TVNZ

"In its negotiations, Sky tried to persuade the studios to allow it to take movies directly after their cinematic release. Sometimes studios would agree because, Heatley says, they did not like TVNZ. The New Zealand broadcaster had a take it or leave it attitude when it came to negotiating and relied on studios preferring to get some kind of return from New Zealand rather than none at all, he contends. While there was no competition, that approach worked. It might have annoyed and frustrated studios, but it was advantageous for TVNZ and for taxpayers since it meant that movies could be purchased more cheaply. He says that often studios would tell Sky that it would get a deal at reduced cost ‘just to piss off TVNZ because it had a reputation for arrogance’."

"Establishing themselves was not easy or cheap. Jarvis and Heatley, sometimes together, sometimes separately, spent months on planes—flying economy class to Britain or the US, getting off the plane, attending a meeting and sometimes heading back home the same night. For more than a year the fledgling Sky negotiated with CNN and the main stumbling block was not money, although that was challenging enough, but persuading CNN that Sky would one day exist as a credible and responsible network and a worthy host of CNN coverage. Heatley is persuasive and a natural salesman, but media companies take seriously their reputations and no matter how much cash went with the deal, the New Zealanders were asking the mostly American companies they were meeting to take a leap of faith. CNN was ambitious for worldwide coverage but was hedging its bets by also talking to TVNZ. The state broadcaster wanted a news feed from CNN that would allow TVNZ to put CNN segments in its own news bulletins or to cross live to CNN reporters when required. But Sky wanted CNN exclusively, and for a good chunk of 24 hours a day. Sky was offering a few hundred thousand dollars a year but so was TVNZ, and it was asking for a lot less."

"⁠The one thing all Sky’s deals had in common were that they were tough to negotiate. That was partly because the network was not yet on air, partly because its people were new, and also because TV rights are notoriously brutally expensive. Heatley initially could not persuade CNN to do an exclusive deal. The US network accepted both offers—Sky got CNN news for the bulk of its 24-hour news channel, supplemented by the BBC, but TVNZ got the news feeds and access to CNN reporters it was after.⁠"

"To set up towers in remote high spots was not only beyond Sky’s financial resources but the process of getting resource consents would have taken years, quite aside from the physical and financial challenges of getting power and infrastructure to the difficult-to-access sites. In that field, TVNZ subsidiary Broadcast Communications Ltd (BCL) literally held the high ground. It had the towers and access agreements already in place with landowners to allow it to reach and maintain the towers. At considerable cost, Sky partnered with BCL. In February 1989, *The New Zealand Herald* announced that Sky and TVNZ’s broadcasting services division had agreed ‘a multi-million-dollar contract’ for the state broadcaster to provide ‘a total transmission service for Sky Media’.[1](private://read/01jectdbce729daxqkxt7cbe8r/#mn18)"

"As the impressive and expensive package of rights came together, the crucial missing element was rugby union. At the time Sky was being established, rugby was still an amateur sport, though players were increasingly dissatisfied with their conditions and arrangements. But although the agitation for reform was real, it was not yet coordinated or well directed. Heatley was aware that when the time came, Sky would have to beat TVNZ or TV3 to rugby rights. More than that, it might be that Sky itself needed to be the catalyst to start a professional competition to which it alone would have the rights. But for now, Heatley and Jarvis had a lot more to juggle, decide, sort and, worryingly, pay for."

"Heatley read about Mounter’s appointment and did what he does—he reached for the phone. TVNZ might have been staid in many ways but it had access to taxpayers’ funds, longstanding viewer loyalty, a significant incumbency status and its government ownership could, Heatley thought, potentially work for or against Sky. He was worried that with a new, savvy chief executive on board, TVNZ could use its strengths to quash his and Jarvis’s start-up. In particular, the two companies were likely to be competitors for the rights to show popular products, especially live events."

"Sky also needed a home base and studios to transmit from and here, finally, it had some good fortune. When the government had tendered the licence for a third free-to-air TV channel, Wilson & Horton had bid for it. The Auckland-based media company had already been dabbling in television and, apparently anticipating winning the licence, had constructed purpose-built TV studios on a 2.6 hectare site in Mt Wellington. The studios were not perfect for Sky—for a start Wilson & Horton had anticipated just one channel, not the three that Sky proposed, so the equipment needed replicating twice over and technology was changing so quickly that it already needed updating. But it was a proper set of functioning, soundproof studios, technical facilities and offices so Sky did not have to start from scratch. Wilson & Horton had rented some morning airtime from TVNZ and had broadcast a few programmes from the studios, but was left with a white elephant when TV3, not Wilson & Horton, won the licence for the third channel. Importantly for Sky, the acquisition enabled it to hang its shingle on a building that genuinely was a television studio. It was important physical evidence that Sky was real, and was coming."

