MEDIA: SPOTLIGHT ON SKY - Sky TV has clear road ahead for greater digital dominance

A lack of competition and a well-run operation puts Sky in charge, Jeremy Lee writes.

Tony Ball, BSkyB's chief executive, can be excused for feeling ever so slightly pleased with himself as he steps up to deliver the keynote MacTaggart Lecture at this week's Edinburgh Television Festival.

Sky's annual results brought much good news for the broadcaster, not least that after five years of expensive investment in its digital platform, it had finally managed to post a pre-tax profit. And, on a personal level, the success translated into an additional £9 million in Ball's pockets after he cashed in 1.8 million shares shortly after the results were announced.

Aside from the financial results and the pleasing news for Ball's bank manager, the wider implications for Sky were good. Its churn was down, the cost of acquiring new customers was down, the amount that existing customers were paying was up and the total number of subscribers was just a whisker away from the seven million that Ball had promised by the end of the year.

This all came on the back of the news that, in a masterful piece of negotiation, Sky had renewed its exclusive rights to Premiership football and reduced the cost per game to levels not seen since 1996.

In bullish mood Ball, who started his career as an engineer at Thames TV before moving into TV management, decided to move the goalposts.

Ball announced that he wanted to increase the number of customers further.

He set a new target of eight million Sky subscribers by the end of 2005 and predicted that the company would eventually end up with between 12 and 13 million customers - using current Barb figures, this means that around half of all TV homes would be Sky homes.

Given the current numbers taking up Sky subscriptions, nearly 750,000 last year, the first target looks distinctly achievable, but what are we to make of his assertion that one day half of all homes would subscribe to Sky?

Paul Richards, an analyst at Numis, estimates that by the end of the decade and based on 80 per cent digital penetration (although the Government still believes that by 2010 it can switch off the analogue signal), Sky will have ten million subscribers.

Freeview and cable would make up another ten million. Because Ball put no date on when the 12 million figure will be reached, it looks like being a realistic goal.

There are many reasons why Sky has a clear road ahead. First, it doesn't have any comparable competition. Richards argues that Freeview is of limited appeal because of its lack of a pay-TV element, but will be used by some as a complementary second set. The cable companies, on the other hand, are still struggling to control their massive debt problems.

Sky, however, is a well-managed and ruthless corporate beast with a clear vision and high levels of customer service.

There are also generational issues at play. Chris Locke, the UK group trading director at Starcom MediaVest Group, points out that given that Sky's multichannel TV launched in February 1989, there is a generation of people who grew up knowing nothing else.

He claims that as this first generation of people who grew up with multichannel TV set up their own homes, getting multichannel TV will be as high on their list of priorities as acquiring a licence fee. Locke predicts that this effect will come into play over the next five to ten years.

Locke argues that this new generation of people are more likely to choose the Sky platform rather than the cable. "The cable companies have been hoisted by their own lack of competence," Locke says.

With Sky in pole position to dominate the multichannel arena and Ball predicting that it could acquire a monopoly of TV homes, is there anything for the advertising industry to fear?

Not really, seems to be the answer. As Sky is a platform rather than a channel and as it offers more potential channels than any of its rivals, audience fragmentation will continue. Locke believes that the main danger is that the more people who take the service up, the more the possibility that viewing of non-commercial channels, such as the BBC's suite of digital channels, will increase.

The Sky channels themselves, with the exception of the flagship Sky One, do not attract large audiences although their reach will continue to grow.

And nearly one year into the job, Dawn Airey, the managing director of Sky Networks, has brought her own touch to Sky One.

While five, Airey's erstwhile charge, has abandoned its pred-ilection for skin flicks, the Sky One autumn schedule contains more than its fair share of sex in a bid to increase its audience share.

Programmes including When Sex Goes Wrong, Laid Bare and Six Degrees of Penetration follow five's populist route. With Sky Digital increasing its own penetration further, the Sky One channel could become a more serious challenge to the terrestrials.

Sky's programming budget currently stands at £1.6 billion a year. The majority is spent on sport and movies. Richards believes that as Sky returns greater profits, this will be reinvested in its programming - Sky currently spends just £100 million in terms of original formats - providing a further challenge to the terrestrials.

With Sky in such a pre-eminent position, Richards thinks that there is little that can stop its continued success bar intervention from Brussels or competition regulators. But given Sky's history in ruthlessly, and successfully, defending itself from any legal challenges, this may prove to be of little hindrance.

THE RISE OF SKY TV

1989: Sky TV launches a four-channel service via the Astra satellite.

1990: British Satellite Broadcasting launches in April. Eight months

later it folds and is merged into Sky to form British Sky Broadcasting.

1992: Sky secures Premier League rights.

1995: BSkyB enters the FTSE 100 index as total satellite and cable

viewers exceed five million.

1998: Sky launches the UK's first digital TV service in September.

2000: Sky screens the first interactive ad campaign for Chicken Tonight.

2001: ONdigital is rebranded as ITV Digital. Sky completes its analogue

switch-off.

2002: ITV Digital collapses. The BBC, Crown Castle and BSkyB win the DTT

licences and launch Freeview.

2003: Sky Digital posts first full-year profit.

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