Sky and ‘Freesat’
A Cordelia report, 23.06.04
Sky’s free-to-air move is a land grab; its aim is to get the 50% of the market that is still analogue, before anyone else. For Sky, success will depend on how many Freesat customers they can persuade to take premium packages and services. However, the potential consequences of Freesat are wider than the battle between Sky and Freeview.
Sky’s signal is nationwide and it currently has seven million subscribers, but growth has slowed to 1% in the last quarter. Freeview currently reaches only 73% of the UK and is in 3 million homes.
The Freeview/sat model is analogous to the arrival of pay-as-you-go cards in UK mobile telephony, which rapidly accelerated growth by removing the fear of long term contracts: Freeview/sat removes this fear of standing financial commitments for digital television.
Freesat could cause a subscription dilemma for niche channels like Discovery, MTV, Nickelodeon, Bravo, Living and UKTV, as they ponder if it is better to be in 66% of digital homes and get a small subscription revenue (from Sky and cable) to supplement their advertising revenue, or to be in 100% of UK digital homes and give up subscription revenue.
2. Sky's offer
With the final channel line-up still being determined, the question is whether Sky’s additional channels and services are worth the extra £110 over Freeview.
From these package outlines it is clear that Sky has a larger range of channels and better coverage. But Sky’s package is more expensive and, unlike Freeview, it is not straight plug and play. It requires greater installation, and calls to Sky’s authorisation centre. It’s not a big deal, but it is an additional friction that makes Freeview more of an impulse purchase.
3. The long view for distributors and consumers – you can’t beat free.
For consumers and distributors of digital TV, Sky’s new channels will have direct consequences.
3.1 Consumers and the government
Sky’s package has appeal both to consumers and to the government. Digital switch over requires that every home should be able to get some form of digital signal1. Currently Freeview is unable to reach 27% of UK homes, whilst Ofcom’s figures suggest that Sky should be able to reach 97% of the UK.
For the government this helps digital switchover. It also replaces the need for there to be a government or BBC satellite service that could reach homes outside of Freeview’s range.
Freeview has hindered cable growth, and Freesat won’t help. A ubiquitous free TV proposition reduces the value of cable’s triple play. Cable’s consumers may not want to pay cable a connection charge for channels they can receive for free. So Freesat could commoditise cable TV, and the consumer might take cable just for broadband and phone.
Sky is offering a free TV package, the promise of high definition television, and PVRs (Sky Plus). Cable has not so far exploited its technical capabilities and responded in kind. This gives Sky a boost as it has a perception of technical lustre which cable is capable of, but sadly lacks.
Sky’s greater coverage allows them the opportunity to get into 20% of UK homes that Freeview and cable can’t reach. Sky will use Freesat as a Trojan Horse, to promote its subscription services to its non subscription “free” customers.
Freeview faces losing potential viewers to Sky, but in turn Freeview poses a new problem for Sky. Freeview boxes are cheaper, and as the cost falls Freeview becomes an auto include, either given away or bundled and built-in to new TV’s. Sky will then be competing with an inbuilt function, not an opponent who must retail separately.
In the meantime it’s worth noting that the major free channels, BBC 3 to 7 and ITV 2, will be on both Freeview and Freesat. So as the cost of the Freeview box falls will people pay the extra for Freesat, to get a range of programmes that is essentially the same as Freeview’s but with a few more channels? Or will the deciding factor be latent access to Sky’s subscription services?
There is another interesting question – will a consumer who wants pay services go for Freeview and Top Up or the far greater range to be had from Sky? Our view is that if you want pay TV then potential access to a lot has got to be better than potential access to a few, so Freesat wins but Freeview can still dominate the genuinely free-to-air market if it gets bundled.
4. The long view for content creators – the end of subscription as we know it?
Free-to-air also changes the market for television channels. Currently, Sky has 7 million customers, Freeview has a presence in 3.5 million households, and cable accounts for another 3.3 million customers2, approximately 14 million digital customers.
What happens to niche channel economics when 1/3 of all digital viewers are free-to-air?
When faced with a significant free-to-air market, channels may reconsider their economics. Most niche channels have dual revenue streams, i.e. subscription and advertising. The subscription can be anything from 1p to 30 p per month per subscriber and over the years, as cable and Sky have got more consumers, they have forced down the subscription revenues to channels.
In this market, channels with dual revenue streams have to consider whether they might not be better off forsaking their subscription revenue for a larger increase in advertising revenue. The balance point is when the increase in advertising revenue available from Freeview and Freesat equals the current subscription revenue from cable and satellite. Being free to air offers several advantages to channels large enough to hold around 1% market share, and the advertising that goes with it. Channels such as E4, Discovery, Nickelodeon and MTV all stand to gain first mover advantage, should they take the risk, building their brand into the heart of the free-to-air model. Should Freeview reach the point of ubiquity, then this is a unique opportunity to become a default television channel, just as BBC and ITV are now, and so to claim the revenue that goes with that.
It will be a brave decision to give up the security of subscription revenue: subscription is constant and, unlike advertising, not dependant on the daily ups and downs of viewing figures. The bravest will succeed because you can only make free-to-air work if you are on all free platforms. Unfortunately, the limit on Free-to-air channels is set by Freeview’s spectrum, not Freesat’s, as the aim is to maximize ad revenue through volume of viewers. There are only 30 free-to-air spaces on Freeview, so it will be a case of the early channel getting the Freeview viewer. Those who hesitate will be lost, not least as the appeal of subscription packages will diminish as key players go free to air. This will mean a reduction in the number of channels, as it will be hard for minor niche channels to shelter in subscription bundles once major players have gone free to air. This will be good news for the major broadcasters because it reduces the number of ants at the picnic of British broadcasting.
Faced with an exodus, Sky will have tough decisions to make about its economics, either waving goodbye to potential subscription drivers in their basic packages, or else offering more money to niche channels to keep them as subscription services. Either way, should free-to-air become viable, Sky will have to alter its business model.
Freesat shows that Sky’s thinking appears to be oriented more to growing the platform than growing their programming.
In the long term, Sky is unlikely to replace Freeview, providing Freeview does come bundled with new televisions, but free digital TV is changing the television landscape. It opens up new revenue opportunities for both distributors and channels, and a greater free market will also drive VOD subscription models, as producers look to gain premium for programme freshness before throwing it away on free to air.
Ultimately, free-to-air is not just about Sky vs. Freeview: it could change business models for everyone.
1 There were two government conditions set in 1999 for switchover: 1. all households currently getting the main public service broadcasting channels still receive them on digital systems, 2. digital TV is affordable for the vast majority of households. Affordability is defined as 95% of households having digital equipment before switchover is complete.
2 Ofcom’s figures available at http://www.ofcom.org.uk/research/industry_market_research/m_i_index/dtv/summary/?a=87101
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