As the pay-TV giant enters the free-to-air arena, it must beware of harming its subscription revenues, says Andy Fry
BSkyB's recent announcement that it will launch a free-to-air digital satellite package this autumn took the TV market by surprise. Sky had been expected to launch a Sky-lite service - offering more channels than the BBC's proposed Freesat service, at an affordable price. However its latest move appears to conflict with its core business: selling pay-TV subscriptions to 7.3m SkyDigital satellite homes and sub-licensing its content services to 2.8m digital cable homes. By contrast, Sky's Freesat service will offer consumers 200 channels in return for a one-off payment of pounds 150.
So why has Sky taken this strategic detour? Mathew Horsman, director of media consultancy Mediatique, says that while Sky's growth has stalled, Freeview (in which BSkyB is a partner) has picked up 4m homes that might otherwise have bought a Sky pay-TV package.
In addition, there is a risk that Freeview, Top Up TV (a pay-TV digital terrestrial service) or digital cable will pick up some of the 9% of SkyDigital homes (700,000) that quit their subscriptions each year. Finally, the BBC has started talking about launching its own Freesat service to encourage switch-over from analogue to digital. Some observers argue that the mere mention of trespass on Sky's turf was enough to spur Rupert Murdoch to action.
Although BskyB's move appeared defensive, the City put 3% on its share price. Why? Because, according to Horsman, the City wants Sky to diversify its pay-TV offering into lower subscription bands. 'With the amount of homes wanting premium pounds 40 packages drying up, this is perceived as the best way to grow profits,' he says.
Sky's Freesat will not do that at the outset, but it does allow it to compete for the 47% of UK homes yet to sign up to digital. Since Sky Freesat boxes will be configured for upgrade to pay-TV, unlike Freeview boxes, the theory is that Sky will cross-promote subscription packages to Freesat customers and charge for the service after a two-year free window.
While Sky's (Freesat) launch looks like a decisive land grab, it is not the usual Sky blitzkrieg. One well-placed TV executive says: 'Sky is charging more than Freeview, it won't offer popular channels such as ITV2 and it won't be in retailers. That suggests Sky is hoping to dent Freeview without tempting existing SkyDigital customers to buy lower-priced packages.'
The executive believes that if just 10% of Sky's pounds 40 homes dropped to pounds 30 packages, it would wipe between pounds 100m and pounds 150m off Sky's bottom line. …