Sky at a crossroads?

I’ve only ever been misquoted once by the trade press, which is remarkable considering the number of comments, quotes, interviews and articles I’ve been asked to contribute over the years. This particular misquote, however, almost landed me in trouble with senior management at Sky.

I had been interviewed about the changing digital landscape, particularly the impending launch of connected TVs, and how it might affect (or ‘disrupt’) the television industry. One of my reported comments suggested that BSkyB ought to beware, because they could face direct competition from brands such as Lovefilm, Netflix or Blockbuster for their premium movie revenues. This did not go down well with the Osterley-ocracy!

What I’d actually said was put firmly within the context of connected TVs offering opportunities for the television industry, rather than purely the threats that the digital journalists and experts consistently banged on about. My point was that platforms like Sky’s would be able to begin to compete directly for the significant revenue streams from the DVD and digital rental markets and that connected TVs could be seen as more of an opportunity than a threat. I think the fact I was completely misquoted proves my point.

That day is getting closer. BSkyB’s recent announcement that it is going to provide unbundled, a la carte access to its movie, sports and entertainment content via broadband to non-subscribers takes us a big step towards the scenario I outlined. As Charles Arthur pointed out in Monday’s Media Guardian, “it’s not often a large media company does the smart thing…in essence Sky is doing with its TV output what Amazon does with the Kindle”.

Much of Sky’s recent focus has been on keeping existing subscribers ‘locked in’ by adding value through innovations such as Sky Go, Anytime+ and Sky Remote. It is now seeking to attract the 13 million UK households who stubbornly refuse to subscribe to any pay TV service with this new strategy. As the vast majority of those households will have a broadband connection, it makes a great deal of sense to reach them this way, before Google and Apple try once again to spoon up big chunks of the TV cake.

The upside is a potential increase in new Sky customers and a slice of significant revenue streams from premium content rental and retail. The downside, though, is that it offers a way for existing subscribers to pick and choose their Sky services rather than buy into the whole package. I think this leaves some of the basic subscription channels in a potentially perilous place.

The whole notion of cord-cutting – even in the USA – has been massively over-stated; only 1 in 20 homes have no cable subscription but do have an internet TV subscription, and not all of those will have been recent cable subscribers in the first place. However, the easier it is for current subscribers to get at a pay TV platform’s premium content, the greater the risk of cord cutting (or, in Sky’s case, dish-washing) will become. This raises two issues relating to Sky TV’s main revenue streams.

The first of these relates to the subscription offering. Sky will have to redouble efforts to not only persuade these new, casual customers that a pay TV subscription offers much more added value, they will also need to convince their existing subscribers that the same holds true. In recent years, this has been less about more content and more about greater convenience and a better viewing experience. Sky+ really started this trend and all of the recent initiatives have been a continuation of this strategy. In many ways, Sky will need to curate the viewing opportunities for its customers so that it cannot be matched by a simple patchwork or aggregated approach from its new breed of competitors.

This brings me to my second revenue stream; advertising. Two questions spring to mind.

Up until now, TV advertising has been a small (around 7% of revenues) but profitable part of the Sky business model, but as the focus switches to subscribers and customers, how much will advertising figure in their plans? So, the first question is, how much will the company invest in creating better opportunities for its advertisers from the digital dividend of connectivity and convergence?Their track record in areas such as red button interactivity and the much-delayed Adsmart initiative has not been encouraging.

My second question concerns the overall role of advertising within their customer proposition. If the focus is to be on added value, isn’t it possible that they will see advertising-free viewing as part of that premium service? To begin with, that could be confined to a la carte customers, renting ad-free programmes from the likes of Sky Atlantic or Sky Living. However, it’s the current subscriber base that they will be most keen to please and keep locked in to the platform – and one way to do that would be to reduce the amount of advertising subscribers are exposed to, well beyond fast forwarding of time-shifted programmes. They could, for example, reduce exposure to TV advertising within their live schedules, either by reducing ad minutage or providing alternatives to the commercial breaks. Maybe not in the short-term, but it could happen within a few years.

This tension between subscription and advertising revenues has always been a product of the pay TV market, especially when the platform operator also owns or manages a number of the TV channels they carry. Until now, the two have (more or less) operated well together but I have no doubt that, if push came to shove, it is advertising that would take a back seat. Maybe, now Sky has embraced the web as a distribution channel, that day is sooner than we think.