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Sky launches UK Internet service for new customers

Sky, the UK’s largest pay TV operator, is finally looking beyond the satellite dish for new subscribers by making content available online with no contract on a pay-as-you-go basis later in 2012. The operator seems to have been sparked into an early announcement by the arrival on UK shores of Netflix pitching movies and past TV shows in a subscription bundle priced well below existing pay TV offerings.

Sky already offers online access to content via its Sky Go service, which has increased the range of devices it can reach progressively since its launch as the UK’s first major online TV service in 2006. However, Sky Go is only for existing subscribers to access content they have paid for over the Internet rather than on the main TV connected to the satellite dish.

Sky has been scant on details so far, merely announcing that these will be forthcoming as the launch date sometime in the first half of 2012 approaches. The operator, which currently has just over 10 million customers accounting for about 70 percent of the UK’s near 15 million pay TV homes, has indicated that the service will deliver the movie catalog first, with sport and entertainment following later. It has also confirmed that the service will be available across the same range of devices as Sky Go, including smartphones, tablets, laptops, video game consoles, and smart TVs, and that there will be no minimum contract. People should be able to sign up and access content straightaway on a pay-as-you-go-basis, with a subscription option also available, although again pricing details are yet to be announced.

The battleground between this new Sky service and the existing UK online video providers, notably Netflix and Amazon’s LoveFilm, will initially be over the 10 million or so UK homes currently without a pay TV service, along with young itinerant people, students in particular, likely to be attracted to a pay as you go service. On this count, Sky will score over Netflix, which is currently serving only movie content coupled with past shows from the leading broadcasters including the BBC and commercial Free To Air provider ITV, and on a subscription basis.

Netflix offers unlimited access to its catalogue of films and past TV shows from the BBC, ITV and Channel 4 for £5.99 per month ($9.25), or €6.99 in Ireland. Movie content is available from Disney, Lionsgate, MGM, Miramax, Momentum Pictures, NBC Universal, Paramount, Sony Pictures Entertainment, Twentieth Century Fox and Viacom International Media Networks. However Netflix is at present restricted to episodes older than six months for some premium TV programmes, such as the BBC’s Top Gear featuring Jeremy Clarkson, and ITV’s award winning period drama Downton Abbey.

LoveFilm attempted to trump the Netflix launch by announcing a similar streaming service at just £4.99 a month, again with a month’s free trial. Currently, LoveFilm is estimated to have around 1.5 million subscribers in the UK, having been the only significant dedicated online VOD provider until the Netflix launch. However, satellite pay TV provider BSkyB is really the leading company since all of its 10 million subscribers have access to its online VOD service Sky Anytime Plus, which also provides access to a battery of movies with the additional advantage of including its sports content such as UK premier league football.

Yet, while Sky may have an initial edge over its rivals in the UK OTT space, the eventual outcome will depend on two things, content and quality. On content, Sky has competed so far on exclusivity for both movies and also football, Europe’s most popular spectator sport, using its combined financial muscle and dominance of the pay TV subscriber base to outbid competitors and largely shut them out. To an extent, the same strategy has been applied in some other countries such as Germany, although the operator does not quite enjoy the same dominance there, having three million subscribers. But, in the UK, the communications and TV regulator Ofcom, and the Competition Commission, which rules over anti-trust issues, have been going after Sky with various proposals, such as to limit the number of Hollywood studios any single-pay TV operator can have exclusive agreements with. While the specific outcome remains unclear, it looks certain that Sky’s iron grip over UK premium content will continue to weaken.

On the matter of OTT quality, satellite operators such as Sky face the classic commercial dilemma that besets dominant companies in a field forced to react to emerging competitors in a new area of the market. The issue is how to compete effectively against the up-and-coming challenger in the emerging sector while preserving the dominant legacy market position. In Sky’s case, it does not want the Internet quality to be too good or else existing subscribers will wonder what they are getting for their satellite subscriptions and churn away to the new online service. It will not be an issue this year, but Sky’s pay TV competitors, cable company Virgin Media, and Telco BT, are in different ways upping the ante on OTT. Virgin Media is installing TiVo hybrid set top boxes at the rate of over 1000 a day to bring Internet content “Through The Middle” over the broadband connection with the same potential quality as the broadcast linear services, limited only by the original source quality.

Virgin Media is also investing in off footprint infrastructure through various initiatives, while offering broadband speeds up to 100Mb/s. Meanwhile, BT has signaled its intention to deliver high quality online services by announcing last week that it will offer customers that are already in fiber-to-the-cabinet (FTTC) areas the chance to upgrade to 300Mb/s early in 2013 by having fiber run from the cabinet into the premise. Although initially pitched at business customers, it is likely to be made available later to consumers when prices come down, and in any case BT is boosting the speed of the existing FTTC lines that still require a final copper connection into the home from 40Mb/s to 80Mb/s. That is plenty to deliver several channels of HD alongside broadband access and voice. This will also chime with BT’s strategy to align OTT with IPTV so that its video will be delivered over a UK wide multicast infrastructure with Content Distribution Networks (CDNs) linking directly to the Central Offices (COs) feeding the access network.

Given this development, it looks like a significant proportion of the UK population will be within reach of high-quality OTT within two years. Sky will then have to face up to the reality of declining numbers of satellite subscribers and probably also of subscription rates.