COMMENTS FROM SKY NETWORK TELEVISION LIMITED

ON SUBMISSIONS ON THE GOVERNMENT’S DIGITAL BR OADCASTING REVIEW OF REGULATION

18 JUNE 200 8 1. OVERVIEW

Purpose of this submission

1.1 This document forms part of SKY’s cross -su bmission to the Ministry for Culture and Heritage from SKY on the submissions of TVNZ, TVWorks, Freeview and SPADA on the discussion papers Digital Broadcasting: Review of Regulation: Volume 1 and Volume 2. It should be read in conjunction with the summar y document “Setting the facts straight .” SKY is aware that the Government has not formally called for cross -submissions. However, the above submissions contain inaccurate and misleading statements and assertions relating to , or potentially affecting , SKY that SKY wishes to respond to .

1.2 The submissions from TVNZ, TVWorks and Free view are effectively seeking self -interested regulatory protection against fair competition from SKY. Their submissions are aimed at preserving or enhancing their position throug h Government intervention, rather than having to compete fairly with SKY.

1.3 These submitters seem to be using their submissions to the review as thinly veiled attempts to attack SKY for their own ends. Few of their arguments are justified by reference to benefits for consumers and are only very weakly linked to the review’s purpose of facilitating the development of digital technology for the benefit of consumers and New Zealand society more generally.

1.4 SKY considers that it would not be sound for the Gover nment to make decisions on the next step of the review on the basis of those submissions. Sections 2, 3 and 4 of this cross -submission provide officials with evidence to assess the accuracy and validity of these submissions.

1.5 As much as possible, SKY has not repeated the comments made in its submission of 4 April 2008, but notes that many of the issues raised by the TVNZ, TVWorks, Freeview , and SPADA are discussed in that submission.

Official’s approach to analysing the submissions

1.6 SKY considers that, befo re making any recommendations on the submissions, Government officials need to:

• check the claims made in submissions to verify whether they are correct; and

• analyse the extent to which the issues raised, and any solutions suggested, are related to the revi ew’s purpose and benefit to consumers.

1.7 Such an approach would be consistent with the Government’s Code of Good Regulatory Pract ice, which it has declared it will adhere to . In this regard, SKY notes the recent comments by the Hon Lianne Dalziel on the nee d for Regulatory Impact Analysis, a Government requirement which supports the Code of Good Regulatory Practice:

“Although there is no single model for a good RIA regime, it will always require the preparation of proposals for decision -makers that follow co mprehensive policy development processes.

Page 1 These include: - clearly defining the particular issue or concern and why government regulatory action is needed; • identifying the options for addressing the problem; • identifying and consulting with stakeholders; • und ertaking an assessment of risks and opportunities and the costs and benefits of the options; and • selecting the preferred option • setting implementation and review strategies” (Hon Lianne Dalziel, Speech to the Regulatory Evolution Summit, 19 Ma y 2008)

1.8 In announcing that the Government would consider the recent Commerce Select Committee ’s recommendation to establish a high -level expert taskforce to investigate ways of improving the process for making and reviewing regulation, the Minister said “ we will cont inue to work on finding effective ways of ensuring that as legislators we make the best possible decisions so that proposed regulation is high quality, appropriately targeted and that it doesn't have unintended consequences ”.

1.9 SKY understands that o fficials are required to report back to Cabinet on the results of the submission process by the end of July, and advise on the next steps in the review. In this regard, the Government has signalled that it would consult further on any proposals for regulatory cha nge.

1.10 SKY supports the need for further consultation on any proposals for regulatory change . However, before that stage, the claims and assertions made in the submissions need to be checked and analysed .

1.11 SKY has been told that no decisions will be made w ithout a thorough analysis of the submissions. It is unclear whether this checking and anal ysis will be carried out now or after the further round s of consultation on the issues raised in the submission s are undertaken. SKY considers that the analysis an d checking of submissions sho uld be carried out before further consultation.

1.12 In SKY's view it would be irresponsible and poor process to consult on the issues raised in submissions without rigorous ly checking the evidence or assertions underlying the submi ssions . That an issue or point has been made in a submission is not enough – there must be some objective evidence that an issue exists or is valid before consultation is undertaken.

1.13 For example, Paul Norris’ submission questions why TVNZ6 and TVNZ7 are not available on SKY’s digital platform and suggests the Government impose regulation depending on who is responsible for the current situation: a “must -carry” rule on SKY, requiring it to carry all Freeview digital channels or a “must -offer” rule on all Freeview broadcasters, ensuring that they offer their channels to SKY. Without analysis of the background to this matter (provided in the submission below) it would be difficult for options for regulatory change in response to this issue to be effective, efficient or fair.

1.14 This is particularly important because of the potential impact that even consulting on issues such as anti -siphoning or must carry legislation could have on listed share prices.

1.15 For its part, SKY would welcome a review of its submission by officials, and would be happy to provide further evidence or detailed analysis of its assumptions, if that would assist officials.

Page 2 Summary of submissions document inadequate

1.16 In light of these comments, SKY is concerned about how the Government and Minis ters will use the summary of submissions that has been prepared. The summary of submissions, in many cases, simply records that there were submissions for and against issues. It does not have any substantive description of the reasons given in the submis sions for particular options or any description of whether assertions in submission are substantiated. SKY is concerned , on the basis of the summary of submissions, that the Government’s decision -making process could therefore become a simple number count ing game of submissions for and against particular options .

1.17 SKY is also concerned that the summary of submission s does not reflect many aspects of S KY ’s submission. These include its concerns over the process of the review raised in the submission, and also its evidence that demonstrates that a number of potential problems mooted in the discussion papers do not exist .

1.18 We understand that Ministers have been provided with a copy of the summary of submissions. However, it is imperative that advice to the Ministers is based on sound analysis.

Page 3 2. RESPONSE S TO TVNZ SUBMISSION

2.1 This section sets out SKY’s detailed responses to the claims in TVNZ’s submission.

TVNZ submitted that “No other flagship public service broadcaster in any other country has to compete against a dominant, vertically -integrated pay -TV provider ”. (See page s 20 , 25, 28 of TVNZ’s submission )

2.2 Firstly , SKY is not the dominant broad caster in New Zealand :

o TVNZ has the largest viewership of any broadcaster in New Zealand – 46.4 % for February 20 08 .

o TVNZ had 18 of the 20 most viewed television shows in 2007 .

o TVWorks is also a strong competitor, with good audience shares from TV3 and C4.

o TVNZ makes 233% more from advertising than TVWorks ( which has the next largest FTA viewership ) makes from all s ources of revenue 1.

• In fact, TVNZ views itself as the dominant broadcaster in New Zealand. In its 5 year strategy document “Inspiring on Every Screen” , TVNZ states:

o “TVNZ continues to be New Zealand’s leading broadcaster” and “ We [TVNZ] are the pre - emine nt television and online local video content propositions in the market”

• TVNZ receives or benefits indirectly from substantial amounts of Government funding and is established by statute, giving it an implicit Government guarantee.

Broadcaster Channel Share AP 5+ 2005 - 2008

TVNZ ’s channel share still remains dominant over all other competitor s in the market. For 2008 year to date, TVNZ ’s average monthly channel share of 46.2% remains 37.1% higher th an All Sky TV (including Prime) average monthly channel share of 33.7% .

60 Sky Network Sky bought Prime in Feb ‘06 Canwest Prime TVNZ 50 Other

40

30

20

10

0

Ja n F -0 e 5 Soubrce: AGB Media/TV Map AP 5+ M - 05 ar A -0 p 5 M r- 05 ay J - 0 u 5 n- J 0 1 u 5 A l-0 The figure of 233% uigs 5c alculat ed by dividing TVNZ’s advertising revenue as stated in its 2006 Annual Report (for year ending 30 S -0 5 ep June 2006) by TVWoO rk- s’ total revenue as stated in its 2006 Annual Report (for year ending 31 August 2006) 05 ct N -0 5 ov D - 05 ec J - a 05 n F -0 Page 4 e 6 b M - 0 a 6 r A - 0 p 6 r- M 0 a 6 y J -0 u 6 n- J 06 ul A -0 u 6 g S - 06 ep O - 06 ct N -0 o 6 v D - 06 ec J - 06 an F -0 7 eb M - 07 ar A - 07 pr M -0 a 7 y J - 0 u 7 n- 07 Ju A l -0 ug 7 S - 07 ep - O 07 ct N - o 07 v D -0 e 7 c- J 07 an F -0 eb 8 M -0 8 ar A - 0 pr 8 M - 0 a 8 y- 08 2.3 Secondly , TVNZ’s claim that SKY is vertically integrated is a red -herring and its significance completely overstated by TVNZ .

