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Mediacom Marketing Digest 27 January 2006

Mediacom Marketing Digest 27 January 2006

Not Quite Ready For Prime Time

We were more than a little surprised to find that the Commerce Commission ruling on Sky's acquisition of Prime Television, scheduled for today, has been delayed until the 8th of February, presumably so that the Commission can reflect on issues raised by those objecting to the takeover. Foremost amongst those objectors: Television New Zealand, whose 72-page submission makes interesting reading.

TVNZ's point of view, if we may summarise their Executive Summary:

1. Sky's acquisition of a free-to-air (FTA) broadcaster will enable Sky to "leverage its market power in the acquisition of Pay TV rights increasingly to acquire bundled Pay TV and free-to-air content rights", thus outbidding the FTA-only operators;

2. Sky's monopoly position in the Pay TV market will allow them to cross-subsidise Prime and "artificially over-bid the price of stand-alone rights to free-to-air content";

3. Sky will, through acquiring Prime, gain influence over an emerging second and alternative digital television platform, with the potential to influence its success "by disrupting, delaying or otherwise influencing roll-out by continuing Prime's involvement with the platform";

4. Or reduce the attractiveness of the hypothetical free-to-air digital TV platform "by withdrawing Prime from the platform" and/or setting up its own free-to-air platform.

Perhaps unsurprisingly, the TVNZ submission makes little mention of the current share of advertising revenues that the combined entity would enjoy (Prime/Sky 11%, TVNZ/CanWest 89% according to Sky's original application), despite the fact that advertising & sponsorship accounts for more than 82% of TVNZ's revenues. The point is obviously conceded that the new operation would not occupy a position of market dominance in terms of FTA revenue streams.

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More unexpectedly, TVNZ is quick to dismiss the availability and significance of alternative technologies to deliver television to viewers anywhere anytime, despite a relentless diet of stories in the trade media which suggest the opposite. We have a contrary worldview but will agree to differ with TVNZ on this point.

Turning to the specific issues raised by TVNZ:

* Point One: Leveraging Market Power Well, doh! Why else would Sky buy Prime? Of course it's all about increasing market leverage! However there are no guarantees that such a combo would actually be able to outbid a determined FTA operator. Most obvious recent example of FTA-only outbidding Pay+FTA: the 2007 Rugby World Cup broadcast rights, acquired by TV3 despite a joint (and theoretically "unbeatable" if you look at the combined market power) bid by Sky and TVNZ.

* Point Two: Cross-subsidising It's kinda difficult to take this objection seriously. When TVNZ set up Horizon Pacific, did it "cross-subsidise" the new channel from earnings on One and Two? Of course. Did CanWest do likewise with TV4/C4? Naturally. When any business buys a loss-making competitor, does it leave the new operation to survive/die on its own or does it inject funds as required?

* Point Three: Disrupting FTA Digital by staying in As it happens, there's absolutely no need for Sky to influence, disrupt or delay FTA digital services - the New Zealand Government is achieving that all by itself, shooting down plan after plan advanced by TVNZ et al.

* Point Four: Disrupting FTA Digital by pulling out or setting up its own It's truly mind-boggling to imagine that Prime's minuscule audience share, laughed at by TVNZ when dismissing the potential threat of the new Paul Holmes show, could suddenly acquire sublime strategic importance in the future of digital television. As for the notion of Sky setting up its own FTA digital offering - if it makes sense, Sky would set up such an offering anyway, with or without Prime.

If you get the idea we don't support TVNZ's arguments, you're right. But what if the Commerce Commission think otherwise? What if the deal does get shot down? What happens then?

In our view:

* Prime will be shut down. As noted in the Sky application "Prime New Zealand previously received programming, marketing and managerial support from Nine Network under an agreement, which has now been terminated ... and will not be reinstated regardless of whether this acquisition proceeds". So business as usual isn't an option. And Prime New Zealand has accumulated losses of around NZ$76m - finding another buyer seems extremely unlikely.

* Sky can simply flick a switch and turn one of its existing UHF Pay channels into free-to-air, without seeking anyone's approval. Then all the nightmare scenarios postulated by TVNZ are similarly possible.

Yes, it's fair to say that Sky is in a very strong position in the New Zealand broadcasting environment - but it's been occupying that position for a number of years, and the Prime acquisition is largely irrelevant in terms of market domination. The moment has already passed. If we were TVNZ, we'd have held on like grim death to that pivotal minority shareholding they once held in Sky. Alas, as an SSE (State-Subverted Enterprise) they are very much at the mercy of their owners, the EnZed Gubbermint, whose long-term thinking rarely extends beyond the next Election. We do sympathise.

We look forward to an uncomplicated approval on February 8 so that we can finally get an inkling of Sky's plans for the channel formerly known as Prime.

Digital Music Rocks The IFPI, representing the recording industry worldwide (with over 1450 members in 75 countries and affiliated industry associations in 48 countries) has just released a global report on the state of Digital Music.

