English football deal hard to win

01:21, Jul 05 2013

Watching Telecom try to win in the retail market often feels about as rewarding as following the English football team.

The team looks OK on paper. But at the crucial moment, when it comes down to penalties, the company always seems to put in a soft shot or balloon the ball over the crossbar.

Ferrit, TiVo, YahooXtra and now, I think, with its English Premier League play, Coliseum; it has been a litany of disappointment and missed opportunities.

Let's do some maths.

Coliseum is believed to have paid about $2 million for the three-year New Zealand rights to the English Premier League.

It will have costs on top of that to deliver its online service and for overheads.

Let's say it needs $1.5m a year to break even.

At $150 a season per subscriber, it would need 10,000 subscribers. That's ignoring GST, but these are rough calculations. (I have since read analyst MorningStar's estimates it would need 13,000 customers to break even, so we are in the right ballpark.)

Now let's put that number to one side for a minute and work on another.

The reason Telecom's involvement in the content market is potentially controversial is because it has about half of the retail broadband market, and content rights are a fixed cost.

Telecom could meet the entire cost of Coliseum's Premier League (EPL) service and provide it free to all its 500,000 home broadband customers at a cost to itself of 25 cents per month per customer.

As a business model that might just have worked for both parties; Telecom would only need to have won or retained an extra 1500 broadband customers to make that revenue neutral. Coliseum could have made its profit from the non-Telecom market.

Sure, it may have proved a loss leader for Telecom, but it would have been a popular one.

Sky's loss of the EPL rights garnered enormous publicity. The bulk of about 1000 job cuts have just been completed at Telecom. Those that remain could probably have done with the morale boost.

Better still might have been for Telecom to offer the service free to all customers on plans costing $85 a month or more, to entice customers on its entry-level plans to upgrade. If one in 40 upgraded to a broadband plan costing $10 a month more, again that would have been revenue positive.

In contrast, an internet provider such as Orcon with closer to 50,000 customers would need to absorb an overhead of $2.50 per customer per month if it wanted to offer EPL games as a freebie. It would be unrealistic to build a business case around that. That is one reason why the bundling of content and broadband has raised red flags from the likes of Xero boss Rod Drury.

As it is, Coliseum's service will cost non-Telecom customers $150 a season and Telecom customers $127.50.

If there is one big mistake wealthy entrepreneurs and managers of large companies repeat most frequently, it is overestimating how much spare cash people have and underestimating how price sensitive the average consumer really is.

There are plenty of excuses for consumers to talk themselves out of this purchase; including the effort involved in streaming matches to their television.

About 5000 people are understood to have registered their interest in Coliseum's EPL service, but that is no guide to likely take-up.

It is worth recalling TiVo boasted that 11,000 Kiwis visited a website to register their interest in its set-top box a whole six months before they went on sale in New Zealand in November 2009.

In the end, it is rumoured only a few thousand were sold at list price, before the initial batch of 25,000 units was heavily discounted - eventually to well below cost - to perhaps finally get rid of them last year.

At a meeting to discuss how to shift the boxes, one Telecom staffer helpfully suggested torching the warehouse.

I reckon Coliseum would be doing extremely well to sell 4000 PremierLeaguePass subscriptions to Telecom and non-Telecom paying customers.

So the fate of the partnership, and Coliseum too, I think, would hinge on whether many new Telecom broadband customers elect to get one free season pass in lieu of a month's free broadband, which was the second but most important element of the Telecom promotion announced yesterday. The company won't say how much it will pay Coliseum for each promotional subscription.

For the promotion to appeal, customers would need to be keen football fans willing to sign up to a Telecom broadband plan costing at least $85 a month, either before or near the start of a season, and probably already moderately tech-savvy.

Telecom stemmed its losses in the broadband market last year by making its plans really quite competitive. But are many such people churning to Telecom broadband?

I have my doubts, and see only struggle ahead for both Telecom and Coliseum in making their agreement a success.

It seems Sky Television had no inkling about the partnership. It is now likely to be eyeing Telecom much more as a competitor than a potential team-mate.

Telecom had one chance to launch its surprise Pearl Harbour attack on Sky and it missed.

Maybe the English Premier League wouldn't let Telecom and Coliseum give away their product more widely in case it undermined the value of their rights in other markets. That's just speculation.

The positives from all this are that the principle of "net neutrality" - the idea that internet providers should treat all online content equally - has not been greatly compromised and competition in the broadband market should be largely unaffected. Plus there will be one free EPL game on TV One each week, which let's be honest, may well be most people's fill.