TVNZ suggests that SKY is a vertically -integrated media company because it is a content originator, content and servic e packager, service provider, customer relationship manage ment services , consumer premises equipment provider and infrastructure operator. However:

• Some of the vertical functions a scribed to SKY are not accurate .

o For example, SKY is not , to any signific ant degree, an infrastructure operator. Transmission of SKY’s signal is carried out by Kordia, over the terrestrial UHF network , and by SingTel -Optus over satellite.

• Some of the vertical functions attributed to SKY have been classified misleadingly .

o For example, TVNZ suggests that SKY pr ovides customer relationship management services but TVNZ does not. SKY believes TVNZ does provide relationship management services to advertisers - the customers that provide a substantial portion of its revenues. It also provides customer re lationship management services to its viewers. In this regard, TVNZ states in its 2007 An nual Report that viewer feedback is a pivotal area of influence within TVNZ . TVNZ manages relationship management with its viewers through i ts website and by conducting surveys of public perceptions of TVNZ. (TVNZ Annual Report 2007).

• Some of the vertical functions would not be of any use to a FTA broadcaster , are functions that are costly for SKY to perform , and do not give SKY any competit ive advantage .

o For example , TVNZ suggests SKY is a customer premises equipment provider. However, for analogue broadcasting, there is no need for TVNZ to provide such equipment to its customers as television sets already include all the equipment necess ary to translate an FTA television signal into a viewable picture. For digital broadcasting , the Free view service is able to source a much cheaper box than SKY because it requires less functionality and therefore no subsidy from the broadcaster is require d. SKY also notes that it is standard practice for overseas pay -television providers to provide a set -top box as well as a subscription based broadcast service ( for example, Foxtel and Austar in Australia, BSKyB in the UK, DirectTV in the US).

o SKY could not be said to be any more vertically integrated than TVNZ and TVWorks, which both now have an interest in the Freeview platform. At a broad level, the most vertically integrated provider in the market is the Government through its interest in TVNZ , Kordi a and Orcon . TVNZ’s 5 year strategy document contains a diagram which illustrates that TVNZ is also vertically integrated and aspires to further media and platform integration in the future to combat audience fragmentation.

• SKY 's business model has not e nabled it to exercis e substantial market power or give n it any advantage .

o Vertical integration by a business does not necessarily provide it with any sustainable advantage. The strong movement in recent years by many businesses to outsourcing demonstrates that vertical integration is not an automatic route to success. For example,

Page 5 while SKY produces content it could not be said to have substantial market power as a result. There are plenty of other content producers including TVNZ itself.

o SKY’s ownersh ip of the set -top box does not prevent viewers from watching FTA channels. They are able to do so either over the SKY DTH service itself, or tuning into the FTA terrestrial broadcasts, or over the Freeview DTH service. There are also a wide , and increasi ng, range of delivery platforms.

2.4 Thirdly , TVNZ ’s claim to be the “flagship PS B [public service broadcaster ]” is doubtful .

• Unlike genuine public service broadcaster ’s overseas such as the BBC or ABC , TVNZ shows a large number of purely commercial shows, a nd receives most of its revenue through advertising.

• TVNZ has no special anointed status as the “flagship” public service broadcaster in New Zealand (as opposed to Radio NZ) .

• Other channels provide public service broadcasting, especially Maori Television and TV3 in the form of NZ On Air funded programmes.

• SKY receives very little NZ On Air funding and does not claim to be a public service broadcaster . However, m any of the programmes it broadcasts could be called “public services”. This includes a wide r ange of local content – with out Government subsidy. In 2007, SKY broadcast 16,488 hours of local content. This included documentaries , special features, news, concerts, feature films, short films, sports, and locally produced music videos .

2.5 Fourthly , genu ine public service broadcasters overseas compete in a mixed F TA/pay -television environment . Most do so in a much more competitive environment than in New Zealand – with pay -television levels in some countries at nearly 80 % penetration and more than 1 othe r major FTA broadcaster as competition.

2.6 Lastly, TVNZ could not be said to be failing. TVNZ’s viewership may be the very highest of any broadcaster in the world . This includes both public service broadcasters and commercial broadcasters. SKY could not fi nd any broadcasters with a higher viewership share.

Page 6 Public Broadcasters Share Of Viewing 2006

NZ TVNZ 48.5%

Austria ORF 47.9%

Germany ARD & ZDF 44.7%

Italy RAI 43.6%

Ireland RTE 41.5%

Sweden SVT 38.3%

France France 2, 3 & 5 37.0%

UK BBC 34.6%

Netherlands NOS/NPO 32.8%

Denmark DR 32.4%

Spain TVE 23.1%

Source: EBU Guides Information Pack, Volume 2: EBU Members ’ Audience Trends. Published by: EBU – Strategic Information Services, July 2007. Source: AGBNMR Dataline/ TVmap

TVNZ 's submission includes a graph that seems to show SKY’s all -day viewer share has increased from 10% in 2000 to 25% in 2007. In the middle of the graph a statement i s made that says “ A more level playing field is required in the future in order for Free To Air broadcasters to compete on a fairer basis with their Pay TV rival”. (See page 13 of TVNZ’s submission)

2.7 SKY believes that TVNZ’s graph is misleading in its atte mpt to be simple :

• The graph purports to show SKY’s growth is unprecedented and unfair . However, a similar graph could be shown of every industriali sed country in the world (see UK example below) . As people make broadcasters more money in industrialis ed n ations they want more television options than what the FTA can provide. Pay -television gives them more option s. For example:

Page 7 UK Broadcaster Channel Share BBC versus Commercial Broadcasters

BBC Channel share is decreasing over time in the UK 100%

90%

35.8 35.0 35.5 34.8 BBC 40.7 39.2 37.5 37.2 38.7 38.3 36.5 80% 42.5 43.1 43.4 44.0 42.6 Commercial

70%

60%

50%

40%

64.2 65.0 64.5 65.2 60.8 62.5 62.8 61.3 61.7 63.5 30% 57.5 56.9 56.6 56.0 57.4 59.3

20%

10%

0% 4 3 7 * 3 9 95 6 7 8 99 00 1 2 0 04 05 6 0 8 99 9 9 99 99 99 9 0 00 00 0 0 0 00 0 0 1 1 1 1 1 1 1 2 2 2 2 2 2 2 2 20

Source: www.thinkbox.tv/ Nickable Charts

• TVNZ’s graph assumes that there is competition for viewers only between SKY and FTA broadcasters . In fact it is much more dynam ic than this. “Traditional” broadcasting is under threat from competi ng technologies and entertainment options like the internet , DVDs , and gaming .

• AGB Nielsen data for 2007 shows that SKY subscribers are still watching approximately 12 hours of FTA chan nels per week, and are only swapping approximately 5 hours of FTA programmes per week to watch subscription programmes. The growth of SKY, has not proportionately taken viewers away from FTA.

2.8 Further, e ven if more broadcasting choice did mean less viewers hip of TVNZ – more choice is the resulting benefit of a competitive environment – and what the review of digital broadcasting is intended to encourage.

TVNZ claims that: • “SKY’s subscription revenues exceed the advertising revenue of any single FTA broadca ster. As a consequence, FTA broadcasters are finding it increasingly difficult to compete with SKY for content .” (See page 31 of TVNZ’s submission. ) • “For example, TVNZ has to spend a substantially greater proportion of its revenue on programming than SKY .” (S ee table on page 32 of TVNZ’s submission. )

2.9 Although SKY’s subscription revenues exceed the advertising revenue of any single FTA broadcaster , when purchasing programme rights TVNZ can use all its sources of revenue – advertising, on sale, Charter f unding, NZ On Air funding, direct digital funding – all of which considerably increase the amount of money available for purchase of content. By not including these sources of revenue in its chart , TVNZ’s submission overstates the revenue differences betw een SKY and the FTA broadcasters and is misleading .