"With a staff of 200, all being paid out of shareholders’ funds and bank loans, Sky finally went to air on 18 May 1990. Initially, only Auckland could receive the new service though by August, Waikato and Tauranga households could get it too, and by the end of the year it was available in most of the North Island. For Heatley the launch meant relief rather than euphoria. He, Jarvis and Green had achieved a huge amount. They had done what they had set out to do. They had built a TV network from scratch offering international channels and up-to-date choices that New Zealanders had never before had, but pre-launch subscriber sales had not matched predictions and the drain on shareholder funds was unabated. By the time of the launch Heatley’s shareholding was about 40 per cent of the company and Jarvis’s was 14 per cent, reflecting how much of his own money Heatley had had to put in. TVNZ had about 25 per cent, Gibbs and Farmer’s investment company Tappenden had about 18 per cent and ESPN’s shareholding had been diluted to 1 per cent."

"By now Heatley was very anxious. Even with TVNZ as a shareholder, the company was costing him and Jarvis far more than they had expected and Heatley was increasingly carrying more of the financial burden. They needed to find another investor. The attempt to bring in Kerry Packer had been a dismal though memorable failure, leaving them with nothing more than a good dinner-party story. It was time for Heatley to try tapping his own business contacts."

"But for a time, all the ingenuity made no difference to the company’s struggle. A year after its launch, Sky had just 18,000 subscribers when the company had expected more like 100,000. For a period in early 1991, Sky was losing $1 million a week. Smart recalls some months where he would sit down with others to decide whether they should use the available cash to pay wages or the previous month’s PAYE, because there was insufficient money to do both. Board meetings were spent discussing loans and how much the shareholders—Heatley, Jarvis, TVNZ, Tappenden and Todd—would put in on a pro-rata basis and whether more could be raised from the banks. Gibbs and Farmer were particularly irritated. More money was required every week."

"Smart’s quick synopsis is that the company started with Jarvis and Heatley as shareholders, spent all their money, brought in TVNZ and spent its money, brought in Gibbs and Farmer and spent their money, then did the same with Todd Corp. The cash burn rate was high. Smart’s forecasts were tracking how quickly Sky would run out of money—one month, two months, three months. Heatley did not always want to know. ‘I remember once saying to him, “Jesus, Craig, you make me feel like I’m responsible for Sky running out of money,” and he looked at me and said, “Good,” and walked out of my office.’ There was occasional professional tension around how to keep Sky going with limited funds without breaking any laws or breaching any accounting standards. ‘We never went over the line but we did occasionally skate along it,’ Smart says. ‘I’d characterise it by saying that in a start-up where you are constantly running out of money, you are challenged to use every means at your disposal to fund the company.’ He sees Heatley as driven and complex, hard to like but someone who commands respect. ‘He started a business from nothing, gave us all jobs, created all that and it wasn’t easy. He might be New Zealand royalty now, but he wasn’t always.’"

"Heatley recollects that TVNZ and Todd Corp said they would put more money in, but in exchange they would require a share dilution of 1:3. In other words, for every share TVNZ and Todd had, they now wanted three. These terms reflected the company’s poor performance against the business plan that Heatley had promoted and, related to that, the company’s risk of failure now being greater than the investors had believed it to be when they signed up. Heatley was aghast at the dilution prospect. He had thought that he and the shareholders were close, but this was the difference between business and friendship. ‘I thought, Oh shit, would they really do that?’ There was no way he would agree to the proposal, but he understood why they were suggesting it. Before TVNZ had become a shareholder, Mounter had warned Heatley that Sky had underestimated the running costs and underestimated how much capital the business would need. Mounter had been right, Heatley had been wrong and the business was now at crisis point."

"It was a fair point. If TVNZ had bid US$350,000—and Sky knew that figure—and TV3 did not bid at all, then Sky was the only potential bidder left so had not needed to pay so much. However, doing so signalled that the market had changed and that Sky was prepared to pay a significant premium for exclusive rights. It wanted to dominate live sports coverage on New Zealand television. TVNZ was furious. ‘If the time for co-operation is at an end and Sky is to “go it alone” then, clearly, we must be formally instructed so that we can end the feather-bedding arrangements put in place to assist Sky,’ remonstrated Harman.[3](private://read/01jectdbce729daxqkxt7cbe8r/#mn26) It was not up to Sky’s executive to terminate agreements laid down in the original and subsequent shareholders’ agreements, he wrote. The board and shareholders needed to do that and Harman was requesting an urgent board meeting to be preceded by a shareholding meeting."

