For Digital TV Europe.net March 16, 2009

Never let it be said that UK pay-TV operator BSkyB doesn’t like to buck a trend.

In the midst of one of the worst financial meltdowns since the 1930s, at a time when leading commercial TV operators like ITV are slashing jobs and costs to survive in a falling TV advertising market, Sky was able yet again to pull a rabbit out of the hat to unveil better-than-expected trading results. The pay-TV operator also announced a significant price drop for its high-definition set-top boxes to £49 (€55) – down from £150 – to help drive new growth from HD. The company even announced that 1,000 new jobs will be added to support its forecasts of increased demand for its products.

Sky is developing a top line growth strategy at a time when rivals are merely hanging on in the hope that the economic climate will improve. The pay-TV broadcaster is even testing 3D TV as well as pushing its HD boxes to attract a broader upmarket subscriber base to its service.

The raw numbers are certainly impressive. Sky added a net 171,000 customers in its fiscal first half (to December 31) and reduced churn from 10.9% to 9.9%. ARPU increased from £430 to £444. Total revenue for the final quarter of 2008 rose 6% to £2.6bn and profit, excluding the write-down of Sky’s 17.9% stake in ITV, rose 9.1% to £335m. Whether these kind of results can be continued into this year when consumers seem to be withdrawing their support from the high street remains to be seen – and doubts remain about the impact of its investment plans and the rising cost of Premier League football rights, under its latest three-year deal with the Football Association, on Sky’s bottom line. On the other hand, the argument that in a recession people watch more TV seems to be born out by some recent statistics from the UK Broadcasters’ Audience Research Board, which found that in 2008 the average person watched 48 more minutes of TV per week in 2008 than in 2007.

But it is Sky’s move to push HD that is really clever – and not just because the pay-TV company wants to get higher-value customers who will pay more for its HD services. HD in the volumes that Sky can deliver (it has 31 HD channels today) is a big point of differentiation from competitors Virgin Media, BT Vision and Freeview. The capacity to deliver dozens of HD channels is a lot more expensive and difficult when you have to use broadband pipes or terrestrial frequencies. In Freeview’s case there just isn’t enough capacity available. Even as analogue channels switch off over the next few years, Freeview will likely only be able to offer four HD channels. Meanwhile BT Vision has HD films to download, but it can take up to eight hours to receive a two-hour film.

In fact it is only Freesat, the satellite version of Freeview, that has potentially as big a canvas as Sky for HD. The problem for Freesat is that many of the HD channels are exclusive to Sky, and so far Freesat has plans for only two HD channels – including one from ITV that is exclusive to Freesat.

Sky’s HD set-top push is also preparatory to one of the company’s next steps: attracting more subscribers and readying itself for a move into broadband TV. All the new HD boxes have a broadband connection in the back, allowing Sky to get into interactive TV and broadband TV in a much bigger way. In the final quarter of 2008 Sky sold 188,000 HD boxes (it reported 779,000 sold at the end of 2008) so with the 67% price cut, it’s not a stretch to say there should be a good up tick in sales. Of course Sky isn’t talking much about the broadband TV potential of its HD box push – because timing is everything.

HD will help Sky reach its target of 10 million subscribers by 2010, a goal that seems increasingly likely given that the pay-TV company, which has already signed up 9.2 million customers, has pushed down churn. The fact that Sky extended its grip on Premier League football rights in the most recent auction will help attract subscribers because football and HD go well together.

The big question is: will broadband TV cannibalise Sky’s existing pay-TV base? On the broadband side, Sky is setting a target of 30% broadband penetration of its pay-TV base by 2010. That may give a clue of its ambitions for broadband TV. The fact is that TV remains people’s favourite medium, representing 54% of daily media consumption in the UK, according to IPA Touchpoints2. Sky – and others – are planning ahead: on-demand TV viewing in the UK has ramped up in the last year driven by viewing via web services.

The poster child of quality TV online has been the BBC iPlayer which is recording more than a million views a day of catch-up TV (programmes that have been broadcast on TV and are available for seven days free on BBC iPlayer). Sky already has an online offer, cleverly called Sky Player to ride on BBC iPlayer’s coattails. Sky Player is still a bit under the radar but there is no doubt that it is a big part of the operator’s plans.