Sky TV's rights negotiation goes into extra time

Price increases are never welcome but sometimes, on rare occasions, we can soften that blow by offsetting ourselves in the market. For instance, accepting a 12-14% insurance premium increase from your insurer Tower is a lot easier to digest when your Tower shares return over 120% in the same year. For the good of the shareholders, you start to say…

So, when Sky Tv (Sky) recently raised their Sky Sport Now (SSN) prices I wondered if the same logic might apply – could investing in Sky shares help balance the cost ledger or even tip the scales in my favour? The challenge, however, is the uncertainty surrounding Sky’s rugby right renewal deal with New Zealand Rugby (NZR), a binary outcome that complicates how we determine Sky’s valuation. When Sky last renewed these rights five years ago, losing them was considered “fatal” to its intrinsic value. Sky clearly agreed, paying a hefty sum of roughly $100m p.a. alongside giving the rugby union a 5% equity stake, to secure the rights and outbid Spark Sport who had just won the cricket rights. Now, the stakes are high again, with a fresh negotiation set to determine whether Sky retains the rights or faces a major upheaval in operations.



NZR to bench Sky TV? Who gets the call up?

Whilst there is no shortage of media reporting around the rights renewal, it is worthwhile unpacking the players involved – it helps us to understand the various scenarios at play.

Sky TV – current captain: As the current rights holder, Sky remains the most logical contender. It has the infrastructure, experience, and, crucially, the subscriber base to justify holding onto the rights. Reports suggest Sky has two offers on the table: $85 million per year including the upcoming Nations Championship or $75 million without it. However, Sky is in a stronger position than it was five years ago and wants the price to reflect the reality that monetising sports streaming is far from easy in a fragmented viewer market (see below).

Spark Sport – retired: Spark’s short-lived foray into sports is evidence of two things. One; that it continues to be a less than excellent capital allocator and two; sports streaming is challenging. Its closure ended in a $52m write-off and handing its hard-won cricket rights to TVNZ for free. Whilst not a current contender, they played a pivotal role in driving up the rights costs last time. Spark gets a shout out for one reason to remember - despite a rock-solid balance sheet, brand presence, and their own customer base to cross-sell to, it wasn’t enough to make Spark Sport work.

DAZN – potential up-and-comer: The threat of international streaming giants like Disney+, Netflix, and Amazon has always loomed over the sports broadcasting industry, but New Zealand’s market size has typically been considered a deterrent – we are simply too small to care about.  Disney’s recent co-exclusive ESPN deal with Sky and HBO’s decision to sell Max content to Sky rather than launch independently in NZ (while simultaneously launching direct in Australia) both seem to support this thesis.

Yet conveniently for NZR (some would say very conveniently…), at the 11th hour when they have been stuck in a gridlock with Sky, it appears that DAZN, a global sports streaming platform, has emerged as a potential new bidder. DAZN’s strategy to-date globally has varied.

It recently acquired Foxtel – Sky’s Australian equivalent – at a 7x EV/EBITDA multiple (versus Sky’s 2x) to get a foothold in the Australian market. In France DAZN acquired the Ligue 1 rights outright – this former strategy has not paid off with DAZN in a legal battle with Ligue 1. DAZN is claiming the league has not done enough to tackle digital piracy and is now withholding payments to the league. It has been reported DAZN has managed to attract just 400,000 subscribers, well short of the alleged 1.5 million required to make a return.

Remember what I said about how Spark couldn’t make it work? It begs the question – what do DAZN think they can do with even less of a brand presence and no subscriber base in New Zealand? The obvious move would be to buy Sky outright, even at a premium Sky would be a bargain compared to Foxtel. Perhaps they are more Machiavellian than that - DAZN could just outbid Sky on the rights and then after the inevitable crumbling of Sky’s share price, try and pick it up at a lower price. The risk trade-off is you have an operational lag between acquiring the rights and Sky’s assts which sees you unable to fulfil your contract rights – or monetise those rights.

TVNZ – the waterboy (or the playmaker?): TVNZ got a free kick from Spark with the cricket rights but lacks the financial muscle to bid for rugby outright. They could sweeten the deal by partnering with Sky or DAZN to bring some content to free-to-air. I find it interesting to note that TVNZ have just lost those cricket rights back to Sky – and that Cricket New Zealand didn’t even give TVNZ an opportunity to bid for those rights. General rule of thumb – to be the playmaker you must be involved.



Determining value - regardless of who wins the coin toss

Markets struggle with binary outcomes because it invites significant uncertainty. As investors we can attempt to manage it by employing scenario analysis – modelling outcomes under different contract winners, different contract prices. We can then assign probabilities to these scenarios to quantify risk-adjusted expectations. Binary outcomes often also exacerbate volatility and can whipsaw returns on any given piece of news. Consider Pacific Edge (PEB) whose share price has seen multiple 50% swings either way throughout their Novitas insurance coverage saga.

For Sky, valuing a scenario in which it retains the rights at various price points is relatively straightforward. The challenge is modelling the downside: what happens if Sky loses the rugby rights? While we know Sky’s total subscriber numbers, the potential churn rate is speculative. Would Sky need to lower its prices to compensate? They certainly haven’t in the past when the lost the Premier League or cricket rights, but rugby may be a different beast. Only Sky really knows the value of rugby to their subscribers. We know Sky would save $110 million in rights costs, and associated production and subscriber-related expenses would also decline. However, the precise impact of losing rugby on Sky’s bottom line is unknown. Even with extensive scenario modelling, there will always be an element of uncertainty.

Sky has often said they will only pay the price for the rights that makes sense, and this time around they have the data to support their analysis. I would like to assume that Sky has a business model they have shared with NZR that shows compelling evidence that the rights are worth $85m (or whatever the price really is) and that NZR accepts that evidence. However, if there is one thing my time in the markets has taught me, it is this – the rationality of all players cannot be assumed.

Between a ruck and a hard place

The economic reality of the NZ sports subscriber market is that it is just not that big. Despite a revenue base of $760m, the SKT FY25 profit forecast is $38m after paying all those rights and production costs. This represents the entire value of the pay-tv market in New Zealand. In fact, arguably the profit pool is smaller when we consider Spark is still funding TVNZ’s loss on the cricket rights. This may be the sobering starting point for global players considering a bid.

A successful scenario for Sky involves maintaining a pathway to sustainable profits and free cash flow, even without rugby. Whilst securing the rights at a reasonable price likely provides the best outcome, losing them may not necessarily be a death sentence if they can cut costs and hold on to the bulk of the subscribers given all the other sports content they have. Investors must weigh risk versus reward, acknowledging both potential downside and upside. Binary outcomes force difficult choices on investors in Sky TV. Some will stay on the sidelines and avoid the volatility, others will do their scenario analysis, hope all players are rational and benefit from the certainty if and when a deal is resigned.

And for the consumer facing the prospect of another price rise? Whilst “monopolies” are always evil, I remember paying for Coliseum, beIN and S park Sport on top of my Sky subscription. Perhaps one sports aggregator paying a dividend to its customers who also choose to be investors is a better outcome.

Visit the link here to hear Paige Hennessey discuss Sky's decision to increase their Sky Sport fees on Newstalk ZB.


Paige Hennessy is an Equities Analyst at Octagon Asset Management

Disclaimer: This article has been prepared in good faith based on information obtained from sources believed to be reliable and accurate. This article does not contain financial advice. Some of the Octagon portfolios own securities issued by companies mentioned in this article.

Octagon Asset Management is the investment manager for Octagon Investment Funds and the Summer KiwiSaver scheme.