Is the Sky falling?

MATT NIPPERT
Last updated 05:00 21/07/2013
Fellet
Peter Meecham/Fairfax NZ

MAIN MAN: John Fellet has been Sky TV chief executive since 2001.

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John Felletmdisputes the description, but he's used to being called a bully. Sky, the pay TV broadcaster he heads, is a big target for critics, due to its bulging wallet and outsized market share.

"That evil genius John Fellet!" the American-born chief executive chuckles as he characterises his reputation in some quarters.

What he isn't used to is being written off.

"It's been a strange two weeks," he says during a wide-ranging interview with the Sunday Star-Times. "If you read the papers I've gone from being the big bully to roadkill, almost overnight."

The recent development spurring some columnists to declare the Sky is falling came in the form of an internet startup poaching the rights to the English Premier League, the worlds' most popular football competition.

The previously unheard-of Coliseum Sports Media - backed by $650 million Rich Lister Peter Cooper - unveiled an internet-based distribution plan unreliant on satellites or broadcast towers.

Sky's share price slumped from $5.67 to $5.20 on the back of the news. The National Business Review declared the move signalled "The end of TV as we know it," while another commentator compared Sky's future prospects to ashes.

Commercial lawyer Michael Wigley even floated a "tall dwarfs" theory, suggesting the EPL loss played into Sky's hands. The theory went that Sky will now be able to point to puny rivals like Coliseum as evidence the market is open to allcomers.

Fellet scoffs at Wigley's theory, later charitably describing them as "interesting," but insists he'd swap an entire back-lot studio full of tall dwarves for his EPL bid to have succeeded. He wouldn't, however, double his bid with a rush of blood to the head.

"Our bid was $1m, and I believe theirs was twice ours," he says.

Fellet says he's never bid big to secure a high-profile marque event as a loss leader, and judges each deal on its commercial merits.

"We've blown valuations," he says of his expensive call to provide extensive 14-channel coverage of the 2012 Olympics. "I could go back and claim that was a loss-leader, but it's certainly nothing that we planned."

Sky's costs for the event exceeded $10m.

The value of the EPL deal was overblown by commentators, Fellet says, with the highest-rating match of the week from the English league less than half an equivalent game played by the lower-profile, but closer-to-home, Wellington Phoenix (which Sky still screens).

Win-at-all-costs bidding games only end in tears, Fellet says.

"You do that across the board you end up like MediaWorks. You say ‘I can't lose this deal,' and keep bidding up and up. It doesn't do me any good to win every right at whatever price - eventually shareholders and customers would feel the pain," he says.

Fellet sees rights wars as a long game. Competitors have made their own plays for sports content before, with mixed results.

In early 2007 MediaWorks successful wrested from Sky the rights to screen the V8 Supercars competition. The deal imploded spectacularly, partly due to timing clashes between car races and the 6pm news. MediaWorks quietly wrote off the V8 deal in a $17.7m impairment charge buried in its accounts to August, 2011.

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While the smoke from the write-off was still clearing, Fellet was on hand to pick up the rights, and the V8s have subsequently returned to Sky.

"You can't win everything. We just try to win everything," he says.

Sky doesn't need tall dwarves to camouflage its bulk. Its choice of headquarters does a similar job.

Despite having a market capitalisation in excess of $2 billion, making it one of New Zealand's 10 largest listed companies, the firm has continued to operate out of its low-rise facility in suburban Mt Wellington.

Labyrinthine warehouse-like studios, with chicken-wire visibly holding the roof together, belie the glamour of television.

Fellet's office is similarly low-rent: Sure it's in a corner of the building, but the walls are painted cinderblocks, and the window doesn't look out on much.

"Gravel and a carpark," Fellet says of his view.

"I'd love to move down to the Viaduct basin, it looks like a fun place to hang out. My problem is that subscribers don't care what offices we're in."

Even with its cinderblocks and chicken-wire, Sky today is unrecognisable from the struggling small outfit that Fellet arrived at as a travelling troubleshooter in 1991. He was made chief executive in 2001.

He points to a residential house bordering the company's headquarters, once owned by the broadcaster.

