For Digital News February 2003 Richard Burrell By Kate Bulkley
There are around 30 shopping channels in the UK. QVC, the biggest, has had a "good year" in 2002. It's success is built on technology that allows it to operate on Sky and on cable and DTT. Richard Burrell, QVC Director of Engineering, talks to Kate Bulkley
Kate: Despite its sort of cubic zirconia reputation or maybe because of it, QVC in the USA has bee very successful. How has the business been growing in the UK?
Richard: QVC in the UK in the UK is doing fine. Where other retailers in the last quarter have been sucking their pencils and saying ‘owhh, it has not been as good as it might be,’ we’ve actually had quite a good year. We’ve not hit the absolute growth targets that we would have liked, but we’ve shown good solid growth in top line sales and profit.
Kate: What do you attribute QVC’s resilience to?
Richard: I attribute some of it to the fact that one-half of our audience i.e. the Sky bit was suffering the various effects of the transition of analogue to digital. This is now past us but we went through a fairly bumpy phase at that point with sales to the home fluctuating all over the place. Things have now stablilised. The same thing started to happen with DTT. As you look at 2002, it was the annus horribilus for DTT because you had the collapse of ITV Digital. Then there was the uncertainly over the licenses and now thankfully the settlement this morning (Jan 20) of the ridiculous proposal by (liquidator) Grant Thornton to try and take the (ITV Digital) set top boxes back which if you were a DTT subscriber wouldn’t fill you with confidence. I think part of our success is coming out of that (these phases of uncertainty) and part of it is also –and this is blowing our own trumpet – our fairly tightly controlled customer service regime. We are really focused on executing this correctly, and that has been one of the watchwords over the last year. Also developing our merchandise strategy has been a focus. We have brought in several new merchandise lines and areas that have been very successful.
Kate: Do you think QVC gets a lot of repeat custom because of this customer service focus?
Richard: That's the way the whole business is built; it's what differentiates us from the infomercial and direct response people. They're looking for is a single response at a very high margin. It's the sort of "one and done" idea. Whereas our whole business is built on the idea that the first contact with the customer has to be the best because then they will come back and buy again. And our business model is built on repeat customers.
Kate: There are a lot of home shopping channels available in the UK today, some 33 at the last count I believe. Haven’t these eaten into your business and how do you differentiate? (There are 26 shopping channels that directly compete with QVC, i.e. minus the travel channels that sell holidays and the auction-style channels, Auction world and Bid-Up TV).
Richard: I think that they (the new channels) must have eaten into our business a bit but without wishing to sound cocky, not so you'd notice. Also, some have gone. We have seen the demise of Shop! (from Littlewoods and Granada; the channel closed in the Spring of 2002). We know they were turning over a fairly substantial amount of money. So their disappearance has probably to our benefit. They were our first competitor in the UK. The other one that went was HSE (Home Shopping Europe) which was something not of their own making as it was due to the collapse of the Kirch network in Germany. It disappeared in the UK, Belgium, Italy and France and has changed owners in Germany. But just listening to the cost of the Sky EPG fee, which is £2,500 for a TV channnel per year, the number of smaller operators that say 'well if Sky makes any change to that, it will ruin our business plan' tells you how thin some of these businesses are.
Kate: Is Sky considering increasing the per channel EPG fee?
Richard: Sky has to be fair, reasonable and non-discriminatory but that does not mean they cannot put the fee up.
Kate: Is this fee to Sky one of the reasons that QVC hasn't multi-plexed into sub-niches like the Simply Group (which runs nine sub brands from Simply Jewelry to Simply Home etc.)
