Kate Bulkley, Media Analyst.

Why Sky is selling songs

By Kate Bulkley

Broadcast News

For Broadcast July 30, 2008

Amy Winehouse

The idea of the UK's pay-TV king getting into the subscription music business sounds rather off key - but Sky is not a company you bet against.

The idea of Sky moving into the music business may seem as odd as Jay-Z headlining at Glastonbury but, as the pay-TV operator looks at how to grow its non-television interests, the idea of applying some of its expertise in pay-TV to other products may not be such a stretch.

Details of the digital music service announced last week with Universal Music Group are a bit sketchy, but Sky has jumped in to try to make sense of a market that has been reeling for almost a decade because of rampant digital piracy. The prize could be very big indeed because to date the legitimate digital music market represents only 8% of the total UK music market that in total is worth over 2.3bn (1.81bn), according to Jupiter Research.

Given its nous in subscription management, cross promotion and its strong retail brand, Sky may have the right tools to make a successful music service, but given the ease of stealing music on the web, it won't be easy, say some observers. In an environment where 19 of every 20 songs downloaded online in the UK are from illegal file-sharing sites, even Sky's partner, Universal Music, admits that creating a workable subscription service is difficult. "The strike rate on digital music services has been pretty poor over the past five years - with the exception of Apple's iTunes," admits Rob Wells, senior vice-president of digital for Universal Music Group International.

Sky's as-yet-unnamed new venture with Universal (in which Sky will be the majority shareholder) will offer a monthly subscription to Universal's catalogue of music - from Amy Winehouse (pictured) to Eminem to Pavarotti - including hundreds of thousands of tracks. The music will be available once the service launches, which is likely to be later this year, on a streamed basis to PCs. It is expected to include a limited number of song downloads that will be free of digital rights management (DRM) software, meaning they will work on any MP3-compatible device, including iPods and mobile phones. The service will be Sky branded and is being positioned as an antidote to Apple's iTunes, where users buy music on a track-by-track basis.

"The music industry has lately gravitated towards the a la carte model because of iTunes," says Universal's Wells. "But we think the future of music consumption is more about subscription or acquisition. The music industry will earn more over time from acquiring a new consumer or from a regular subscription service. We think the future is about more volume play. The truth is I would rather take 10 a month off of a million customers than 1,000 off of 100 customers."

Playing for profits

Sky won't reveal how much the new music venture will cost to set up although one equity analyst said the venture looked "immaterial" relative to Sky's other businesses. But Sky clearly sees this new music venture as something it wants to be profitable in its own right as well as seeing it as a subscriber retention and upgrade tool. At a time when all the UK Internet Service Providers (ISPs) - including Sky - have agreed to try and educate broadband users through a letter-writing campaign warning users against illegal downloading of pirated music to their PCs Sky is also likely to be seeing a music service as a "carrot" for its broadband subscribers after the "stick" of warning them about abusing their internet connection.

And at a time when high-speed broadband connections all look pretty much the same, a music service could also be a way to differentiate Sky's from the rest.

"I want this to be big," says BSkyB chief operating officer Mike Darcey. "I want to sell services to everyone and if I can get good penetration by bundling it with Sky Broadband or Sky TV then I will do that. But I am not going to do that to the exclusion of other opportunities."

Universal is clearly eager to have Sky cross-promote the service to its 8.8 million subscribers and to bundle the service in with either a Sky broadband or a Sky TV subscription or both. "At the moment this is about building a relationship with Sky and learning a lot of new and clever stuff," says Universal's Wells. "There will probably come a point - and I think it is inevitable - where the price of the music service is bundled into the Sky broadband subscription or is part of the cost of the set-top box subscription. And that's where the model becomes very interesting."

Universal would like to have the cost of its music inside another Sky subscription so "the actual cost of the music is hidden". This is clearly the thinking behind another soon-to-be-launched music subscription service from Nokia called Comes with Music. The music companies earn revenue from the sale of the mobile phones, which covers the cost of offering free, unlimited music downloads for a year to owners of the Comes with Music handsets. After a year of ownership users must take out a subscription to download any new tracks but the music they already have downloaded is theirs to keep regardless of whether they take out a subscription.

Industry's Plan B

The Nokia Comes with Music service and Sky's planned music subscription service are part of what Mark Mulligan of Jupiter Research calls "Plan B" of the music industry's attempt to provide attractive and legitimate music services for consumers. "People have learned to own music and part of the reason why subscription services have failed is because subscribing means renting, not owning," says Mulligan.

Until more of the details are known - such as a pricing plan - it's hard to say whether the Sky-Universal music service can succeed or not. But Sky is known for making far-reaching ideas work and its latest non-TV moves could leave it owning the vast majority of the UK legal digital music subscription market and that's one heck of a big prize.

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