Key findings from the IFPI report:

* Sales of music in 2005 via the internet and mobile phones generated sales of US$1.1 billion for record companies - up from US$380 million the previous year;

* Music fans downloaded 420 million single tracks from the internet last year - twenty times more than two years earlier;

* Digital music now accounts for about 6% of record companies' revenues, up from practically zero two years ago;

* In Europe's two biggest digital markets, UK and Germany, IFPI research indicates more music fans are legally downloading music than illegally file-swapping;

* Mobile music now accounts for approximately 40% of record company digital revenues;

* Nokia alone sold over 40 million music-capable phones;

* In Japan, the most developed mobile music market, mobile sales reached US$211 million, representing 96% of all digital music sales, for the first nine months of the year;

* Globally, there are now more than 335 legal download sites, up from 50 two years ago;

* Online song catalogues doubled, with more than two million tracks and 165,000 albums available on the major services;

* The Apple iTunes music store has now spread to 21 countries - but not, as yet, to New Zealand (where the market is shared by Digirama, Amplifier and 2005 newcomer CokeTunes);

* New digital distribution channels for music are in the pipeline, such as podcasting and digital radio - but key licensing issues still need to be resolved;

* Actions against illegal file-sharing were extended to nearly 20,000 cases against uploaders in 17 countries;

* 35% of illegal file-sharers have cut back or stopped the activity, while only 14% have increased it;

* Major labels and independents have set up digital-only record labels (such as Universal's UME Digital and Warner's Cordless Recordings) to promote and develop new acts;

* Marketing is gathering pace in the online ecosphere: social networking and music-focused website has 22 million member users and is attracting up to 2 million new users per month. TV shows and new music are often debuted on the site, and several US bands have gained large fan bases and record sales almost entirely by word of mouth;

* Given a choice between CD, vinyl or digital, more than 25% of consumers chose to buy digital singles in the UK;

* Portability is a key driver of digital music. Nearly half of all file-sharers (45%) transfer music to portable players on a monthly basis. Legal downloaders are rapidly catching up - 29% transfer to portable players;

* And finally: download sales in UK and US saw a huge spike the week after Christmas 2005, with UK download sales of 1 million and US download sales of 20 million. Both spikes are directly related to consumers receiving portable players as Christmas gifts.

If you'd like your very own free electronic copy of the IFPI Digital Music Report, simply email us at .

Top 10 Fraud Complaints For 2005

The US Federal Trade Commission this week released its annual report detailing consumer complaints about fraud and identity theft in 2005. Complaints about identity theft topped the list, accounting for 255,000 of more than 686,000 complaints filed with the agency in 2005.

Identity theft complaints represented 37 percent of the complaints filed. Other top categories of fraud complaints for 2005 include:

* Internet Auctions - 12 percent * Foreign Money Offers - 8 percent * Shop-at-Home/Catalogue Sales - 8 percent * Prizes/Sweepstakes and Lotteries - 7 percent

* Internet Services and Computer Complaints - 5 percent

* Business Opportunities and Work-at-Home plans - 2 percent * Advance-Fee Loans and Credit Protection - 2 percent * Telephone Services - 2 percent * Other - 17 percent

Other findings from the report include:

* Internet-related complaints accounted for 46 percent of all fraud complaints.

* The percent of Internet-related fraud complaints with "wire transfer" as the reported payment method more than tripled between 2003 and 2005.

* Credit card fraud was the most common form of reported identity theft, followed by phone or utilities fraud, bank fraud, and employment fraud.

* The most frequently reported type of identity theft bank fraud was electronic funds transfers.

PS To intending fraudsters: please do not treat this as a To Do list.

From Our Mailbox: Name Removal

We do get letters from time to time, not all of them unprintable. We received three this week commenting on our Do Not Call Register story from last week and pointing out that New Zealand's own Marketing Association does operate a Name Removal service (and has done so for quite a number of years). Keith Norris, Chief Executive of the Marketing Association, summed up the philosophical and moral dilemma rather well, and we report his comments here:

"The US 'Do Not Call' register was ratified by Federal legislation about three years ago, and as you rightly say, over 70% of American telephone subscribers are now registered to receive no unsolicited commercial telephone calls. Organisations exempted from this legislation are charities, not-for-profit organisations, researchers and, of course, Government.

"It's a catch-22.... because whilst on the face of it this is a good social policy, it's put thousands of people out of work.

"Here at the Marketing Association we run a free Name Removal Service for New Zealanders who wish to be removed from unsolicited mail, telephone and fax communications lists. The service has been running successfully for nearly 20 years and we recently signed an agreement with the Department of Internal Affairs to include the Deaths Index in our Name Removal Register. It would be fair to say that all the major listbrokers subscribe to the service, receiving monthly updates of people who do not wish to be contacted or are deceased. "Whilst the concept of a Government-run service may seem attractive at first sight, it has many drawbacks. Amongst these are :

* fundamentally legislation tends to be unwieldy, inflexible and expensive - once it's in place, it is difficult to modify or unravel. Responsible self-regulation is a far better solution.

* if we follow the US model, we would effectively endorse the very calls that most consumers complain about, i.e. charity solicitations and research

* the economic downside, e.g. job losses (and the resulting consequences), and cost of compliance would be significant

"My biggest concern is that such legislation tends to be the thin end of the wedge. In New Zealand, we have a strong tradition of freedom of communication. Indeed this is embodied within the Bill of Rights. We also have a good record in the field of responsible self-regulation.

The Advertising Standards Authority, of which we are members, is a world-class model of self-regulation. As the DMA, we introduced the Code of Practice for Direct Marketing in New Zealand, and Codes of Practice for emarketing, telemarketing and the use of commercial fax. Now that we have widened our scope to become the Marketing Association, one of our major aims is to educate and encourage New Zealand marketers to carry out professional, socially-responsible marketing. The Name Removal Register is an important part of this philosophy. "In a country of 4 million people, peer pressure and market forces can be much more powerful than Government legislation."

Well said, Keith. Personally, we'd prefer all Caller ID systems to come with a Feedback rating (a la Trade Me) so that we can prejudge the merits of an incoming telemarketer before we pick up the phone. Oh, well, dreams are free ...


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