Richard: No, the EPG is not a real hurdle because if you look at the cost of a live TV channel, £2,500 for an EPG entry is not top of the tree. Producing live television costs much more money than that does. The real reason we've not got into the multiplexing of QVC is that we don’t think it's worth it on a viewership and commercial basis. Our take on this is you would do better having a single position in the EPG where the world knows where to find you and stay there and then try and make the channel offering wider, which is where interactive comes in. So once they come to you, if they don’t like what's on the main channel you give them something different, but they stay with you (on that channel). Another point is that you can't pre-buy and book your block of channels, so if we launched QVC Jewelry for example, if would be 50-odd channel numbers down the tree from us. By the time it took us to start another (niche) channel, three more channels might start up, so there would be more separation from the original QVC. We would end up with QVC dotted all around the Sky EPG.
Kate: So I know that it is against the EPG rules to be able to negotiate for adjacent channel numbers, but how come Sky One Mix when it launched late last year popped up on the next channel number away from Sky One?
Richard: In the early days of Sky Digital existing analogue broadcasters including us were allocated blocks of three EPG numbers. When things started to get busy they trimmed that down to two. Then they trimmed it to zero unless you had a channel proposition to put there. By that time we had already taken our decision that we didn’t want to diversify into multiple channels so we waved goodbye to (channel) 631. But Sky One held onto theirs (adjacent channels numbers). But you will find that this (giving up adjacent channel positions) is true of the BBC, it is true of ITV, much that they winge about it, as well.
Kate: So interactivity behind the one QVC channel is the way you have decided to expand your offer. How is TV interactivity doing, particularly against the online QVC.com part of your service?
Richard: Well QVCUK.com the basic website launched in 1998 and it is currently turning over about 6.5% of the business, which is not bad. It is not a standalone business. It is fully integrated into the TV channel. Next on the interactive front was the QVC Directory on cable, ironically enough. This launched in Jan 2000, on what was then the CWC network, now part of NTL. Hotly pursued in May of that year it launched on Telewest. July of 2000 saw the Directory launch on Sky and in October, or whenever the IMF (the interactive menu) launched on Sky. We were part of the introduction of that.
The QVC Directory changed and grew but it was essentially the same thing through to until Sept 13, 2001, a stunning date when the world was all looking at New York (and the aftermath of the terrorist attack on the Twin Towers). On that date we launched the ‘buy’ button (five clicks to an easy buy) on Sky, which is a name that we have given up trying to change now. I personally don’t mind the term the ‘buy’ button because I think it has a nice ring to it, but the marketeers name for it was the ‘buy now’ button and lawyers name for it-- which I think is hilarious-- was ‘integrated interactive purchasing’. Takes a lawyer to come up with the snappy title like this. The overall service is of course called QVC Active.
Kate: So how has the ‘buy’ button changed the buying patterns of the channel on Sky? Do people use it?
Richard: Oh boy did they start to use it. We sort of sneaked it on the air and didn’t tell anybody, which is our way of launching things in order to get it up and get some traffic on it and see if everything is (technically) okay. For a fortnight we didn’t really publicise it. However, you cannot have a service up there on Sky wrapped up behind your existing Red Button service and people not find it. So we got a steady trickle through. We launched it officially on the channel’s birthday Oct 1, 2001 and suffice to say the demand has gone absolutely bananas on it. We reckoned it would be doing really well if by the end of its first year it was taking 20% of the orders generated on Sky. And by the way, we feel it does generate incremental sales but it is really hard to prove. So the story is that within a week of launching it officially we have a charity promotion which we do every year with Breast Cancer Care. And we do a lot of publicity in the tabloids and we do several hours of products at half price which is donated by the manufacturers and all the money goes to charity. Well demand of everything on QVC went absolutely bananas. It was a great success for the charity. I hate to think how long the queue was on the call centre. It was about 900 people waiting and the website was so busy dishing out shopping trolleys it couldn’t serve out home pages. And into the middle of this comes the new kid on the block the ‘buy’ button which we had scaled thinking it would go to 20% in a year so at that moment it was not expected to be doing very much. Well (laughs) it gets 75,000 order requests of the first 20 minutes of the show, throws its hands up in horror and dies not very gracefully. We got it back up again but of course as soon as the high demand hit it is packed in so it has a fairly terrible evening but it did give us some idea of what the demand was.
