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Sky boosts OTT strategy with O2 takeover

BSkyB, the UK’s largest pay TV operator, has bolstered its TV Everywhere strategy by acquiring the country’s O2 broadband operation from Spanish Telco Telefonica for £180 million ($280 million), rising to £200 million if customers are transferred successfully.

The move brings in 500,000 new customers and promotes Sky into second place in the UK broadband market with 4.7 million subscribers. That number is still well behind market leader BT at 6.6 million, but now just ahead of cable operator Virgin Media at 4.5 million.

It brings the UK’s broadband and pay TV markets into closer alignment with a three-way fight between Sky, BTY and Virgin Media. In pay TV Sky is the market leader with just over 10 million subscribers, followed by Virgin Media on 3.7 million and the BT Vision hybrid DTT/IPTV service a poor third at around 750,000. However BT has invested heavily in content rights to close the gap, in particular by spending £246 million for each of the three seasons 2013-14 through 2015-16 for exclusive rights to show 34 English Premier League matches live. Sky though still retains the bulk of the rights for 116 games per season.

Meanwhile, Virgin Media, which gave up its content business by selling Virgin Media Television to Sky for £160 million in 2010, has been acquired by the larger Liberty Global group, which has existing operations in 11 European countries. That deal was for $23.3 billion in cash and shares. This will make Virgin Media part of a larger empire that will be involved in content rights acquisition and original programming.

For Sky, the O2 acquisition is part of a strategy to expand strongly in broadband to cement its position in TV Everywhere, which, as a satellite operator, requires a strong presence on the ground. Any competitor in pay TV needs a broadband presence in the multi-screen era and cannot rely on obtaining fixed line bandwidth through local loop unbundling arrangements.

“Local loop unbundling has largely run its course, and any broadband provider that wants to remain relevant in the future will need to outline a path to fiber,” said Emeka Obiodu, Telco strategy analyst at UK technology research group Ovum. “But, that costs money. And, with retail prices so low, and the return on investment tough to earn, pure-play broadband providers will struggle to survive. The market is now left with players that are able to spread the cost of fiber across more services, with its attendant economies of scope benefits.”

BSkyB’s chief executive Jeremy Darroch would agree.

"Sky has been the UK's fastest-growing broadband and telephony provider since we entered the market six years ago," Darroch said. "From a standing start in 2006, we have already added more than 4.2 million broadband customers. The acquisition of Telefónica UK's consumer broadband and fixed-line telephony business will help us accelerate this growth.”

Ovum’s Obiodu also indicated the move was significant for the cellular industry, signaling that operators in the UK were happy to get out of fixed line services to pit their whole broadband and video strategy on emerging 4G/LTE services coupled with WiFi. This, he said, was risky and at odds with the rest of Europe.

“This sale reduces the power of UK mobile operators in the converged space,” said Obiodu. “At a time when telcos across Europe are intensifying efforts to offer converged fixed, mobile, broadband and TV services, mobile telcos in the UK are making themselves much more reliant on mobile. Ultimately, this is a dangerous scenario as it might reduce the strategic maneuverability of the UK’s mobile telcos in a converged future.”

This is a good point because although the future may be mobile, that only applies to access, and all the data being generated will have to be backhauled onto a fixed line infrastructure. WiFi is merely a conduit onto the broadband infrastructure owned by fixed line players, and if mobile operators have no stake in that they will lack control over their end to end cost base.

They will also be vulnerable to competition from fixed line operators extending into the mobile sphere via WiFi as hot spots becoming more ubiquitous with increasing ability to roam between them.