Page 8 2.10 SKY spends a smaller percentage of its operating revenue than TVNZ on content – but this is not evidence of excessive revenue or unfair competition. This is the norm: the same difference in programming spend/revenue exists between FTA and pay television providers worldwide. This is because SKY – like all pay television providers – has to use a large part of its revenue to fund the costs of its set -top boxes, installation, maintenance and other pay telev ision specific infrastructure costs. Last year:

• Depreciation of infrastructure totalled $85 million o r 14% of SKY’s revenue.

• Subscriber management totalled $42 million or 7% of SKY’s revenue .

• Broadcast and infrastructure costs totalled $51 million or 8% o f revenue.

2.11 More importantly, there is no evidence that FTA broadcasters are finding it hard to compete against SKY for premium content. Recent evidence shows exactly the opposite. SKY dropped out of the bidding for Twentieth Century FOX programm e rights , leaving TVNZ and TVWorks to compete for this package. Furthermore, TVNZ has secured the large Disney, Warner , and Granada packages since SKY acquired Prime .

2.12 Despite this, when calculated including all revenue, TVWorks revenue/content ratio is close to S KY – demonstrating if anything, that TVNZ spends more than it needs to on securing content.

2.13 FTA broadcasters need to show programmes that attract the largest possible audiences to increase or maintain viewership and advertising revenue . Showing p remium fi rst -run programmes, commonly sold as part of output deals, in primetime are one way of achieving this. TVNZ, in particular, strongly pursues this strategy. This content is inherently more expensive than most of the content pay -television broadcasters pur chase. Pay -television providers’ business model is not about attracting single large audiences :

• TVNZ spent $229.8m on programming for 2 channels in 2007, or $114.9m per channel.

• SKY spent $204.6 million on 79 channels (exclud ing the audio and radio channe ls SKY carries , but including 19 PPV channels as these channels also have programming cost s and revenue s), an average of $2.59m per channel.

• Prime spends $15.7 million on programming.

• TVNZ spends around 10 times more per hour in primetime than SKY do es on general entertainment channels such as Vibe and the Box.

• TVNZ spend s $4.9m per viewership share point on programming v er sus Prime’s $2.7m – i.e. TVNZ spends 80% more than Prime .

2.14 It may be possible that FTA broadcasters are finding it harder to afford such content packages . However, any increases are not as a direct consequence of SKY’s actions or competition from SKY for the content , let alone a consequence of the fact that SKY’s subscription revenue is higher than any single FTA broadcaster s advertising r evenue . If anything, TVNZ has been driving up content costs through its actions , particularly in purchasing content ahead of TVWorks . In this regard :

Page 9 • TVNZ seems to be pursing a strategy of purchasing higher cost, high rating US dramas over lower cost fo reign programming (e. g. from the UK ). Examples are its purchase of Big Love, Criminal Minds , The Closer and Cold Case for TV One, instead of UK productions (which Prime is targeting because they are more cost effective) . The US shows give TVNZ greater re assurance of commercial success, given their high US ratings which often lead to strong media coverage before the shows even air in New Zealand .

• TVNZ has purchased a number of programmes and studio output deals at prices far in excess of what SKY, and ap parently TVWorks, was prepared to pay. For example, TVNZ is estimated to have spent NZ$ 15 million on the Disney programme rights.

• SKY never put in a bid for the Warner Bros, CBS Paramount or NBC Universal packages, so any increase in price of those packag es was through no direct impact of SKY.

2.15 TVNZ also claims that local content costs are increasing and again implies that this is due to SKY. This is not correct :

• It is true that local content is generally more expensive than foreign content in that it co sts more purely on an hourly basis. On the other hand, it can be purchased without the need to purchase other content, such as movies or other series, as often occurs in relation to foreign content. It also ignores the fact that the broadcaster can commi ssion programmes, thereby targeting programmes to audiences and reducing risk.

• Moreover, much of the increase in the costs of local programme s, especially for TVNZ, is because of the kind of programmes commissioned. TVNZ has moved from factual/documenta ry programmes to commissioning more entertainment programmes. These programmes, such as Stars in their Eyes and Dancing with the Stars are far more expensive to produce. The commissioning of these programmes is a deliberate choice by TVNZ, in order to ob tain higher -rating programmes .

2.16 Another important factor is the programming strategy adopted by TVNZ. For example, the locally made Wheel of Fortune has a significantly higher per -episode cost at 5.30pm than previous foreign shows which have inhabited that time slot, such as Masterchef. This is outside of primetime (defined in New Zealand as 18:00 -22.30 ) so the channel has substantially raised advertising costs in that slot to help pay for the show. However , Wheel of Fortune fulfils a strategic role in TV ONE’s schedule which has nothing to do with public service:

• It gains audience to lead into TV ONE’s news programme at 6.00 pm .

• It simultaneously damages TV3’s popular Home and Away, which also leads in to their news programme .

• This gives a big advantage to TV ONE in the battle of the 6.00 pm news hours, where ratings and revenue are critical .

Page 10 2.17 Another example is TVNZ’s decision to outbid rivals for certain shows or to play shows off -peak, simply to deny them to the competition. Examples include:

• The HBO seri es Entourage, a cable hit in the USA which TV2 plays outside of primetime. Although two other channels in New Zealand have offered to buy this series and screen it in primetime, TVNZ will not release the series.

• The BBC series Torchwood, which is a spin -off from Doctor Who. TVNZ outbid Prime for this programme in 2006 and has apparently shelved it since. Two series of Torchwood have gone to air in the UK, but as yet it has not screened in New Zealand.

• The BBC series Jekyll, which TVNZ outbid Prime for in 2007 and which is now screening on TV ONE outside primetime, at 11.00 pm at night.

• The USA series The Contender, which TVNZ outbid other networks for in 2005 and which is now screening at midday Saturday s.

2.18 SKY believes that the main reasons for the increas e in content costs, especially for TVNZ, is TVNZ’s choice of programmes, its willingness to spend large amounts for shows it does not really want or cannot use (e .g. Torchwood, Entourage), and by competing over -aggressively for deals it does not need if it is to fulfil its charter purpose (e .g. Disney ).

TVNZ stated “there are relatively fewer first -run series and films targeting a mass audience ” (See page 20 of TVNZ’s submission).

2.19 This is demonstrably not true. If anything, the proliferation of channels i n Australia, the UK and the USA has ensured there is more commercial English -language television product available than ever before .

2.20 Again the issue comes down to TVNZ's decision to pursue a particular strategy. TV ONE has moved away from UK dramas in fav our of American dramas such as Big Love, Criminal Minds , The Closer and Cold Case. If a UK drama does make it to the TV ONE schedule, it is likely to be screen ed late at night, like the critically acclaimed Bleak House. The logical consequence of this is that two channels, TV ONE and TV2, are now dividing the American product that once would almost exclusively have gone on TV2. But this is a voluntary programming decision, not a decision driven by necessity.

2.21 If it were not for Prime, there would be a f ar smaller range of quality UK programming available free of charge to New Zealand viewers. Such popular UK series as Planet Earth, Life in Cold Blood, Oz and James' Big Adventure, Top Gear, Antiques Roadshow, The Seven Ages of Rock, Rick Stein's Mediterr anean Odyssey, Midsomer Murders, Lewis and Wild China, have either played or will play FTA on Prime this year.

2.22 TVNZ’s claim that there is a shortage of foreign product also seems at odds with comments made by TVNZ’s Head of Acquisitions and Commissioning A ndrew Shaw in December last year, when he was discussing potential effects of the writers’ strike in the USA. These comments stress the robust nature of TVNZ’s product library.

Page 11 Acquisitions and commissioning chief Andrew Shaw says if the strike becomes a long -term issue, it will have significant implications because there will be less first -run US TV to screen.

“What does this mean for us? Firstly, we're fortunate we have quite a good bank of very good programming that we can deploy .

Secondly, we have got very good New Zealand producers who can extend and vary what they're producing for us.