Kate: So was it just ease of use that drove this?
Richard: Well if you look at our ordering methods, we have the Web, speaking to an operator on the telephone and also the touch tone phone (IVR technology) and then you’ve got the’ buy’ button. I would say that the easiest of these is still the touch tone phone but the ‘buy’ button has really grown. If you are thinking of time to make an order, the touch tone method and the ‘buy’ button are about the same. For a simple order it takes about 55 seconds. Now the real pros on the touch tone service can do it in 20 seconds ‘cause they know how to type ahead of the prompts. But the ‘buy’ button is pretty easy and if you are watching QVC on Sky you are going to have the remote in your hand anyway.
Kate: And in terms of volume of business, how does the ‘buy’ button rank? Richard: In terms of total business, including cable and DTT and everywhere else as well, QVC Active last week (week of 13th January) took 16.24% of the whole business in terms of order volume. Now as a rough and ready guide Sky generates slightly more than half of our overall order volume so crudely Sky Active is taking about 32% of the Sky business, which is pretty good considering that we though it would take a year to get to 20 percent of the business! So one of the projects at QVC Active at the moment is increasing capacity.
Kate: So how did this last year’s Breast Cancer promotion go? Did the system fall over this time?
Richard: Well we took some measures on that one to spread the load around a bit and we made some changes in the technology. We have had a few occasions since the Breast Cancer promotion (in 2001) where orders have just swamped the poor thing. But this (charity auction time) time (last October) the system did not fall over. It came close but it survived. Bear in mind this was all newly invested technology when we launched it in 2001 so neither ourselves not Sky nor NDS (the software technology company) that built it really knew how it was going to behave under volume.
Kate: So the ‘buy’ button has essentially been a huge success. Will it go on cable or and DTT?
Richard: On cable we have a Directory on the systems but it is a ring up on the phone and buy. We are also working on a way to click and buy through the Directory but I have learned not to announce launch dates. We are also working with NDS to upgrade that to include online buying. Now in terms of going the whole hog, i.e. a ‘buy’ button experience linked into the TV show on cable for us the back end and the synchronisation on our end is pretty much the same, but there are some things that have to happen on the cable side to allow true enhanced TV. This has to do with what version of Liberate software they are running. Telewest, bless them are pretty up to date and are working out there head end structure. I have to take my hat off to them. Ntl unfortunately have not (upgraded). Until it is clear how this is going to work I am not going to launch one (cable) service without the other. They’ll get there but there are a number of factors that effect the timescale. Everyone thinks that cable is the easy one. To do a simple website based service on cable is easier than doing a catalogue on Sky cause there are no over the air problems with a point to point connection. But true enhanced TV with all the timings that get involved in that so that the order form carries the right product and not the product that was on the air five minutes ago is quite difficult on a cable system. To come to DTT, of course the crucial thing that is missing is the return path. The old ITV Digital boxes had a return path but it was never really implemented. Looking at the Freeview boxes that are out there it is a real mixture of ones that could have a return path added, and ones that could never have a return path added…so I am not sure what is going to happen
Kate: What should have happened?
Richard: I know what I want to have happened, but it’s too late now. I would have liked to have had a return path included on all the boxes. The debate was between do we do a return path box out or a provisional (conditional) access one. And the mainstream broadcasters decided they wanted to see the possibility of introducing conditional access later than having a return path. Of course the manufacturers say sticking a modem in their adds another $3 of costs in materials and building while putting a potential hole for a smart card reader puts about the same, so if you are aiming for a price point and you are building it up by bits and pieces you have to make a choice. The wise and the great of the broadcasters said we’d like to stick in the possibility of some sort of access control. Now even so we will do some interactivity on DTT even if it is some super text thing. But this situation with return path-less DTT boxes we’ll be one of the interesting ones in the next year.
Kate: Since the ITV Digital boxes are now not going to be forcibly pulled out of people’s homes who refuse to pay the 40 pounds to (ITV Digital receivers) Grant Thorton, is this an opportunity?
