquisitions) to create a distribution platform. This then provides the economic leverage on which to develop favourable content deals. As Vodafone is now developing much of its revenue growth from broadband, a potential next step could be to invest in broadcasters and TV-show production companies, as has been seen by Liberty Global (which has followed a similar path to Vodafone in its own expansion across Europe and the Caribbean). The Sky deal can be considered in this light.

Henry Lancaster