Sky armed and ready for broadband battleground
BSkyB is to spend 400 million over the next three
years rolling out its new broadband service that
will bring viewers films and sport on demand.
Sky has transformed Britain's TV industry, becoming
the bogeyman for the BBC and commercial television
operators in the process.
It created a new model for television with its
subscription service, making it virtually independent
of advertising revenue.
Now Sky boasts more than 8.26 million subscribers,
but until recently, it had a significant weakness
-- it could not offer broadband, which is expected
to be one of the key battlegrounds of the future.
Now, after buying broadband supplier Easynet, Sky
is pushing its broadband offer hard to take on its
main rivals NTL and BT.
Since the summer, more than a million people have
registered an interest in Sky broadband and the
company has 74,000 signed up.
In its most recent results for the three months
to September, NTL saw its broadband performance
come under severe pressure. The company added 78,100
broadband subscribers during the quarter compared
with 205,000 during the same period a year ago.
At the same time, it suffered a net loss of 54,600
phone users.
Independent observers, such as price comparison
service Uswitch, reckon NTL is losing out to voice
and broadband suppliers such as BT, Tiscali and
TalkTalk.
Sky, meanwhile, is now using its TV packages to
attract hordes of broadband customers. The company
realised long ago the power of owning attractive
content to draw in subscribers, as its 14-year hold
on Premier League football clearly shows, though
it has lost exclusivity on live rights, which it
now shares with new sports channel Setanta.
Sport, and especially Premiership football, has
always been the key attraction for Sky subscribers,
which is why the company was prepared to pay more
than 1 billion to secure the rights again this year.
Sky's understanding of the value of owning content
goes some way to explaining its decision to pay
nearly 1 billion for a 17.9 per cent stake in ITV
in November.
This has, for the moment at least, scuppered NTL's
attempt to acquire the broadcaster, not least because
BSkyB was prepared to pay 135p a share, even while
ITV's share price was standing at 111p.
Now, if NTL wants to bid again, it would have to
offer more than 135p to stand any chance of success,
while it could also expect ITV's new biggest shareholder
to ask some demanding questions about NTL's long-term
intentions.
BSkyB's move demonstrated its fear of a combined
NTL and ITV. The key purpose of that proposed move
was for NTL to acquire ITV Production, the huge
programmemaking arm of ITV, which is behind long-running
soaps such as Coronation Street and Emmerdale.
Access to such content would give NTL a vital edge
in rolling out its broadband offer because the cable
company could then draw on ITV's huge archive of
programmes going back to the dawn of commercial
television 51 years ago.
NTL knows the potential of such an arrangement
as it has a similar deal with the BBC. The two companies
jointly run UKTV, which offers mostly repeat broadcasts
of BBC-produced programmes on channels such as UK
Gold.
Sky has also just launched PC service Sky Anytime,
formerly called Sky By Broadband, to its digital
customers. The service allows users to download
films, entertainment programmes and Sky Sports highlights
and watch them on home computers.
The company will offer premium pay-per-view film
titles, such as Jarhead and American Dreamz, via
broadband at 3.95 for each download. Sky Anytime
will also provide downloads for some Sky One series
from launch.
The service allows Sky to tempt viewers to watch
hit shows such as Lost since episodes of the series
will be available to Sky Anytime users immediately
after airing on Sky One.
Live streamed Champions League football and Ryder
Cup golf coverage will be available via skysports.com
for a one-off payment, too.
This all comes at a price, however, which BSkyB
chairman Rupert Murdoch appeared to hint at in November.
During a chat to investors, he reportedly said
that BSkyB's three-year rollout of broadband would
hit company profits. Some accounts of the briefing
report that he said earnings before interest would
fall from 900 million this year to 700 million or
even 650 million in 2007.
This is nearly 15 per cent less than the City's
2007 profits forecasts for BSkyB of 770 million.
BSkyB itself says it is comfortable with profit
forecasts of 730 million to 820 million.
Investment bank Goldman Sachs says: "We are
downgrading our long-term margin assumptions [for
BSkyB] on the basis of lower returns from broadband
and higher investment requirements to maintain product
leadership."
Sky has other attractions for subscribers, including
high definition television and Sky+, its personal
video recorder, which now dominates the personal
video market.
The Sky+ box allows users to record an entire series
after one setting, record two channels while watching
a third, and pause and rewind live programmes. Of
more interest to Sky's commercial rivals, Sky+ also
allows viewers to skip commercials, which suits
Sky as it makes the bulk of its money from subscription
revenue, but it worries advertising-funded channels
such as ITV.
More than 1.7 million people signed up to the Sky+
service.
Sky's technological innovation has repeatedly transformed
the broadcast industry, but even so, such is the
pace of change that, as Goldman Sachs says, Sky
will have to move quickly to build up a broadband
subscriber base that approaches its target of three
million by 2010.