And there is a significant, unaffected English and American independent market. And, of course, there's always a growing and healthy supply of reality/non -scripted content... I think we're well placed to ride it out. I feel confident we have a programming strategy that can survive it, that we've got choices we can make that will maintain the quality of the output, and we've got good supply chains that mean we can w ork around it. ” (OnFilm magazine December 2007 .)

TVNZ stated that “ Uneven competition in a multi -channel FTA and Pay -TV environment is contributing to audience fragmentation ”. (See page 20 of TVNZ’s submission. )

2.23 SKY disagrees that the basis on which it is compet ing with FTA broadcasters is "uneven".

• TVNZ is doing more than just vigorously compet ing in this so -called “uneven” environment – it is the dominant broadcaster with a 46.4 % share of all television viewing in February 200 8 and 18 of the 20 top m ost viewed television shows in 2007 .

• TVNZ is leveraging off its viewership levels to extract a premium from advertisers – TNVZ secures 65% of all advertising revenue but only has 45% of viewership.

2.24 The evidence does not show that SKY’s competition with FTA broadcasters is contributing to FTA audience fragmentation.

• AGB Nielsen data for 2007 show s that SKY subscribers on average watch more FTA programmes than SKY programmes and that SKY subscribers are swapping approximately only 5 hours of FTA programmes per week to watch subscription programmes. 2

• TVNZ in its own 5 year strategy document “Inspiring on Every Screen” envisages that by 2011 fragmentation will not be a problem for TVNZ – “we have learnt how to manage redirection of audiences from our mass -ap peal analogue channels to our digital channels on Freeview and other digital media outlets ”. TVNZ clearly believes audience fragmentation is largely attributable to different media platforms rather than a result of an unfair playing field – and can be add ressed through smart business practice rather than Government intervention .

2.25 SKY believes that audience fragmentation is almost entirely due to the greater and ever increas ing range of broadcasting platfo rms and media content , which is good for consumers . This is a consequence of digital technology and is not driven by SKY. Both SKY and FTA broadcasters ’ audience shares are under threat from compe ting entertainment options like the internet and DVDs. For example :

2 Non SKY subscribers watch 17 hours, 17 minutes of FTA channels per week (on average).

Page 12 • On Tuesday night 3 June 2008 at 9pm, the ho me page of Trade Me had 74,330 individuals log ged on. Assuming the information is accurate and the count represented only one individual per computer screen then if “Trade Me” had been a channel, it would have been the 5 th most watched channel at that tim e.

• The Online DVD rental industry (a small subset to the total DVD industry) has about 12,000 customers who on average watch a DVD once a week. Typically about 2.3 people watch each DVD. If the viewing is spread out over the week in prime time then it is possible that on Thursday night 5 June , over 4,200 individuals were watching a DVD from an Online Rental service making it the 20 th most watched “channel ”.

• There are also DVD Box set s of television series like Lost or CSI, hundreds of web sites like YouT ube, legal and illegal downloading site for clips, movies or television series.

2.26 SKY assumes that the reference to “uneven competition” is, at least in part, a reference to SKY’s ownership of Prime. If so, TVNZ’s assertion is completely contrary to the Co mmerce Commission’s decision to grant a clearance for the acquisition of Prime, where the Commission decided the acquisition of Prime would not substantially lessen competition in any affected market.

TVNZ claims that “[u]nlike other countries, the lack o f marketplace rules in New Zealand has allowed SKY to secure nearly all premium sports content ”. (See page 30 of TVNZ’s submission. )

2.27 This claim is simply not supported by the facts . TVNZ and TVWorks are able to secure premium sports content, as evidenced by the following purchases:

TVNZ TVWorks

Beijing Olympics Rugby World Cup 2007

America’s Cup V8 Supercar Series

Rugby World Cop 2003 Golf: NZ PGA Championship

Athens Olympics A1GP Motor Racing

Rights to NZ netball internationals

IRB Rugby Sevens (2 008 jointly with SKY)

Last Commonwealth Games

FIFA World Cup 20076 (jointly with SKY)

Formula 1 from 1995 -2005 inclusive

Motorsport such as NZ V8 Series and Toyota Racing Series Tennis: ASB Classic, Heineken Open

• SKY does not disclaim that it tries to secure premium sporting rights. Sports content is the main driver of SKY’s subscriptions and it dev otes 6 full time channels to sports coverage.

Page 13 • However , SKY purchases the rights in competition with other broadcasters, and where it does secure r ights, SKY also aims to provide delayed coverage to high interest events on FTA . Part of the reason for purchasing Prime was to facilitate this, given TVWorks and TVNZ’s unwillingness to utilise such rights . Indeed, SKY has made extensive amounts of prem ium sports available over FTA for the benefit of viewers (e.g. 170 hours of delayed rugby on Prime in 2007). This is a significant increase in the amount of rugby shown on FTA prior to SKY acquiring rights to such content .

• TVNZ has acquired sports rights and only showed them on a limited, selective and delayed basis. For example:

• Auckland America’s Cup: TVNZ did not show all the races and refused SKY’s offer to broadcast them .

• Beijing Olympics: TVNZ will produce eight channels of content, but intends to only show two of these channels. Additional channels are being sold to pay -television operators overseas, but not to SKY.

• 2003 Rugby World Cup: TVNZ did not show all games and refused to sell rights to SKY.

This is detrimental to consumers.

• SKY also d ifferentiates itself from its FTA competitors by showing sports live and uninterrupted. By doing so , it ensures a competitive broadcasting market – which should be encouraged, rather than stifled.

• One of the reasons SKY’s 2010 Winter and 2012 Summer Olymp ics bids were successful was because SKY is able, through its pay -television channels and Prime to make better use of the Olympics programming than any other broadcaster by providing multi -channel and substantial FTA coverage. This was recognised by the I OC. Compare TVNZ’s 2004 coverage of 12.5 hours per day to Prime’s 22 hour Olympic c overage commitment for 2012.

• TVNZ lists a number of sports events in its submission as “premium” that it would never normally have bid for or broadcast. It is over -claimin g the extent to which SKY has ac quired sports rights.

TVNZ claims that “the lack of marketplace rules has allowed a variety of other anti -competitive behaviour to develop in the New Zealand market, including bundling, hoarding, cross - subsidisation and ga te -keeping ”. ( See page 30 and 34 of TVNZ’s submission .)

2.28 These claims are demonstrably wrong. SKY does not engage in anti -competitive behaviour and sets out below the evidence that proves this.

Page 14 Bundling/Hoarding

TVNZ claims that “SKY can use its purchasin g power to secure total rights to sports events and thereby deny access to others e.g. cricke t”.

TVNZ also claims that SKY is using Prime “to secure both pay -TV and FTA rights to sporting events ” and refers to the 2010 Winter Olympics and 2012 Summer Oly mpics .

TVNZ alleges that SKY “seldom utilise s any improvements to the FTA rights via Prime except on a limited, selective and delayed basis ”. (See page 34 of TVNZ’s submission. )

2.29 These claims are not true:

• The claim that SKY shows sports only on a limite d, selective and delayed basis on Prime is simply not supported by the facts: Prime broadcast a total of 804hrs of sports from 672 individual programmes b etween January 2007 – June 2008.

• SKY , TVNZ and TVWorks purchase so -called “bundled” FTA and pay -tele vision broadcasting rights simply because this is commonly the only way in which the rights are sold. They are sold this way worldwide to obtain maximum value for the rights seller as well as to gain the maximum benefit to sports bodies .

• The purchasers of the rights (broadcasters) have better information than the sellers as to the optimal split of rights between pay and FTA television , so purchasers are in the best position to maximize the broadcast -related revenue that can be derived from those rights. The issue for the purchaser then becomes how best to utilise the rights. In SKY’s case, the optimal value is obtained in most cases by broadcasting the sports event live over pay -television and, in many cases , showing the event delayed on FTA (whether Pr ime or another channel). There is no anti -competitive purpose by SKY and no unfair exercise of market power .

2.30 Where SKY purchase s broadcasting rights for FTA channels as part of a bundle, SKY’s preference is to provide a FTA broadcasting package. This m akes commercial sense for SKY as it sells rights it would otherwise not see a return from. SKY’s purpose is not to deny access to other broadcasters for anti -competitive ends.

