Sky's Defensive Picnic

| About: Sky Plc (SKYAY)
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Sky have released details of a forthcoming service called Picnic.

Much of the information about the TV element of the service is already in the public domain: Sky wants to encrypt its Freeview capacity and broadcast in MPEG4 to add extra capacity. This is already subject to a delayed OFCOM consultation and even with a fast tracked approval in 10 weeks. I can’t realistically envisage a customer launch before Christmas 2008.

Personally, I can’t see any reason why OFCOM would want to refuse anyone permission to use MPEG4 and encryption technology. Although MPEG4 is new to the UK DTT platform, OFCOM are actually suggesting that this is a potential solution for HD broadcasting. Encryption is not new and dates back to the original failed launch of ITV digital. I suspect the only reason for delay is that because the proposals come from BSkyB.

Unfortunately for Sky sometimes logic is of little relevance to broadcasting decisions as was witnessed by the EU decision to force the Premier League to have a minimum of two broadcasters for UK rights, whereas in Scotland and France one is suffice.

The new information is full details of the content: a 24-hours Sports Channel, an evening Movie Channel and an evening general entertainment channel from Sky’s own channel portfolio were pretty obvious choices. A daytime Children Channel and a daytime factual Channel were more surprising: however Sky already has within its joint ownership stable Nickelodeon UK, National Geographic and The History Channel. Dependent on MPEG4 adoption, 24 Hour Sky News for the fourth channel is also a pretty obvious choice.

Given that most content is already broadcast on the DTH platform, then incrementally the content costs have obviously been kept to a minimum and the main service costs are going to be the subscriber acquisition and ongoing management costs together with the transmission costs. The subscriber acquisition costs are going to be minimised with no Set-Top Box subsidy or distribution costs. Sky already has a long term contract for the transmission capacity and therefore no new money is required there.

The big question in my mind is whether the “Free to Air” advertiser funded model of the Freeview platform is under real strain and associated with this is whether some of the minor channels will survive and more immediately whether transmission capacity prices have peaked. There currently is very little programming outside of BBC, ITV, Ch4 and five: with three t-commerce channels (Virgin & QVC), two music (Viacom and Emap) and one “new” general entertainment (Virgin). Whatever happened to the original concept of Freeview encouraging new entrants to broadcasting?

Of course, the biggest risk for Sky is that it cannibalises DTH revenues: I think this is inevitable and where I’m struggling with the whole concept. I think there is a big percentage of the population who would never pay any extra subscription fees above and beyond the beeb’s annual telly tax. Admittedly this refusenik percentage is shrinking year by year and this is the natural target of growth that Sky will see in its subscriber numbers year on year.

However, the landscape is getting much more complex with the entry of a budget Sports payTV channel and budget movies available over the internet. Arguably, if Virgin Media ever get their act together they could also cause a little market disruption. I suppose the equation which drove the payTV DTT decision is how much cannibalisation would have occurred from these new entrants versus the self cannabilisation from launching their own services.

I also expect that standalone services for broadband and voice are also of dubious economical value for shareholders. To be fair, we have to wait for pricing, distribution and the all important bundling strategy before we can definitively deliver the thumbs down.