March 22, 2013 – A flurry of events profoundly affecting the competitive landscape among providers of video entertainment in the U.K. hints at what may be in store for U.S. providers as the struggle for survival in an Internet-saturated marketplace intensifies.
Leading the charge in the U.K. is satellite provider BSkyB, which has pulled out all the stops, including multiscreen service, pure-play OTT, big spending on acquisitions and introduction of targeted advertising on satellite channels, in order to outflank its ground-based competitors Virgin Media, BT and a growing legion of OTT players. For their parts, Virgin Media and BT are shoring up their positions with major new strategic moves, including an agreement by Virgin Media’s owners to sell the company to European cable powerhouse Liberty Global.
As the center of competitive gravity moves to broadband, Sky, the leading U.K. pay TV provider with over 10 million subscribers, has raised the stakes with a new agreement to acquire Telefónica UK’s O2 and BE consumer broadband and fixed-line telephony businesses. By adding Telefónica’s 500,000 broadband subscribers to its base, Sky will reach 5 million customers via broadband, second to BT’s 6.6 million and ahead of Virgin’s 4.5 million.
Sky CEO Jeremy Darroch promised to keep his foot on the gas as competitors respond with their own efforts to build video business on the broadband side, all with the aim of capturing some of the 13 million households not currently subscribing to traditional pay TV. “Sky has been the UK’s fastest-growing broadband and telephony provider since we entered the market six years ago,” Darroch said. “From a standing start in 2006, we have added more than 4.2 million broadband customers. The acquisition of Telefónica UK’s consumer broadband and fixed-line telephony business will help us accelerate this growth.”
Over the past year Sky has put broadband to use in several ways to strengthen itself against the technology advantages of fixed line competitors. In the process, it has become a leading force in TV over broadband through two initiatives: Sky Go TV Everywhere service, now delivering a large share of the subscription satellite service over broadband to iOS and Android devices as well as PCs, and the pure-play OTT NOW TV service, which offers on-demand movies on a monthly subscription or one-time rental basis to all major device platforms, including a wide range of smart TV models. In a new development, a live TV option is available in conjunction with distribution to Roku boxes.
Adding to the NOW TV clout, Sky has just added access to its six Sky Sports TV channels with a unique pay-as-you-go 24-hour payment scheme, allowing sports fans to buy into live action just when there’s something they want to see. Sky has also cut a deal with the IP-based subscription YouView service, which is partly owned by BT, to allow users of the YouView set-top to gain access to NOW TV.
Sky Go is expanding as well, with a new Sky Go Extra option that charges satellite pay TV subscribers a monthly premium for downloading movies and TV programs from 43 channels for later off-line viewing – in other words a kind of network PVR service with a 30-day limit on time-shifted access. It’s also worth noting that with Sky’s acquisition last year of on-demand app service supplier Acetrax, which enabled NOW TV access on Samsung, Panasonic, LG and Toshiba smart TVs, Sky is well positioned to make the Sky Go TV Everywhere service available to those devices as well.
All of this is paying off for Sky, even as, like many other pay TV providers, it experiences a slowdown in uptake on its traditional satellite TV product. The company had just 40,000 new signups in the quarter ending December 31 compared to 140,000 a year earlier, along with a jump in churn to 10.3% from 9.6%. But in the same quarter the company saw approximately as many signups for the brand new NOW TV as it had for the traditional pay TV service, and broadband and telephony signups grew rapidly as well, resulting in a net gain in subscriptions for all products of 772,000.
Further reflecting how the diversified broadband video service strategy was paying off, Sky reported downloads of on-demand content jumped four-fold year-to-year hitting 4.4 million per week in the quarter ending December 31. In all, average spending per subscribing household for 2012 was up 4.4 percent, contributing to a 6 percent revenue and 8 percent net profit increase for the six months ending December 31.
“We have seen a strong response to new services like On Demand and Sky Go, which increase customer satisfaction and loyalty and will provide important sources of future growth,” Darroch reported. “Although we expect the consumer environment in 2013 to remain challenging, we have a strong set of plans for the year ahead.”
These plans include a big increase in programming investment, Darroch said. At a recent Royal Television Society event, as quoted in press reports, Darroch commented, “Today we are spending well over £2 billion every year on programs, more than any other broadcaster in the UK. And we’d like to go further.” He said new spending will go into creating a “valuable fourth leg to our content offering” to rival sport, movies and news.
“On the face of it, entertainment isn’t an area that looks under-served. There are some great shows out there and viewers have been reasonably happy,” he said. “But what we hear from our customers is that they have an appetite for more entertainment – and, just as importantly, an appetite for something a bit different.”
He noted that Sky made a major drama push last year and now has more than 70 hours in production. It also brought through a number of new comedy shows with “more in the pipeline.”
Rounding out the new Sky initiatives is a new advanced advertising strategy that utilizes the storage capacity of the Sky+ HD receiver in conjunction with the NDS Dynamic ad management software now sold under the Cisco brand. Slated for limited use later this year and full launch in 2014, the AdSmart service will allow advertisers to stream multiple ads for a given spot to the receivers, which will act as media servers to match the ad to whoever is viewing a program based on profiles selected by advertisers from a matrix of household types and geographical locations.
The BT Response
The Sky juggernaut is not going unanswered. BT, seeking to exploit multiscreen opportunities, has decoupled itself from what were deemed to be encumbrances on service flexibility imposed by the managed on-demand IPTV service running on Microsoft’s Mediaroom. This move coincides with the carrier’s massive broadband network upgrade, which has pushed fiber to within a few hundred feet of customers, allowing it to use VDSL2 to achieve throughput of up to 76 mbps to most of its six million broadband customers.