• From 1996, SKY entered into agreements first with TVNZ, then with TV Works for d elayed transmission of rugby. Both broadcasters, however, showed a growing disinterest in the delayed rights. As a result , SKY has most recently used its FTA channel Prime, to broadcast major rugby games in full on a delayed basis. SKY also sells FTA br oadcasting highlight rights for rugby and rugby league to other FTA broadcasters.

• SKY purchased the exclusive New Zealand broadcast rights for New Zealand cricket in April 1998 . A fter long and extensive negotiations for the renewal of the rights , TVNZ had withdrawn from the bidding process at the 11 th hour . New Zealand Cricket believed that TVNZ was only interested in “cherry -picking” coverage of matches (see letter from Justin Vaughan, C hief Executive of NZ Cricket ).

• SKY will broadcast twice as much FTA Summer Olympic s coverage in 2012 than TVNZ showed in 2004 (12.hrs delayed and live coverage) and nearly twice as much than TVNZ is

Page 15 intending to show in 2008 (12.5 hrs on TVNZ vs 22 hrs on Prime). One of the reasons SKY’s 2012 Olympics bid was successful w as because it was better able to meet the IOC ’s Olympic mandate than any other broadcaster. SKY’s acquisition of rights to the 2010 Winter Olympics and 2012 Summer Olympics is an example of healthy competition for bidding rights as envisaged by the Commer ce Commission in clearing the Prime acquisition.

2.31 Where possible SKY attempt s to show its FTA rights on Prime, though of course it is not possible to show all this content on the single Prime channel. SKY , therefore, has tried to make arrangements with o ther broadcasters for some of this content to be shown (e.g. Stratos for the England/New Zealand Cricket Tour). Furthermore, SKY has worked together with TVNZ to jointly buy programme rights, such as the IRB Rugby Sevens and the FIFA World Cup.

2.32 SKY also n ote s that TVNZ has been extremely aggressive in the negotiation of production agreements over the past three -to -four years in terms of capturing local digital rights for out - sourced, NZ on Air funded programmes. By not granting local producers the ability to ‘on sell’ their titles to pay -television and having lengthy licence captures on funding agreements TVNZ is able to hold on to local content, to the detriment of local production industry , and have restrict ed the availability of local content to a wide audience.

TVNZ suggests that “a la carte rules ” is one method that will “ promote diversity and guard against a lessening in competition ”. (See page 46 of TVNZ’s submission .)

2.33 TVNZ has not provided any evidence as to why SKY’s bundling of packages is anti -competitive or detrimental. There should be no presumption that program me bundles are necessarily anti - competitive or welfare -detracting. Bundling of products is widespread in the economy generally and in many instances pro -competitive. Indeed, in highl y competitive pay -television markets overseas, there has been no major instance of a la carte pricing by multi -channel pay video providers. This shows that a la carte pricing would not benefit consumers generally or multi - channel pay video providers.

2.34 Whil e a la carte pricing may benefit a few customers it would be harmful to the majority of consumers and a major imposition into SKY’s business. The potential detriments include that mandating a la carte pricing for pay -television would reduce the diversity and quality of programmes offered by SKY, increase programming, equipment and marketing costs, and reduce revenues to SKY. It would also directly conflict with many programming contracts , i .e. SKY could be in breach of existing contracts if it were requir ed to provide a la carte subscription packages .

2.35 In any case , competition in the provision of multi -channel services is increasing – both worldwide and in New Zealand. Options for downloading video content via the internet have emerged and/or likely will soon emerge. This competition may create pressure for SKY to re -package its channel offerings , if in fact it is needed . There is no need to mandate unbundling.

Cross subsidy

TVNZ claims that SKY cross -subsidises the operation of Prime . (See page 34 of TVNZ’s submission.)

Page 16 2.36 TVNZ’s claim seems to be made at two levels :

• Pr ime, as a business, is being operated at a loss .

• When SKY acquires both pay -television and FTA rights, it cross -subsidises the FTA rights from its pay -television revenues.

2.37 The first claim is true . F or the first two years that SKY has owned the Prime channel, but that does not mean that SKY is acting anti -competitively - SKY and TVWorks also made losses in their first years . The costs for operating the Prime business are accounted for by S KY separately from pay - television operations . While it has made a loss over the first 2 years of SKY ownership, this does not prove anything. SKY’s intention in purchasing Prime was , and continues to be , that it operates profitably without support from t he rest of the business.

2.38 TVNZ has provided no evidence to back -up the second claim, and simply makes a bald assertion. Prime has not used SKY’s “deep pockets” to outbid other FTA broadcasters for content – in fact, Prime has failed to secure premium FTA content after being outbid by TVWorks and TVNZ.

2.39 There are a number of elements that TVNZ would need to prove to support its claim, not least that SKY has some anti -competitive purpose and that Prime is the means of giving effect to that purpose. Prime’ s share of viewership (6% last year ) versus TVNZ & TVWorks joint share of 65% of viewership means that neither of these element s exists. Furthermore, Prime’s viewership share has remained largely consistent since being purchased by SKY .

2.40 Ownership of a FTA channel by a pay -television provider is not unusual, either:

• In NZ - at one time TVNZ was SKY’s largest shareholder .

• Overseas – Consolidated Media Holdings owns shares in Australia’s leading pay -television provider FOXTEL and also PBL Media, which owns F TA Channel Nine, one of the major FTA channels in Australia. Also, in Australia Win Corporation owns the FTA channel Win Television as well as the pay -television provider : Selec TV. There are also other overseas examples.

Gate -keeping

TVNZ claims that SK Y has a virtual monopoly on live sports coverage and many New Zealanders are effectively paying a “sports ta x”. TVNZ also claims that a number of channel owners in New Zealand have nowhere to go but to SKY, and consumers have to pay SKY even to watch FTA channels on SKY . (See page 34 of TVNZ’s submission)

2.41 This is discussed and refuted exhaustively in SKY’s submissions :

• The claim that channel owners can only go to SKY ignores the development of Freeview and broadband and the range of other transmission v ehicles that have always been available.

• SKY has a history of successfully working with NZ entrepreneurs who want to set up their own channels and broadcast them on SKY (for example, the 100% NZ owned Documentary channel, Arts channel, Food TV, Living cha nnel, Juice TV).

Page 17 • The claim that consumers have to pay SKY to watch FTA channels on SKY is misleading and does not recognise that most consumers can receive FTA channels by other means and SKY only charges a minimum basis for the FTA only package to cover t he cost of the set top box and broadcast infrastructure .

• SKY carries or tunes into every national FTA channel – with the agreement or blessing of broadcasters. The only exception is TVNZ 6 and TVNZ7.

• It is TVNZ, rather than SKY, that is preventing the av ailability of TVNZ 6 & 7 on SKY. TVNZ’s lawyers threatened to sue SKY if it tuned into these channels – despite one of TVNZ’s key strategies bei ng to “broaden the accessibility of [local] content to all New Zealanders through whatever screen device attach ed to whatever platform they choose” (Chief Executive Overview, Annual Report 2007).

• Other Freeview broadcasters have welcomed SKY tune in – including Parliamentary TV, Stratos, Cue and Maori TV.

• By allowing SKY decoders to tune in to the Freeview channels , SKY subscribers do not have to buy a Freeview decoder for $100 plus. This is a significantly saving for the community.

• TVNZ has commandeered Freeview. Its original purpose was to encourage viewers to switch to digital in order to free -up analogue spect rum. But by releasing new channels on Freeview and warning SKY off tuning them in, TV NZ has effectively restricted the availability of local content and wasted tax payer subsidies. They have also punished viewers who have made the move to digital but did not choose Freeview.

TVNZ claims that there is no easy path for the growth of FTA satellite transmission. (S ee page 34 of TVNZ’s submission )

2.42 This is not correct. SKY believes s atellite transponder space is obtainable, and queries whether TVNZ has tried to discuss this with Optus.

2.43 TVNZ had opportunit ies in the past to acquire transponders on the Opus D1 satellite but decided not to take up these opportunities. These included the opportunity to bid for transponders which SKY ultimately acquired and optio ns over other transponders which TVNZ decided not to exercise . TVNZ have chosen not to do this. These were commercial decisions made by TVNZ. SKY should not be blamed for the consequences .