"In my first week we had to sell it to make payroll," he says.

A planned 18-month assignment at Sky turned into an effective life sentence, Fellet says, after he fell in love with New Zealand and finally found a company that didn't require savage restructuring to keep afloat.

"I always picked up companies at the bottom of the cliff - and [Sky] was at the top of the cliff."

With positive cashflows of more than $150m to December, 2012, and $1.94b in assets to only $788m in liabilities, Fellet has turned the company into a clifftop mansion. The company's balance sheet is underpinned by goodwill valued at $1.4b, and Fellet says it's not in any danger of impairment.

The company's auditors, who run the rule over goodwill every six months, haven't taken any notice of Henny Penny commentators and instead focus on fundamentals, he says.

"The auditors just look at subscription count - that's still increasing - and cashflow and profit, that's still increasing too."

The core of his business is still selling paid content on television screen. Prime - strategically useful in rights bids requiring some free-to-air broadcasting - is in a tough market, Fellet says.

"Prime was financially challenged when we bought it - in fact it was going into bankruptcy at the time. But Prime does OK now - and by OK , I mean it breaks even," he says.

Fellet concedes sharing overheads with Sky's numerous other channels helps its viability. "That's what keeps it alive."

And Fellet even claims to be happy with the modest launch of Igloo, a cut-price joint-venture with TVNZ.

Fellet compares the $25-a-month service, beset by delays, to a budget airline mopping up parts of the market unable to afford Sky's premium channels

Again like Prime, though, Igloo would have trouble if not backed by behemoths. "If you try to do it on a standalone basis it'd be kind of tough," he says.

The fragmentation of viewing habits - away from televisions in the lounge and towards mobile screen - is not something that overly concerns the Sky boss.

"Sky probably has not pushed as much on the additional devices as we have on making sure we have enough content for that first quality screen," he says. "But we're catching up."

Now 58, Fellet has told shareholders he wants to retire in the saddle. His two decades and counting tenure at Sky, including 13 as chief executive, is a rarity amongst listed company bosses who - through being head-hunted by rivals or decapitated by directors - tend to churn.

"I have gotten all sorts of offers over the years, in spite of my track record here," he says.

And it hasn't all been plain sailing. Over the past 12 months, shareholders Todd Communications and NewsCorp - between them owning 54.7 per cent of the company - have sold out.

Beside the 2012 Olympics over-commitment, which he freely admits responsibility for, Fellet has also learned to steer Sky well clear of managing sports codes and teams.

Before Twenty20 cricket made millions in India, Sky was the hothouse for a curious version of the game, developed by Martin Crowe, called Cricket Max.

"Back then we couldn't afford test cricket, couldn't afford the rights - we were too small," says Fellet.

Max quickly ran into opposition and competition from cricket associations - who supplied players - and the format dropped off the face of the earth.

Then Sky became part-owner of the seemingly cursed Football Kingz. It made sense to support the struggling team at the time, Fellet insists. "We thought: ‘This'll be a good thing. The fans will like us if we step up and keep them alive'."

Fellet quickly became aware that fanatical club supporters make excellent viewers, but vicious critics.

"After the first two losses I was getting hate mail from every soccer fan in New Zealand," he recalls. Sky's stake in the team was one of the first things Fellet disposed of when becoming chief executive.

He's kept his personal enthusiasm and commercial decisions separate ever since, dismissing talk of a channel showing his much-loved baseball as impossible.

"I'd love to have a baseball channel - but it'd only have four viewers, one of which would be me," he says.

He instead gets his baseball fix by coaching the Howick-Pakuranga team, winners of the last three national titles.

His firewalling of the personal and commercial doesn't stop his employees trying to exploit his quirks.

Fellet's love for John Wayne is obvious - a life-size cardboard cut-out of the "Duke" keeps him company in his office and quotes from Wayne's westerns are sprinkled on random walls around Sky's facility.

Fellet is wise to this being used against him: "I always know when we're coming up to executive remuneration season. The guy who runs movies always starts programming John Wayne films as his movie of the week - and he makes sure I know about it."

- Sunday Star Times

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