MEDIA FORUM: Can Sky make its advertising sales work harder?

Sky's new ad production initiative could slash the entry costs for TV. Will it help to attract new advertisers to television? Alasdair Reid reports.

Can Sky seriously hope to improve its performance on the ad revenue side of things? Selling spot and sponsorship inventory has never seemed a priority for what is, after all, primarily a pay-TV operation - but that might be about to change if you believe the recent noises emerging from Osterley. The plan is to increase the amount of advertising money it takes in absolute terms - and, more crucially, to ensure that advertising contributes more in percentage terms to the total revenue picture.

Theoretically, the good news - from the point of view of the Sky bean counters - is that it starts from a relatively low base. It took £251 million last year - not exactly a sum to be sneezed at but puny in the broader scheme of things. ITV, for instance, takes £1.5 billion. But there are already signs of growth - Sky's advertising revenues this year are expected to exceed £300 million, contributing around 10 per cent to total BSkyB revenues.

You can see why it wants to hot-house that side of the business. Sky has almost reached what many people believe is a glass ceiling in penetration - seven million homes. So there's not much growth to be had in subscription terms, though it's true it will continue to search for ways of getting existing subscribers to up their spend by using more services (everything from pay-per-view to interactive gambling).

However, advertising is arguably where the greatest growth potential is, though Sky hasn't exactly been badly sold in the past. It acts more than competently as a sales house for a whole range of channels other than the (now extensive) Sky family and it has been responsible for developing two of the best sponsorship partnerships the UK market has ever seen - Domino's Pizza and The Simpsons and Ford and Premier League Football.

But now it's time to take the game on a stage. For instance, it will be trying to make more of the fact that its audiences, though small compared with terrestrial networks, are younger, more affluent and have good credit ratings (after all, Sky screens all subscribers).

And, last week, Sky also embarked on a major initiative to attract advertisers that have never previously been users of TV. The theory is that many of them are put off not by the media costs (and, after all, airtime on smaller digital channels is hardly prohibitively expensive) but by the high costs of producing a commercial. Which, as everyone knows, usually involves airlifting a fleet of cordon bleu catering trucks all the way to an atoll in the South Seas.

The solution? Use Sky's in-house production team - the people who create the broadcaster's own trailers and promos. After all, they're good. They've won lots of creative awards for their efforts. Mark Chippendale, the advertising sales director of BSkyB, explains: "When we began looking at non-TV sources of revenue we looked at the obstacles there were likely to be in moving it into TV. One stems from the fact that it's relatively cheap in press to create (a page) of advertising. So while it might be possible to attract media money over from press, the cost of production would be the obstacle.

We're going to be looking to team up with agencies on an initiative that can offer something on that front. Therefore we might be able to help advertisers with production costs. We don't want to steal revenue from creative agencies - it's all about attracting revenue from other media."

Meanwhile, it will continue to remind existing TV advertisers of Sky's merits, notably the attractive demographics it offers. "The TV market has to move towards a more effectiveness-based model rather than (one based on) cost. TV is still too obsessed with Station Average Price and cost. TV is not a commodity - a rating point on Sky is not the same as a rating point elsewhere. And, yes - we are going to continue making a big point about that," Chippendale says.

Will the market listen? After all, this isn't the first production initiative of this sort. Granada has been doing this for years, mainly for regional advertisers, but it hasn't exactly changed the world. You could also argue that Sky has a lot of ground to make up on the advertising side. It has not, some say, courted the market as enthusiastically as the sorts of broadcasters for whom advertising is their only income.

Chris Hayward, the head of television at ZenithOptimedia, says that's just not true: "I think Sky generally is a smart and sharp operation and it's always had an innovative approach to media - it's been very flexible, for instance, in areas such as sponsorship. Making more of their own in-house production can't be anything but good news for clients. Once you begin thinking about client needs in this way you can get involved in negotiations that incorporate the whole thing - sponsorship and spot and production."

Production costs are already a big issue, he states - and not just with smaller advertisers. "Over the past ten years, there has been a move towards total accountability on our side of the business, and auditors have become more and more prevalent. I can't see why the creative and production side of the business should be exempt from that," he concludes.

But what does the City think? Many analysts in recent months have released briefing notes on Sky's slowdown in subscription growth and the whole issue of the "glass ceiling". Do they think advertising could be a replacement growth strand? Too early to tell, seems to be the consensus.

Lorna Tilbian, a media analyst at Numis, says: "For many smaller advertisers, I'm not sure that the cost of production is the only issue. If you have a small budget, that's what radio is for, isn't it? It may not be appropriate to take the budget out of radio, below the line or regional media. They use these media for specific reasons and Sky offers something completely different. This initiative may work in its own way - we'll have to see."

But Chris Boothby, the negotiations director of BBJ, says that this is an area in which Sky (and to a certain extent the cable sales house ids too) has a real competitive edge over its terrestrial rivals - because of its increasing willingness to offer an integrated communication solution embracing spot airtime, sponsorship, interactive, online and promotions as a complete package to advertisers.

He adds: "And, yes, expanding and promoting its in-house creative capability fits well with this integrated offering and already the production of sponsorship credits are often negotiated with Sky as part of an overall sponsorship package. Whether this creative initiative will help to attract new spot advertisers to Sky remains to be seen, but certainly in terms of its sponsorship and promotion opportunities, Sky's ability to deliver integrated creative solutions has proved to be successful."