Richard: Yes but they are a diminishing proportion of the market so I think it will be a case of working with our multiplex operator SDN and see what they say and also try to get a consensus through bodeis like the DTG. I think there will be a generation of DTT boxes with a return path in them. But it si a question of when.
Kate: Do you think the return path capability should be mandated in the next DTT boxes?
Richard: No. I think that you need to get an audience out there. All the things about mandating things like plugging boxes into phone lines are great when they are upstream from a launch. That is where Sky was a winner. They ended up with a population of digital boxes all of which behaved the same and all of which were plugged into a phone line. That’s great and thank you very much Sky for that. But it’s too late to do that with DTT. The boxes are already out there.
Kate: So how do we get a population of return path DTT boxes?
Richard: It is going to have to have to end up being some very clever incentivising of the viewership to use it and some fairly clever technologies to bridge the gap.
Kate: How important is the DTT platform to QVC, especially with out a clear view to when a return path will be available?
Richard: DTT is a long-term strategic piece of the jigsaw. We take the view that particularly with the push behind it from the government that DTT is the right long term bet. If you look where QVC is now and not counting DTT we are in under 10 million homes and we are doing quite nicely. So imagine whet you could do with access to the whole country. That will take years but our internal growth projections see most of our growth over the next few years coming from DTT. Yes it will cost us money for the first year or two but it will be worth it.
Kate: Do you know if people are ordering on the phones where they have seen the product?
Richard: When a new customer calls we ask them how they are receiving us so we can see what the new name generation of DTT is and it is very good. That’s because it is a small universe of only 30-odd channels and so you don’t get lost like you can in Sky and the other thing is the channel numbers are the same right across the country, not like the cable companies. We’re pretty hopeful about it and it is a long way to go.
Kate: The 16 or 64 QAM debate has now been settled with the ITC saying that broadcasters like ITV can use their signal as they like. Now for you, and I know you came down strongly for the more robust signal, is this a problem?
Richard: Well, we’ve ended up with what SDN nicknamed the Kronenberg solution. The 1664. I said that in a management meeting and they all thought I meant the film director. But I said, "No, it’s the beer." (laughs) There are really two things that effect the reception and use of DTT signals. One is the resilience of the signals, which is where all this coding comes in, the 16-64 debate. The downside is if you code 16 then there are less channel spaces on the multiplex but they are more resilient. That has an effect on the edges of the transmitter coverage so in practice the signal decays close to the edge of the coverage area. The other part of the equation is the transmitter power. My take has always been that you can’t do these things in isolation and my view is the ITC has been overly cautious in the past with DTT transmitter powers. The reception issue of DTT channels is not solvable by a blanket decision to stick’em all up 6 dbs. This is like using a sledgehammer to crack a nut. What needs to be done --and we have been talking to SDN about this-- is to look at each transmitter and see what’s needed. If you blanket up the signal, you end up with all the boundary problems with leakage into France and Ireland and also you don’t necessarily win. And you also end up spending quite a bit of money on transmitter upgrades, which are not simply upgraded by the waving of a magic wand. So our conclusion is that this needs to be taken as a holistic solution and that simply waving the coding standards around is not going to solve it.
Kate: So is the message getting through to the ITC?
Richard: I think so. They have had quite a lot of input from the DTG and it came up on quite a lot of the responses to the consultation on analogue switchoff.
Kate: And what is the next step?
Richard: Now we need to map out which need to go down in power and which need to go up. I mean I think that the ITC did this for all the right reasons because they were dead worried at he beginning of DTT that it was going to create interference problems with mainstream TV and so they were extremely cautious. But some of the tests done since suggest that whilst the caution to preserve analogue TV signal quality was laudable it was perhaps a little over zealous.
Kate: So if the signals do get bumped up on some selective transmitters what will this do for the DTT service?
Richard: It might make it more stable and it might increase the coverage but it will take some time to build it out.
