Telecom Announces their Content Play

The big news here yesterday was that local Telco ( Telecom) was changing their name to Spark. In my view the real news was the announcement of ShowMeTV which is their long awaited content play.

Ever since Jason Paris joined Telecom back in August 2011 some of us have been waiting to see how the convergence of content and delivery will work out. Paris left TV3 where he had been CEO for 18 months and before that he was at TVNZ as Head of Digital Media, Marketing and Strategy for just over 4 years.

The point there is that this is not some Telco pipe dream – the ShowMeTV project is being driven by an experienced TV person who knows what it takes to run a TV channel. And he saw the writing on the wall from online players enough to jump ship from the broadcast world.

Peter Griffin makes a good case for Telecom (Spark?) as the challenger of note for premium TV content in NZ subject to getting those rights. Peter Griffin: Chance for the bright sparks to fly… if they get the right stuff

“But crucial to the success of this venture is Telecom’s ability to secure the rights to sought-after TV shows and movies.

It will be stepping on Sky’s toes – and those of the free-to-air broadcasters – as it goes after HBO series and the cream of the crop from the big American TV networks and Hollywood movie studios.

Netflix, Amazon, Hulu and Google have all jumped on the original-content bandwagon.

These internet giants have no allegiances to the traditional pay-TV operators and are keen to sell their shows for viewing outside the core US market.”

So why would Netflix, Amazon, Hulu and Google want to pass on a share of their content streams ( or revenue) to ShowMeTV ? This is where it gets really interesting.

“Telecom said it would spend $20 million on the service in its next financial year, which begins on July 1, and roughly $15 million of that would be spent on buying shows.”

SkyTV has a huge programme budget by comparison. See the screenshot below which shows a number of $289.3m which is more than 19 times the the ShowMeTV (Telecom) content budget. It also outlines the split between programme rights and programme operations.

sky-budget

Also if SkyTV is still a winner here why have their 2 largest shareholders ( Todd & Murdoch) “left the building.” (Sky’s Largest current shareholders are Hyperion Asset Management Limited, Cooper Investors Pty Limited and BNP Paribus for a total of 20.83%)

So what are the missing pieces of the puzzle here?  Because $15m does not compete with $229 or 289m for programming?

The other costs are arguably already covered by existing Telecom customers.

Telecom has an installed base of users that they can get content out to. Presumably it knows a great deal about what content its ISP customers are already consuming.  At least at the meta level – which domains and content sites are being accessed. That should help them to determine when the tipping point for online content has been reached.

All of that helps but if they want to be the Netflix in the NZ market surely Netflix themselves would be better to just do that themselves?

The quick answer is that “Netflix Spends $2B Per Year On Content, Primarily On Licensing Movies And TV Shows” and they can share that cost across the population of the US, Canada & UK? but actual audience is 30m.

Although some reports show 40m users in 50 countries. I’d suspect that quite a few are outside of the license areas. (Netflix is worth $25.6B so it has muscle to go after content.)

I know there are work arounds to get Netflix in NZ and I’d love to do that. Especially since US $7.99 per month is nothing compared to iTunes or other providers. Most users already pay for a large or unlimited datacap so that cost is not directly relevant.

Back in November 2011 Brent Ayrey, who was then vice president of product innovation at Netflix was asked about Netflix in NZ. ITEX: Netflix not coming to NZ – blames poor broadband and content deals said it won’t happen at the time.

Since then the average data cap in NZ has gone up to about 30GB and there are plenty of users on unlimited data subscriptions. If you can get unlimited data for about $100 per month and you have VDSL or better it makes sense to stream all of your TV content online.

This has been happening for years overseas and Brent was correct in noting that data caps and speeds were a major brake on online content deals. Of special interest (to New Zealanders anyway) is that Brent was originally from Christchurch.

He left Netflix two years ago for another content project but there are other savvy New Zealanders in Silicon valley who have an excellent understanding of what it would take to make a large scale content play work in New Zealand.

There is one other clue “hiding in plain sight” for the Showme content play. Back in January I spotted this headline Telecom drops media agency which may offer some insights into the business side of making a content play work.

“Telecom has formed a new agency along with the DDB Group, where it will be the sole client, using the arrangement to build strategies to target customers in digital campaigns.

Advertising industry sources said that the new agency, called Dynamo, would give Telecom a lot of leverage dealing with media companies and as sole client would give it more direct buying power.

The change is effective from March 31.”

This is a significant and disruptive change for the ad industry as relegates them to creatives and takes away the fees gravy train out of the media spend. The writer thought the media budget was about $25m and although that is unconfirmed it does mean that the fees on that would be in the millions of lost revenue for Starcom.

What is also means is that Telecom / Spark / ShowMeTV now has a seat at the table for media revenues. They have complete transparency over what they will invest via the new agency going forward. That has to also give them greater capabilities for cost savings and revenue earning if Dynamo also works for ShowMeTV.

Subscription revenue needs to be significant to fund future programming costs and Dynamo might be able to help with some other revenues. I’d rather not watch any ads ever again which is why I cancelled my Sky sub way back in 1993 but competing with Netflix at a price point of $10NZ per month will be difficult to do.

Last but not least. There are thousands of NZ users already paying for non Sky content via iTunes on Apple TV; or using Roku, Chromecast and VPN’s to watch hulu or Newflix. The New Zealand digital TV rollout is largely complete and many upgraded their TV’s so they can watch online content on a large screen.

Speaking for myself – as an Apple TV user I can stream anything online to my TV via Airplay. Even though I have a smart phone and an iPad as well as various laptops I like to watch films or TV programmes on a larger screen.

Making that transition easier for middle NZ by being a programmer / content player is something that was inevitable for Telecom so there is a space there but the budgets and content partnerships don’t quite make sense yet.

What do you think? – how are ShowMeTV going to get up and running on a tiny programming budget?