Market Insight

Sky seeks UK growth with full online TV offering, amid carriage dispute with Discovery

January 26, 2017

Tim Westcott Tim Westcott Director, Research and Analysis, Programming

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Pan-European pay TV operator Sky delivered a characteristically impressive set of results for the first six months of its financial year – but with some notable caveats.

Despite adding 500,000 customers across Europe and increasing revenue for the period by £692 million to £6.41 billion, the rise in Premier League TV rights costs in the UK lowered operating profits, by 9% across the group and 18% in the UK and Ireland.

Keeping content costs down is a priority for Sky, highlighted by its carriage-fee dispute with long-time channel partner Discovery, which could see key factual channels and Eurosport disappear from the Sky TV and Now TV platforms on 1 February.

Growth in total products – otherwise known as revenue-generating units (RGUs) – has been strong, with Sky adding 1.98 million in the six-month period to end-December to reach more than 59 million. But on the TV side, growth is being driven by online offerings Now TV (UK and Italy) and Sky Ticket (Germany), with traditional pay TV net additions harder to come by.

In search of new growth for the Sky TV proposition, the operator unveiled plans to launch a pure online version of the flagship Sky Q offering in the UK in 2018. This will make the full Sky service available without the need for a satellite dish for the first time.

Our analysis

Sky’s move to deploy its core TV service over broadband is not surprising, with this reduced reliance of satellite in fact bringing the UK operation in line with its European counterparts. Sky has a long history of distribution via cable in Germany, where it is heavily dependent on the partnerships with MSOs. And in Italy, Sky has been distributing its full offering via Telecom Italia’s fibre-based IPTV offering since 2015. The key difference in the UK, of course, is that Sky owns and operates its own ISP, giving it more control over the packaging of bundles featuring broadband-based Sky Q plus internet.

Take-up is unlikely to be significant, at least in the short-term – while there are certainly homes that either do not want or cannot install satellite dishes, there are many alternatives available to them, with large portions of Sky’s channels and content distributed via cable operator Virgin Media, telcos BT and TalkTalk, and Sky’s own Now TV. This puts the size of the niche the service will appeal to into question. In the longer-term, however, the move does lay the groundwork for a more IP-based future.

News of a notable potential change to Sky’s UK offering broke when Discovery took the unusual approach of releasing a press statement about its failure to renew a carriage deal for its 12 channels the night before Sky’s results announcement. While no details were given on the terms, Discovery said it was being paid less by Sky than it was ten years ago, suggesting that Sky may have offered it even less as part of its programme of cost reduction.

While common in the US, carriage disputes of this kind are rare in the UK, where Sky is by far the largest pay TV platform. If no agreement can be reached, Discovery’s channels will no longer be available on the Sky platform from the end of the month. While Discovery also has agreements with Virgin Media and BT, loss of Sky carriage would have serious implications for the US company’s international channel business. IHS Markit estimates that the UK accounts for between 15 and 20% of its revenues outside the US.

Discovery has more to lose than Sky, but customer loses – which could be accelerated by the loss of some key channels – are a concern for the pay TV operator, with annualised churn remaining high, at 11.6%. This is partly attributable to broadband customers switching to alternative providers, but also of a shifting TV base – though it is attracting new customers with Now TV, Sky’s satellite business is under pressure.

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