Costs and competition in New Zealand are about to spiral upwards, with two major SVOD plays out the starting gate, official entry from Netflix just around the corner and an overseas foray from Australian IPTV service Fetch TV all set to stir up a relatively stable ~US$1.5 billion TV and movie marketplace.

In common with other affluent countries, near-national broadband penetration opens up New Zealand's TV market to possible disruption. At the same time, online viewing continues to evolve, as network speeds accelerate and more consumers sign up for multiple mobile services.

Consequently, digital challengers are ratcheting up competition in New Zealand for eyeballs, advertising and consumer entertainment spend – a trend that will pick up speed this year.

At the same time, the upcoming tussle will take place in a more confined space than larger markets such as Australia or the UK, even though the number of contenders remains roughly the same.

This sets up a potentially fierce battle, with just 4.5 million New Zealanders and 1.7 million TV homes to win over. “The business is going to get uglier before it gets better,” predicted John Fellet, chief executive of incumbent pay-TV provider Sky, speaking on a recent earnings call.

Telco Rivalries

Fellet has his own horse in the race, a paid OTT service called Neon unveiled earlier this month. Neon is an attacking play, venturing into the broader market as a NZ$20 (US$15) a month subscription service, but could also serve as protective measure, potentially included as a value-add to Sky subs.

Neon also forms part of Sky’s tie-up with local telco Vodafone, which bundles TV content from Sky with its broadband packages, including a free six-month offer for uncapped plans.

Both share a common rival: New Zealand’s largest ISP, Spark (formerly Telecom New Zealand), which in August unveiled its own paid video offering called Lightbox.

Spark’s fixed line broadband customers, about 653,000 homes, plus those signing up before the end of April, will get Lightbox free for 12 months. For everyone else, it’s NZ$15/month, NZ$5 less than Neon.

Earlier this year, Spark also dialed up financial backing for Lightbox from NZ$20 million to NZ$35 million in 2015, a sharp but manageable hike for the telco and a portent of possible content bidding wars to come.

Meanwhile, a JV with online broadcaster Coliseum Sports Media in December secured some attractive sports properties, including Premier League football from the UK as well as golf, both previously with Sky.

While these bolster Lightbox’s overall appeal, they are unlikely to challenge Sky's sports stronghold however, as the pay-TV operator has almost cornered the market for top-tier rights.

Nonetheless, Sky has also launched a sports streaming service for non-subscribers earlier this month called Fan Pass. The service delivers access to one season of Super Rugby, NRL rugby or Formula 1 for NZ$69/month or NZ$19.90/week, priced to minimize cannibalization of Sky's main sports offering.

Two Australian DVD rental companies also offer SVOD services in New Zealand: a longstanding service from Quickflix, so far unaffected by rival offerings, plus a more recent movie-oriented offering launched in November by high street chain Video Ezy, further amplifying competition for rights and subscribers.

Netflix and Fetch TV

Maneuvering from all of New Zealand’s domestic players is taking place ahead of the arrival of two potentially disruptive players into the market.

Best known is Netflix, likely to follow its playbook of entering new markets with a partial content offering at launch, expected sometime next month. This portfolio will slowly build over the ensuing 12 months, making the SVOD giant an increasingly formidable local competitor.

Global scale in particular could give Netflix an edge in content negotiations over local rivals, especially standalone offerings.

At the same time, the prospective launch of a slimmed down IPTV service from Australian provider Fetch TV, possible offered direct to consumers and including Netflix in its offer, could pose a particular challenge to Sky’s basic tier subs.

It's hard to gauge the threat however, with little visibility on pricing and content,

Nonetheless, Neon is well placed to grow, largely thanks to its parent company’s extensive investments in sports and entertainment programming.

Each year, Sky writes a content cheque of about NZ$280 million, about 31-33% of revenue, making the pay-TV operator New Zealand’s biggest buyer of TV content.

This includes top-tier Hollywood fare such as HBO as well as major fixtures in rugby and cricket, New Zealand’s most popular sports.

Sky is a powerful force in New Zealand TV, delivering pay-TV to just under half of the country’s TV homes. About 70% of its subs base takes sports, which will shield the operator from the brunt of online disruption for the foreseeable future.

The remaining 30%, however, might be more tempted to look elsewhere. This could encourage Sky to review its consumer offering while taking a hit to its margins, standing at about 40%, during the most intense spell of competition with a looser rein on costs.

At the same time, Sky’s subs growth seems to have levelled off, focusing attention on alternative avenues for growth as well as subscriber loyalty. Arpu has risen in recent years however, as more customers upgrade to HD packs.

Sky is also about to roll out an arguably overdue upgrade for its set-top boxes, adding internet connectivity and in turn opening up additional possibilities for on-demand and catch-up content. This should add some protection for its more vulnerable flanks, movies and entertainment.

New Zealand’s small but lucrative video market is still taking shape, with just 78,000 paid OTT subscribers at the end of 2014, according to Media Partners Asia. This figure includes an estimated 35,000 people accessing Netflix's US service, using special software such as VPNs and other workarounds to hop over territorial blocks on the content.

An influx of new services will bring new customers on board, accelerating growth in the Pacific nation for the next few years. Even with deep pockets however, success will be far from easy.