Kate: What do you predict for Freeview’s takeup given some of these issues, including the fact that at least for a while it is going to be a non-interactive service and some people won’t be able to get it at all.
Richard: We think it won’t grow meteorically but that it will grow steadily. It’s not going to rush away like Web penetration has recently but it will be good steady growth and as I say we see the majority of our homes growth coming from DTT.
Kate: And the timetable –2006 to 2010-- for analogue switch off is this a workable timeframe?
Richard: The backend of it is (i.e. 2010) but so much depends on what the government does. If they really want this done there is so much that they can do to influence it. They can give the multiplex operators tax breaks on transmitter spending. They can do various things about the "nevers" or what is basically the grey vote. There are all sorts of things here like if you are an OAP (old age pensioner) you get a subsidised box or a free box or relief from your TV license. And so on. There are ways that if the government really wanted to make this happen they could do.
Kate: What about the problem of converting an entire house to digital? There are multiple TVs per house and one or two VCRs and add to that a wonky aerial that needs upgrading for digital. You are talking about a lot of money maybe 600 pounds per home.
Richard: It’s expensive for some but not for all. But this comes back to the whole business of why the government wants to do the switch off in the first place. Presumably it is to get the spectrum back and it sees some value for the spectrum. But what is the cost benefit analysis? I don’t even know if someone has done it yet. My point is that it is easy to take an individual snapshot about a home and its devices and what a switchover will cost. Then you have to then do a quite serious analysis on what is the density of homes that come in at the upper end of the switch-over cost scale versus the more typical cost of switchover for most homes. With that information you can take another punch with a real world view and not a 3G phone auction view about what the real benefit will be. It may be that it is worth spending the money to get switchover to happen because the government will get (a monetary) benefit. And the spin-off is the government keeps the UK at the front of the digital market. But all this is something that an economist needs to be doing, not me!
Kate: So how does broadband fit into all of this?
Richard: Under current analysis broadband is being driven as an extension of the internet. What if you had a set top box with a broadband return path? What would you do with that and more importantly what would the market do with that? I think Sky will do something alone these lines to create the triple play (TV, phone and broadband) against cable. There has been huge technological change in TV over the last five years. More has changed in the last five years in TV than changed in the last 30 or 40 years before that. There is a guy I used to work with at Thames TV that says this is the industry that used to be called television. So where is that evolutionary path going? If 3G ever gets off the ground that is another form of television carriage. What do we do with that or more to the point what does the consumer do with that?
Kate: So is there a cautionary tale?
Richard: The majority of people that get a TV just watch TV on it. It is going to take a long time for the interactive element to be the norm. The statement that Ashley Highfield said more than a year ago now that all the BCC commissions from there on should always have an interactive element makes sense, but it was ahead of its time. We have to be really, really careful with all the technical advances not to leave the audience behind.
It’s like QVC’s own path to interactivity. We started off with two of the most trusted instruments in the home the TV remote control and the telephone. No body is scared of those. We moved through touchtone and teletext, which moved people from speaking to someone to buttons on the phone to pressing buttons on the remote. It is much more popular and it is so because there was a build up of confidence. The highest transaction size per method of ordering is still the telephone where they talk to someone but it is being hotly pursued an in fact has been overtaken quite recently by the Web, depending on what we are selling. Last year the overall ASP (average selling price) per order was 27 pounds but it’s the breakdown per ordering method that is interesting. Ordering via the internet and ringing up and talking to someone both saw ASPs at £36 each. Meanwhile, people using the touch tone phone ordering method brought in an ASP per order of 27 pounds. The ‘buy’ button was not far behind at an ASP per order of £24 last year. This is interesting because it shows that people get used to trusting new technologies. The cautionary tale if you like is don’t get too far ahead of your customer. I always get asked ‘when will we close the call centre?’ I say ‘never’ cause there will always be someone who wants to talk to someone. But it is true that since we built the Liverpool fulfillment centre in 1995 had we not had all these electronic ordering methods we would have had to build a second calling centre by now purely on our sales volume.