"It was at that point, Smith said, that it became clear to Sky that TVNZ ‘was going to continue to act in an uncompromising manner when it came to joint purchasing of compelling product’. That was when Sky decided to bid alone for the South African tour and sent a fax to TVNZ to say so. On learning of Sky’s determination to bid, Harman rang Fellet. Fellet afterwards made a file note of the call. In it, he recorded that Harman had said that TVNZ had been told its bid for the South African tour was not the highest, so TVNZ presumed that Sky’s was higher.[8](private://read/01jectdbce729daxqkxt7cbe8r/#mn31) ‘I told him that was probably a good assumption,’ Fellet wrote. ‘He said, “It is crazy that we should be bidding against each other for programming.” I told him I couldn’t agree with him more but Sky could not survive being a replay service of the highlights of TVNZ. He said, “We [TVNZ] put in a good bid and I can sleep at night knowing it was a fair bid. I hope you [Sky] are prepared to take the political implications that this move will generate. Your bid will cause Members of Parliament to discuss for the first time legislation to prevent siphoning of programming from broadcast [free-to-air] to pay TV…” I thanked him for his insight and told him that he and Nate both agreed on what type of programming was important for Sky, yet somehow it never seems to translate to any positive action by TVNZ.’"

"Through the early nineties, Heatley closely observed the debate. Professional rugby would need money. Sky needed rugby coverage. The synergy was plain but the breakthrough was elusive. ‘We knew rugby was the Holy Grail,’ Heatley says. ‘If the rugby union would agree, we thought there was potential for us to cover some of the minor games that otherwise got no TV coverage. That would give us a foot in the door. It was a time when rugby was still a religion, yet almost no domestic rugby was shown live and, before Sky, even a test match might be on at 2 p.m. at Eden Park and the soonest TVNZ might have the game on would be 3.30 p.m. or 4.30 p.m.’ Rugby authorities were worried that if people knew that they could see a test match on TV, even delayed coverage might reduce the vital gate takings that were every rugby union’s main source of revenue. To Heatley’s mind the situation also illustrated how much TVNZ, with no competition, took its viewers for granted. Live coverage was, and still is, expensive to produce, so TVNZ had no incentive to spend a lot of money on live broadcasts when viewers had no chance of seeing the game on another channel. If viewers had to wait two hours until after a game had started, and then the coverage was interrupted by advertisements, TVNZ had nothing to lose because viewers had nowhere else to turn."

"Half an hour later the TVNZ team returned. Downey talked to them about contract law, about the nature of offer and acceptance. ‘This morning we made you an offer and you did not accept it so, to clear the air and make sure of exactly what we are saying now, that offer is gone because you did not accept it,’ he said. ‘We are starting again.’ In a brilliant deal for Sky, by the end of the negotiation TVNZ agreed to pay $5 million over three years—the same cost of Sky’s full package of rights from News Corp over the same period. ‘The beauty of the story for us,’ says Heatley, ‘is that for the first three years that Sky had wall-to-wall rugby, and while our subscriber numbers went through the roof, it cost us nothing. In exchange for a package of delayed rights and nothing live, we got TVNZ to pay us the same amount of money that we were paying Murdoch. I don’t want us to sound like smartarses, because I don’t mean it like that, but if TVNZ had been willing to pay that amount to News Corp, TVNZ could have won the exclusive rights for itself. But for various reasons the board of a government-owned company is a lot slower than the board of a private company. So instead of getting the rights itself, it had unknowingly just agreed to pay the full cost of us getting them.’ Ironically, just as Sky’s board had gone into the negotiation feeling under pressure from the government because Sky had the full package of rugby rights, TVNZ’s board had probably gone into the negotiation also feeling under pressure from the government because TVNZ did not have any rights. Board members may even have thought their jobs could have been on the line. After all, if the prime minister was angry that the live games were all going to be on Sky, how much angrier might he have been if TVNZ had emerged from the negotiations without even delayed coverage rights? For Sky, the deal was a triumph. ‘We felt very happy. It was fun,’ Downey says."

"Chisholm’s role in the negotiations was to maximise the return for News Corp. Heatley’s was to maximise the exclusivity for Sky, while minimising—as far as reasonable—the financial outlay. Both men knew the picture. TVNZ also wanted the rights, but its board was likely wrestling with the constraints faced by the boards of all government-owned companies: trying to weigh the public tolerance for spending against people’s expectations of service and trying to second-guess what their minister-shareholders would want them to do. TV3 would also want the rights but was likely to be priced out of contention, especially since it had just beaten Sky to the Super League rights so, Heatley thought, had probably spent its budget. But he could take nothing for granted."