Kate Bulkley, Media Analyst.

Sad loft people and the digital deals

By Kate Bulkley

Cable & Satellite Europe

www.informamedia.com

01 Sept 1998

The war of digital promises, subsidies and snappy rejoinders ramped up several notches recently as BSkyB unveiled a digital pricing plan that takes much of the wind out of rival OnDigital's sails.

And the war of words escalated as well. BSkyB chief Mark Booth twisted OnDigital's "plug and play" slogan into "plug and pray". Not to be outdone, OnDigital's Stephen Grabiner disparaged the many-channel Sky offer as something that only would only appeal to "sad loft people."

Of course, as long as they pay their monthly fee, Sky will provide its service to anyone - sad or otherwise - and its new pricing plan looks to enlarge the base from the very sad to the not so sad. Under the plan, BSkyB will offer several digital mini-tiers, the cheapest - for six channels only - starting at £6.99 a month, with 15-channel themed services coming in at £8.99 a month. These compare to OnDigital's intention to offer a £10 a month service. When added to Sky's decision to offer free dish installations to new subscribers, these lower-priced tiers did knock the pay-TV company's stock price down as analysts re-did their earnings forecasts, but the bet for Sky is clear: take a hit today for a long term gain tomorrow.

The bet is that higher cost today will mean bigger and faster sign-up of digital subscribers.

Of course it might also mean that Sky subscribers who now take a high-priced pay package, could switch to a lower-priced one more tailored to their tastes, reducing Sky's income per subscriber. Sky's bet is that the higher number of subscribers will take care of the fall in per sub revenue.

But erasing the price advantage of OnDigital's rival digital terrestrial offer is only part of the battle. Sky also has to contend with the digital cable offer, specifically cable's ability to offer interactive services directly over its network. Sky dish customers must use their telephone lines. And BSkyB's plans for interactive services through its joint BIB venture with Matsushita, BT and Midland Bank, is in trouble. Its second CEO resigned and the launch schedule for home banking and home shopping services has been delayed for technical reasons from late this year to sometime next year.

Meanwhile, cable TV company CWC announced several interactive service providers. And CWC's service will have Internet capabilities while BIB has - for the moment - stuck to its decision to offer only a limited interactive capability. This so-called walled garden approach is based on the perception that people do not want to be confronted by the maze that is the Internet.

But spoon-feeding may not be the answer either.

Take pay-per-view. Front Row, the cable TV delivered PPV service, claims that one in three people in its homes are buying an average of one film a month. That equates to a 34 per cent buy-rate across about one million subscribers. It is also a bigger number than had been assumed and analysts believe it has outstripped Sky's analogue PPV service in terms of orders.

The differing factor is not the price of the PPV movies or the movies themselves. The high take-up on cable has to do with the ease of ordering.

A cable customer orders using the TV remote control; a Sky customer must use the telephone. And sometimes the telephone is already in use.

Although BSkyB is limiting its interactive services, the pay-TV giant has wholly-embraced the more-is-better view for its TV service. In the battle for channels Sky has pulled out the stops. The BBC will air its public service digital channels on Sky. Channel 4 and Channel 5 will be on Sky and it is complaining to UK regulators about the exclusive agreement that the popular Channel 3 has penned with OnDigital. Sky also has exclusive carriage deals niche channels. The only chink in this strategy seems to be MTV, which will be available on OnDigital's platform from July 1, 1999.

The only big remaining channel question mark is over sports, especially exclusive sports. Under an agreement signed when Sky was still an equity shareholder in OnDigital, Sky will supply its rival with a Sky Sports service. But what that service will be is still unclear. Also unclear is if Sky will pen a new deal for Premier League football games. Although Booth has been keen to say that in digital Sky is about much more than sports and blockbuster movies, key sporting matches and championships are big pay-TV draws. But the football clubs in the UK have gotten more savvy over the last several years and some among them are not so sure they want to simply sell rights to a broadcaster that then uses them to build loyalty to a channel or series of channels it and not the league owns.

But probably the most important key in all this is speed. The market for pay-TV is so sensitive that increasing the projected number of subscribers substantially changes the earnings projections for the companies involved.

According to Merrill Lynch bank if the number of Sky dish subs increases from five million for Sky out of 11.3 million total UK pay TV homes to six million for Sky out 12 million total pay-TV homes in the year 2003, the pre-tax profit for BSkyB soars by 24 per cent.

So the buzzwords may be plug and play or even plug and pray, but what all the players in this digital game want as fast as possible is for people to plug and pay.

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