Mediaroom IPTV service was devoted to the on-demand component of the carrier’s BT Vision offering, with live programming delivered from the over-the-air DTT (Digital Terrestrial Television) service to a hybrid set-top. By moving to an open Linux platform with an in-house developed set of client apps and to a new user interface with recommendation engine supplied by The Filter the carrier has been able to integrate its pay TV and broadband operations for the launch of the long-delayed YouView subscription service. YouView, introduced last fall in partnership with the BBC, ITV, Channel 4, Channel 5, Arqiva and TalkTalk, provides more than 70 digital TV channels with DVR features and an expanded volume of VOD content along with seven-day catch-up TV on demand.
Critically, BT is leveraging thePlatform’s cloud-based mpx video publishing architecture to serve as the core cross-platform management system. As a result, BT is now able to deliver an enhanced user experience with live, catch-up and on-demand TV on new IP-connected set-top boxes, said Alex Green, director of TV for BT.
“thePlatform enables us to simplify many of our back-end processes by providing a centralized video logistics system capable of publishing video to our new set-top boxes, and other IP-connected devices in the future,” Green said. Specifically, mpx eases video workflow, coordinates playback data with recommendations engines, and enforces the viewing rights for each subscribing household. The open architecture integrates with a variety of BT’s internal systems and technology from other vendors for content delivery, set-top boxes, and user interface software.
Having accomplished the transformation, BT is betting it can take a more aggressive run at pay TV competitors by integrating the on-demand BT Vision service onto the multi-device friendly YouView platform, especially given the price advantages it enjoys over other pay TV suppliers. With only 771,000 BT Vision subscribers as of year-end 2012, BT has some catching up to do, but management is confident they’ve come up with a winning formula.
“This is a fantastic offer,” Green said, in reference to YouView. “Customers will now be able to enjoy BT’s super-fast fiber broadband with a YouView box and TV Essential pack all for £18 per month.”
Liberty Global and Virgin Media
As the second largest pay TV service provider with 3.8 million subscribers Virgin Media hopes to benefit from the purchasing clout and advanced service knowhow of Liberty Global to be a more formidable competitor. Liberty, acquiring Virgin at a purchase price of $23.3 billion, is coming off a strong year with its next-generation Horizon pay TV service registering an early take rate topping 100,000 subscribers in The Netherlands and Switzerland.
Liberty saw revenue-generating units grow in 2012 by 1.6 million to reach 34.8 million on a base of 19.8 million unique customers, with fourth quarter revenues hitting $2.7 billion, up year-to-year by 7 percent. Digital TV subscriber growth was significant with 920,000 new subscribers bringing the total to 9.1 million, even as the net TV subscriber base fell by 287,000 as a result of analog service drop-offs. But this was the lowest annual video attrition in absolute numbers in five years, the company said.
Virgin, too, had a growth year, with an actual gain in pay TV subscribers totaling 32,400 and an increase in subscribers across all service categories of about 90,000 to 4.9 million. As a quad-play provider with an MVNO (mobile virtual network operator) service supported by Everything Everywhere, Ltd., a joint venture between France Telecom’s Orange and Deutsche Telekom’s T-Mobile, Virgin has been steadily expanding its service capabilities with broadband speed upgrades to 35 mbps, a new multiscreen service and dynamic ad placements on an expanding VOD portfolio. It is also moving to implement Wi-Fi small-cell technology throughout the London underground, putting in place the same type of integrated Wi-Fi and MVNO strategy that’s taking shape among U.S. MSOs.
The combination of the broadband speed upgrade with launch of multiscreen service may be Virgin’s strongest competitive thrust against the dominant Sky. Employing Harmonic, Inc.’s ProMedia family of integrated software video processing and encoding solutions, Virgin’s TV Anywhere service allows customers to use a wide range of connected devices to watch up to 45 live TV channels streamed via Apple HLS and Adobe HDS streaming modes. The Harmonic platform can also manage recorded programs and control TiVo set-top boxes through a TV Anywhere app, officials said.
But they made clear this is only the beginning, given the flexibility and scalability of the Harmonic ProMedia platform. Through a comprehensive user interface, Virgin Media is able to create and modify network topology and channel lineups, in addition to setting encoding parameters, they said, suggesting they could easily support hundreds of live television channels as well as introduce additional services like start-over and catch-up TV.
Just how much harder Liberty will drive Virgin in its efforts to meet challenges posed by Sky and BT remains to be seen, although Liberty’s track record as a pioneer with the next-generation media gateway-based Horizon service suggests the company isn’t averse to risking investments on new strategies. Commenting on the deal at the recent Cable Congress in London, Liberty president and CEO Mike Fries described the U.K. operator as “a great asset, a great brand” with an “extremely competent management team.” Liberty’s scale will make it easier to launch new products, he noted.
But Fries also indicated he wasn’t inclined to take the aggressive path in program investment pursued by Sky’s Dorrach. He ruled out competing with Sky for sports rights and said Liberty wasn’t planning to buy a content provider, although he added, “Never say never.”
Two major points leap out in regard to assessing what the U.K. market has to say about what can be expected elsewhere: further consolidation is likely to be seen as a way to shore up competitive strength and delivering a full slate of live and on-demand content over broadband is vital to subscriber growth.
Competition couldn’t be more intense than it is in the U.K. The steps such competition is driving major U.K. players to take are likely to become universal.