2.44 Further, TVNZ or anyone else can seek space on new satellites by making contractual commitments to use transponders on the satellites – just as SKY contracted for satellite space on the Optus D1 satellite before launch at its own risk and cost .

2.45 Further , satellite transmission is not the only transmission path. Other transmission vehicles include digital terrestrial transmission , cable and broadband . This range of different transmission vehicles was recognised by the Commerce Commission in its clearance decision for the Prime acquisition.

Page 18 TVNZ’s submission refers to its public funding as a percentage of revenue and states that " TVNZ receives one of the lowest levels of public funding (as a % of revenue) of any public service broadcaster ". (See pages 11 and 16 of TVNZ’s submission .)

2.46 This figure is misleading, as it is not appropriate to simply compare TVNZ ’s public funding to that of other public service broadcaster s.

2.47 TVNZ is one of the few - if not the only - major public service broadcaster s to receive any direct advertising revenue whatsoever. Therefore, TVNZ's revenue stream is naturally differently weighted to such public service broadcaster s as ABC Australia, the BBC in the UK or PBS in the USA, who are not required to bring in any such direct commercial revenue. Accordingly, these broadcasters are proportion ally more heavily publicly funded than TVNZ with two different revenue streams; public funding and advertising revenue.

TVNZ’s submission contains a table purporting to compare New Zealand’s policy environment to other OECD countries. The table gives the impression that all the types of measures and policies exist in other countries. (See pages 26 and 27 of TVNZ’s submission).

2.48 The TVNZ table is incorrect because New Zealand does have legislation or other measures in many of the areas mentioned .

Objectives for policies TVNZ’s position: SKY’s position: and measures

Plurality of voices in the NZ has the draft digital strategy, NZ On media Air policies and funding, and Charter funding

Cultural diversity and NZ has an effective voluntary local national identity content quota, TVNZ charter funding, establishment of Maori TV

Programme diversity NZ has policies and monitoring in place on programme diversity, NZ On NZ has no policies or Air policies and funding, Charter very limited policies funding

Eff icient allocation of NZ’s current radio spectrum allocation spare spectrum policies provide for efficient allocation of broadcasting spectrum and the Commerce Act applies to any acquisitions

Universal coverage of a NZ has a lo ng -term strategy to ensure free broadcasting nationwide FTA coverage, including service provision of subsidies by NZ On Air, funding of TVNZ directly by MCH , development of the Freeview platform

Page 19 Objectives for policies TVNZ’s position: SKY’s position: and measures

Restriction on NZ has no policies, very NZ has restrictions on advertising on advertising limited policies, or is self Sunday morning, and some public regul ating holidays, a prohibition on tobacco advertising, self regulation of alcohol advertising and advertising aimed towards children (but with potential for regulatory intervention )

2.49 The TVNZ table is also misleading because the extent to which each other country has the measures identified differs. The TVNZ table should have identified which country or countries New Zealand is being compared against.

2.50 Furthermore the TVNZ table fails to refer to the competition law requirements under the Commerce Act and compares policies and measures to ensure plurality of voices in the media while ignoring that New Zealand has a plurality of voices without specific policies or regulatory measures – f or example, the Hindi channel , and Mandarin channels on SKY and Maori TV .

TVNZ claims that New Zealand has paid little attention to the broadcasting and media competitive environment (See page 25 of TVNZ’s submissions).

2.51 This statement is not correct. The Ministry of Economic Development, the Ministry for Culture and Heritage , and the Commerce Commission all play an active role in ensuring competition in the broadcasting and media environment through regulation, investigation, investment and resource al locatio n. Some examples are: the review and regulation of the telecommunications industry, the creation of Freeview digital platform, the allocation of spectrum licences, the allocation of competitive content funding through NZ On Air, Commerce Commissio n oversight of mergers and acquisitions, the draft digital strategy, to name but a few.

Page 20 3. RESPONSE S TO TVWORKS

3.1 This section sets out SKY’s detailed comments in claims on TV Work s’ submission.

TVWorks states in its submission that “the public is not well ser ved by having a Pay TV monopoly in New Zealand. As with any monopoly, there are few controls on pricing and New Zealanders are charged fees in excess of what would be likely in a competitive situation. ” ( See page 5 of TV Work s’ submission. )

3.2 Firstly, SKY c ompetes with TVWorks and TVNZ for content, advertising and viewers. SKY (including Prime) last year had a 33.7% share of viewership, which is less than TVNZ with 46.4 % of viewership.

3.3 Secondly, SKY’s fees are directly comparable and consistently lower than those earn ed by pay - television providers in Australia, the UK and US . This is demonstrated by the following broad comparison of prices for comparable packages between Europe, BSkyB, SKY and Foxtel:

Sports package Movies Package Sports & Movies

Euros

European Average 42.64 43.10 53.52

BSkyB 47.08 47.08 56.77

SKY NZ 35.87 34.06 54.24

Foxtel 34.32 41.08 52.10

Note: European coverage and BSkyB figures taken from PWC report 29/2/2008 prepared for BSkyB on outcomes for consumers in relation to pay TV in Europe (see www.ofcom.gov.uk). SKY NZ and Foxtel prices (over the same period) have been converted to Euros on the average exchange rate for November 2007.

3.4 Furthermore, SKY’s channels are packaged in a similar way that most, if not all, pay -televisi on providers sell their rights. TVWorks provides no evidence of overcharging by SKY.

3.5 Thirdly, and most importantly, SKY offers a service that appeals to the New Zealand public and meets the needs of viewers . If SKY is to secure subscribers, SKY must prov ide a better service and more choice than FTA channels – 73 0,000 subscribers believe SKY is value for money.

TVWorks states in its submission that “there is [on SKY] a huge quantity of sport available, and SKY has seven channels and sometimes more devoted to sport of various types. For the sports aficionado SKY is a good bet, and 99% of the sport that is on SKY should remain there for those who are interested and willing to pay. ” ( See page 7 of TVWorks ’ submission. )

3.6 SKY agrees.

Page 21 TVWorks also states, “[h]owever, when it comes to a few key events such as the Olympics, Commonwealth Games, All Blacks Tests and ODI Cricket there is a strong case to be made that all New Zealanders should have free access to these events ”. (See page 7 of TVWorks ’ submission. )

3.7 Si nce 1996 , the key events listed above have been broadcast on FTA , with the exception of One Day International C ricket (for the reason stated in paragraph 3. 9 below) .

3.8 TVNZ or TV Works have won the rights to broadcast many of these events in the past (for exa mple, the Rugby World Cup, Olympics, Commonwealth Games). Where FTA channels have won these rights, many of the events have been shown delayed, highlighted, interrupted for advertising or not at all.

3.9 Where SKY has won the rights to these events, it has r ecognised the importance of these events for all New Zealanders . SKY has mostly showed these events in their entirety in real -time and often ensured delayed coverage of these events has been available on FTA. In the case of some One Day International Cri cket matches, it has been FTA channels which have not been sufficiently interested in events to broadcast full coverage of the events because of their length and impact on viewing schedules .

3.10 For more evidence on sports broadcasting and FTA requirements for key sporting events , see SKY’s submission of 4 April 2008 , paragraphs 6.1.8 - 6.1.30 , which provides a detailed, substantiated response to this issue .

TVWorks states that “ Pay TV cannot create the same sense of “event” and excitement that Free to Air , wit h its virtually 100% reach, can … Without full coverage Free to Air TV scre ening of major sporting events, a sport will find it more and more difficult to grow ”. (See page 7 of TVWorks’ submission .)

3.11 SKY is committed to ensuring sports are shown live and u ninterrupted – SKY believes this is a crucial part of ensuring the excitement of a sports match is retained. Due to scheduling constraints and advertising incentives , FTA channels have often shown key events (such as the Rugby World Cup or the Olympics) d elayed or interrupted. This detracts from the sense of “event” and excitement.

3.12 Pay -television has been responsible for creation of events such as the Super 14 and the trans - Tasman netball. Without the revenue that pay -television has provided these compet itions would not have existed.

3.13 More importantly, broadcasting rights are an essential source of revenue for sports codes to retain top talent from moving to more lucrative contracts overseas. Without top players competing at the major sporting events, the appeal of the events is reduced – for sports players, television viewers and fans attending live matches.

3.14 In their submissions, sporting codes or sporting representative bodies have emphasised the value that SKY 's broadcasting brings to their sporting c odes. They believe this would not be delivered by FTA. For example – the New Zealand Rugby Union emphasises that “ the number of rugby matches broadcast has dramatically increased since agreements were entered into with SKY, from

Page 22 38 in 1995 (including 5 l ive) to over 200 in 2007 ”. SKY ’s contribution has helped, rather than hinder ed , the growth of sport in New Zealand.

TVWorks suggests that “NZRU, NRL and many others are exclusive providers of sport to the country…these codes [should ] be legislated to u nbundle their sporting packages for both the good of the sport and the benefit of the consumer. ”

“In Europe, football has been the object of unbundling legislation to the benefit of all. ” (S ee page 7 of TVWorks’ submission. )

TVWorks suggests that “ [a]n a lternative to unbundling would be to enact anti -siphoning legislation. That could be phased in over a number of years, and would only apply to a very limited number of high profile sporting events ”. (See page 8 of TVWorks’ submission .)

3.15 Forcing sporting c odes to unbundle their sporting packages would:

• Be harmful to the sporting code :

o Because r egulation would diminish the value of sports rights for sporting codes, it would reduce the funds available to support re -investment in sport at lower levels . Justi n Vaughan (Chief Executive of NZ Cricket) acknowledges how:

“[a]ny move towards anti -siphoning regulations would significantly decrease the value of any future [broadcasting rights] agreement – and this reduction in value would have direct consequences on the amount New Zealand Cricket can invest into all levels of the sport .”

• Be detrimental to consumers :

o This can be illustrated using an example of the European football unbundling referred to by TVWorks . In the UK, the compulsory split of the Premier Leag ue rights between pay - television providers Setanta and BSkyB, by dividing games into a large number of packages, has meant that audiences cannot be sure of viewing comprehensive footage of their home team without purchasing two subscriptions. Because cove rage of all games cannot be guaranteed, the expectation is that subscription levels will drop, which will mean that there will be no incentive to purchase the rights in subsequent seasons. This will affect the money the content provider receives, which in turn affects the sport’s revenues. It also means that consumers will get less choice in the programmes they watch.

Page 23 TVWorks claims that “[t]he unlevel playing field caused by the cross -ownership of Pay -TV and F ree to A ir television is possibly the bigg est medium term threat to the future of F ree to Air television in New Zealand ”. (See page 6 of TVWorks’ submission. )

“The solution is to enact legislation requiring SKY to divest itself of Prime TV. This is consistent with Cabinet’s objectives by ensurin g diverse platforms and ensuring the operation of effective markets .” (See page 6 of TVWorks’ submission. )

3.16 SKY’s ownership of Prime has not given it any “dominance” in the broadcasting market. Prime currently has a viewership of 6% versus TVNZ & TVWorks joint 65% of viewership . The Commerce Commission cleared SKY’s purchase of Prime on the basis that it would not substantially lessen competition in any of the affected market . This is convincing evidence, as opposed to TVWorks unsupported assertions.

3.17 Pr ime has not used SKY’s “deep pockets” to outbid other FTA broadcasters for content – in fact, Prime has failed to secur e premium FTA content after being outbid by TVWorks and TVNZ . An example of this competition, with no evidence of an “unlevel playing fi eld” in SKY’s favour, can be seen in the competition over the Granada package. Although SKY was able to bid competitively when the package came up for renewal, its bid was unsuccessful. If anything, TVNZ and TVWorks have been better able to secure exclus ive deals with studios than SKY has. For example, TVNZ holds the rights to the Disney, Warner, Sony and Granada packages, while TVWorks has rights to the Fox, NBC Universal and CBS Paramount packages.

3.18 In any case, SKY’s ownership of Prime is not unusual a nd certainly not “one of a kind” , as discussed in paragraph 2.40 above .

3.19 SKY also notes that TVWorks’ suggestion is inconsistent with the Government’s objective of ensuring diverse platforms for broadcasting . When Prime went up for sale, no one but SKY was realistically interested in purchasing it. If SKY had not purchased it, it is possible that Prime would have ceased business , and it certainly would not be able to compete as well as it now does . SKY’s acquisition of Prime has ensured greater competitio n in FTA, for the benefit of viewers.

TVWorks state s how in the past, “ [v] irtually all the VHF frequencies available in the country were used by TVNZ and TVWorks for television networks owned by those companies… This mean t that TVNZ and TVWorks were able to attract large audiences due to the advantage of their ‘ reach ’ ”. (See page 2 of TVWorks’ submission. )

TVWorks states that “[o] ne of the primary goals of this legislative review must be to ensure the continued health of those broadcasters [TVNZ/TV Works ] in the face of all the new challenges that the digital world will bring ”. (See page 3 of TVWorks’s submission. )

3.20 SKY disagrees that the continued health of existing television broadcasters should be the focus of the review . This is not the stated purpose of the review and there is no evidence of the “poor health” of TVWorks or TVNZ 3. The focus of the review was clearly intended to be on the development of digital broadcasting for the benefit of all New Zealanders. Focusing on protecting

3 See paragraph 2.2. The viewership figures above suggest TVNZ and TVWorks are in great health.

Page 24 specified broadc asters is not only unjustifiable, but any attempt to protect the “continued health” of FTA broadcast ers may mean that many of the benefits of digital technology may not be realised and large inefficiencies created . The result could be larger costs for tax payers, less choice for viewers and a less er contribution from the broadcasting sector to New Zealand society than would otherwise be the case.

TVWorks claims that “[i] nstead of the current scenario where only four television channels have access to VHF frequencies, dozens of channels will have access to digital frequencies on an equal basis to TVNZ and TVWorks. …It could be argued that a loss in viewing to TVNZ or TVWorks will be compensated for by growth in other channels … but many of these new channel s are simply rebroadcast s of foreign content that add nothing positive to the production community, but take fees from subscribers out of the country to fund internatio nal operations ”. (See page 2 of TVWorks’ submission. )

3.21 SKY does not agree that growth in other channel s will add nothing positive to the production community. SKY believes that the digital environment will allow further competition not only in digital broadcasting, but broadcasting from other platforms.

3.22 TV Works’ seems to be trying to prote ct its market position through regulation, and appears to be afraid of the competition digital technology will bring .

3.23 It appears TVWorks is referring to SKY when it refer s to channels that simply provid e foreign content, and takes fees from subscribers o ut of the country to fund international operations . This is completely untrue . To the contrary, SKY carries a lot of local content (see latest NZ On Air survey) and a large number of its shareholders are New Zealanders. This assists the local production community. Furthermore , and ironically , TVWorks is almost 100% foreign owned – as opposed to SKY which has a substantial New Zealand shareholding base.

3.24 SKY also considers that TVWorks’ comment is inconsistent with TVWorks ’ suggestion elsewhere in its sub mission to have additional funding for its Freeview channels. TVWorks appears to be saying that viewers should not have more content choice, unless that content choice is tax payer funded and provided by either TVWorks or TVNZ.

Page 25 4. SKY’S RESPONSE TO OTHER S UBMISSIONS

4.1 This section sets out SKY’s response to claims in Freeview’s and SPADA’s submissions.

Freeview

Freeview stated that “With the exception of sports and music, the pay -TV sector typically has avoided local content as this content does not fit into its subscription -based pay -TV model.” (See page 3 of Freeview’s submission)

4.2 This is not true. SKY broadcast 16,488 hours of local content in 2007, which included documentaries, special features, news and concerts, feature films, short films, sports and l ocally produced music videos. In 2007, SKY showed 17 NZ feature films , 83 NZ short films, and 27 NZ documentaries – a total of 1305 hours of premium NZ content, other than sports and music. (Source: NZ On Air, Local NZ Television Content 2007). Furtherm ore, every year local content on SKY increases without Government subsidy or intervention . SKY would like to broadcast more local content but much of this content is tied up by TVNZ7.

One “asymmetric ” regulatory option considered by Freeview is :

• Broadcas ters should be free to cho ose whether they wish to broadcast their channels on the SKY digital platform.

• All near national FTA analogue broadcast licence -holders are required to broadcast their channels digitally i.e. on Freeview. (See pages 9 and 10 of F reeview’s submission) .

4.3 The first comment is not correct. Broadcasters are already free to choose whether to broadcast their channels on SKY’s digital platform. In the past, TVNZ and TVWorks reached agreement with SKY to broadcast their channels on SKY . Other broadcasters have welcomed their channels being decoded by SKY set -top boxes (e.g. Parliament TV, Maori TV, Stratos, Cue). However, l ast year , TVNZ chose not to broadcast TVNZ 6& 7 on SKY’s digital and warned SKY off tuning in or broadcasting these channels .

4.4 Freeview’s position also seems inconsistent with its approach of encourag ing viewers to use SKY funded infrastructure (namely SKY installed satellite dishes and/or UHF aerials which were installed by SKY at its cost and which under SKY’s subscrip tion agreement are owned by SKY ) for the reception of Free view, and to make use of the SKY decoder to power the LNB (Low Noise Block Down Converter) , which amplifies the signal received by the dish.

4.5 In relation to the second comment, SKY w ould be in brea ch of its contractual obligations with SANZAR and the NRL if it was required by legislation to broadcast Prime over the Freeview satellite service . Prime broadcasts delayed rugby and rugby league footage in NZ over UHF – any unencrypted satellite transmis sion of this footage by Freeview may allow viewers in other countries (e.g. Australia, Pacific Islands) to tune into the footage , instead of locally transmitted footage . Freeview’s suggestion would therefore create contractual issues for SKY.

Page 26 4.6 SKY notes th at t his problem would not arise with Freeview’s DTT service . The cost to SKY in doing so would be $2.2 million a year - $1.625 million per annum transmitter, transmission and linking to Kordia for HD services, plus annual Freeview costs and capital costs for infrastructure upgrade at Prime’s Albany’s Studio. Accordingly, once Freeview DTT viewership numbers reach an appropriate level, SKY intends to transmit Prime on the DTT platform.

4.7 Because the cost is considerable, (Prime’s entire revenue was only $22.09 million last year) SKY believes that it should be up to broadcaster s to make their own decision about whether the move to Freeview is commercially viable. Otherwise the imposed cost may affect the viability of small FTA channels , actually reducing co ntent choice in the long run. SKY should not be forced to transmit over Freeview especially when it would be at their cost.

Freeview stated that :

“For Freeview to maintain its relevance and attractiveness in the fac e of competition, its broadcasters will need to have a clear expansion plan and route for obtaining more spectrum. During the process of creating the initial licence sets for DTT transmission MED designed a five set plan , subject to further spectrum clearance work. To enable the allocation of these sets therefore requires nothing more than a definitive Government policy to that effect. ” (See page 11 of Freeview’s submission .)

4.8 There is no impediment to additional licence sets for DTT transmission under current spectrum structures. The Freeview partners have already been given plenty of spectrum on concessionary terms.

4.9 Further, t here is no reason or need for intervention in the allocation of spectrum in favour of Freeview. Freeview should compete for further spectrum fairly with other broadcas ters. Any concession terms or preferences for Freeview could result in the inefficient allocation of spectrum and its inefficient use.

Screen Production and Development Association (SPADA )

SPADA states that “…New Zealand is unique (and it is suggested, no t in a positive way) by international standards in allowing Pay TV operators to “free ride” due to the lack of obligations around local content in return for licences”. (See page 12 of SPADA’s submission)

4.10 SKY has not had a “free -ride” :

• SKY is New Zealand’s first pay -television provider. When SKY was set up in 1990, demand for pay -television was uncertain. SKY took considerable risks and invested heavily to develop new and innovative broadcasting and digital services , a total of $1.0396 dollars to date. S KY also made substantial losses for a number of years - $237 million from 1990 -2002).

4.11 SKY broadcast 16,488 hours of local content in 2007 which included documentaries, special features, news, concerts, feature films, short films, sports, and locally produ ced music videos. 4

4 NZ On Air, Lo cal NZ Television Content 2007.

Page 27 SPADA claims that as opposed to nearly every other Western country, pay -television operators in New Zealand are able to retransmit free -to -air channels without paying a cent to copyright owners.

4.12 This is incorrect and shows an astounding misunderstanding of the Copyright Act . SKY’ s current retransmission of the FTA channels is by agreement. Without this agreement, SKY would not be able to retransmit the FTA channels. In New Zealand only cable retransmission is permitted as of right unde r section 88 of the Copyright Act. If retransmission is carried out under section 88, copyright owners could establish a licensing scheme under which a charging regime could be established .

SPADA states that SKY acts as both a network and a content aggr egator. SPADA submits that “Depending on the market penetration of Freeview, SPADA believes this issue may need to be addressed through separating operations, as undertaken with TVNZ and Telecom; potentially offsetting the growth of market dominance by so le operators.” (See page 26 of SPADA’s submission)

4.13 The argument that separation has been pursued in other industries is very weak. The competitive circumstances and other factors in those industries are very different than the television industry in New Z ealand.

4.14 The rational given for split of TVNZ and Kordia by Michael Cullen at the t ime the separation was announced was that given the different natures and objectives of the two parts of TVNZ's business it was more appropriate that they operated complete ly separately, not within the same company structure: "A different mix of skills is needed for the governance of each business and this can best be achieve d by having separate companies" – not to address growth of market dominance . Therefore the split doe s not create any kind of precedent.

SPADA submits that New Zealand audiences should have access to events of national importance and cultural significance, by giving priority to free -to -air television broadcasts in acquiring the broadcast rights to premi um content. (See page 23 of SPADA’s submission .)

4.15 Most of the “premium content ” referred to is related to major sport events. SKY agrees with the sentiments expressed by Sport and Recreation New Zealand (SPARC) in its submission - such as questioning whet her FTA broadcasters could provide comprehensive coverage of major sporting events.

4.16 Also, TVNZ has previously “cherry -picked” only the most high -profile events and shown little interest in buying (and essentially sponsoring) an entire sports package. Th is has negative flow -on effects, particularly harmful to sport at its grass roots.

4.17 SPAD A’s membership does not include sports bodies and most of its members are not directly involved in producing sports coverage. SKY therefore queries how much knowledge SPADA has of these issues. Further, the sports bodies (e.g. NZRU and NZ Cricket) have a different view than SPADA.

Page 28 5. NO JUSTIFICATION FOR VERTICAL SEPARATION OF SKY AND/OR “OPEN ACCESS” TO SKY’S PLATFORM

5.1 Finally, SKY wishes to briefly comment on call for separation of SKY or open access to SKY’s platform that TVNZ and other submissions have sought.

5.2 All national FTA channels are available on SKY other than TVNZ6 and TVNZ7 (due only to TVNZ’s stance on this). According to figures provided by TVNZ, the FTA channels retain about three - fourths of the share of the audience for television in New Zealand (with TVNZ alone accounting for well over half of the FTA share) .

5.3 There does not appear to be any “competition problem” that would justify mandating the substa ntial regulatory changes sought by TVNZ and others.

5.4 Quite apart from there being no justification for such claims, there would be serious detriment to the broadcasting environment in New Zealand:

• Any such separation or open access regime would place signi ficant costs on SKY and on consumers and lead to a reduction in revenue to sports bodies . These costs and affects have not been taken into account by the submitters who support such policies for self interested reasons .

• No evidence has been provided for h ow vertical separation along the lines suggested (or “open access”) would benefit broadcasters or competition more generally. It is difficult to see how the changes would achieve any of the review’s aims.

• The argument that separation has been pursued in o ther industries is very weak. The competitive circumstances and other factors in those industries are very different than the television industry in New Zealand. The separation of Kordia and TVNZ does not create any kind of precedent , particularly as it separated the broadcaster from the provider of transmission services and both were Government -owned .

• Requiring SKY to provide free access over its facilities, after the investments i t has made in those facilities , and the risk it took in doing so, interf eres in its commercial decision -making and would set a precedent that would generally work to discourage future investments, both by SKY and other companies considering to invest in broadcasting and other digital services.

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