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Sunday, March 04, 2007

TV Market: Virgin Media & Sky Battle


Reading through the Sunday newspapers, I’m struck by how few focus on the strategic considerations of the deal. I still believe the main reason for the withdrawal of Sky channels is that Sky wants to differentiate its service against the Virgin Media service.

Even before the Virgin pullout of Sky News and the proposed pullout from Freeview, Sky Satellite is the platform of choice for news junkies. It not only has Sky News and BBC News 24, but CNN, Foxnews, all the financial news networks or even the obscure networks such as Al-Jazeera, Chinese State News and the new French News network. I believe if you are a serious news junkie and are allowed to put up a satellite dish, you will already be a Satellite user – even if you belong to the Murdoch hating brigade.

The general Sky Entertainment channels are a completely different matter and although content quality is a very personal matter, I don’t believe that the Sky Entertainment quality even stand up to the poorest of the UK Free-to-Air terrestrial networks – Five. I do believe that Sky are quite successful in targeting the UK SciFi community and these are pretty loyal and heavily addicted beasts. I’m sure there is more people thinking about swapping because of losing Battlestar Gallactica, Stargate, Star Trek and the rest of Sky SciFi menu than because of 24, Lost and The Simpsons. It is also noticeable that the big Sky in-house production of last year was an adaptation of a Terry Pratchett novel – again niche programming targeting the significant SciFi community.

The Sunday Telegraph reports that the current level of cancellations is very low at 100 / day. To be honest, I’m not surprised at this level, but I was surprised that Steve Burch admitted that the retention team on the call centre was keeping 95% of callers – that means that Virgin Media are probably handing out 1,950 package discounts /day. I do think that one of the best actions taken during the whole sordid affair was when Virgin Media said they would allow people to exit contracts up till the end of March – very reasonable, mature and fair.

However, as I said I don’t believe the Sky One move was meant as a short term fillip to the Satellite subscribers. It is extremely noticeable that the Sky adverts are aimed at 24, Lost and Simpsons viewers – these are all content that have and regularly appear on Free to Air TV and attract large audiences. Sky in its advertising is more or less saying that if you want to watch first run quality TV Entertainment Content – you need to sign up to Satellite. Of course, the content is nowhere near as appealing as some of the ITV and BBC one-off dramas, but it is a start and the Mudoch play the long run in the content game. I believe Sky is targeting the vast number of people who are going to make the switch from analogue to digital and have a choice – a basic package such Freeview which gives more than analogue or a basic Sky Satellite package which offers first run TV programs or Virgin Media with limited “basic” content.

In order for Sky to be successful in this strategy, first of all it must broadcast “must watch event” based TV. The sort of series that people are going to stand round the Tea Urn in the morning saying “Did you see watch Jack Bauer save the planet, again, last night?” or “Isn’t that Homer Simpson just like our Boss?” In reality, Sky only needs to get exclusivity on these events for a short period of time, because the value drops off quite quickly after that initial Tea Urn moment.

This brings us to the next element of differentiation which is On Demand programming. Here we definitely have huge differentiation between the Sky and Virgin Media offerings. Currently, the respective PVR offerings (Sky+ and V+) aren’t that much differentiated to the average punter, especially when you consider the latest models in Japan have 1TB (not 80GB or 160GB) of storage and have an in-built DVD burner to transfer the collection to a more permanent home. The big differentiator is that Sky+ has over 2 million users whereas V+ has around 77 thousand. In the PVR world Sky was first and its subscribers have bought into the service is vast numbers; I see nothing to indicate that this innovation will not continue into the future.

There are only two problems with PVR as a means to deliver the on demand fix of the TV addict: the first is that it requires the viewer to be semi-organised and order content in advance and the second is that it doesn’t deal with those impulse or long tail moments. It is difficult to deal with the problem of people who are completely disorganised – Sky+ has tried to solve it by making the Sky+ available via the internet and mobile ie when someone is on the street and has that “Damm, I’ve forgot to record The World TiddlyWinks championship” moment.

The long tail is where Virgin Media actually have currently a huge advantage over Sky and that is with true Video-On-Demand programming. Virgin Media has a VOD solution from SeaChange which places programming storage at the Regional Head Ends and viewers make a special connection to a Remote Server which deliver the programs on a “as is required” basis – I’d love to know how much bandwidth is required and if anyone knows the detail of the technology feel free to email off-line. This is something that Sky can’t replicate currently until they have a critical mass of Sky Broadband subscribers and even then they have to integrate the PVR into the service. This is why Virgin Media are plugging the Virgin Central service, as it is the current differentiator.

The best short term strategy for Sky is to keep content off the service. I would imagine this is easy with Fox owned content (such as The Simpsons, 24, Prison Break) but is nigh on impossible with other content owners. It is really interesting that Comcast, the mega-US cable company, is having huge success with its VOD offering (from SeaChange as well) especially as a retention tool. As I understand it, the boffins at Sky and their suppliers are working hard in linking the Sky+ local storage and User Interface to remote long tail content, but a product is still a while off. The current plan of downloading content overnight is only a partial solution at best, but gives Sky an opportunity with first run movies to put a huge dent in the video rental market.

The other thing that is missing in the analysis is the economies of scale that Sky enjoy. In the year 2000 cable had 3,352,000 subscribers, now cable has 3,301,000. In the year 2000 Sky had 3,963,000 subscribers, now Sky has 8,437,000. This is why Sky can reduce unit costs with content owners, because the base is increasing and therefore overall they get offer the content owners more revenue and also the content owners are also getting more advertising revenue. Virgin Media with a fairly static base does not enjoy the economies of scale.

So to sum up, Sky has the current advantage in terms of overall audience, PVR users and therefore negotiating power with content owners. Virgin Media has the advantage of a much better VOD platform for impulse viewers.


There is also much talk in the papers about the excellence of the Virgin brand, whilst I agree that loads of people actually know the brand – is it better known than the Sky brand? I don’t think so. If we look at the Top UK Brands surveys, I think Sky is normally more predominant than Virgin. For sure, Sky is nowhere near as popular a brand as the BBC, but nevertheless I think it is the second “entertainment” brand.

There is a certain element in the media that absolutely despise Murdoch, but I don’t believe that flows into the Sky brand and certainly not the Sky subscribers. Personally, I think that Virgin Media face an uphill battle to even match the Sky brand in the long run.

It is difficult to estimate which brand has suffered most from the last week’s brouhaha and I do believe that both brands will have suffered. Probably, the only gainers are the BBC, ITV and Freeview; Channel 4 is currently on brand-double-secret-probation after the Big Brother and Phone Call-In rip-off fiascos.

An examination of Virgin Mobile brand show that it is far behind the o2 and Vodafone brands and these have been around in the consumer eye for a lot less time than Virgin. Although, Virgin Mobile has done well, especially considering it a mere MVNO, the network brands power over it especially when it comes to converting brand into cash flow performance.

Next Moves

I notice in a couple of papers hints that Virgin Media is going to appeal to the regulators as their next move. I would advise them to think long and hard before taking this move, because it will completely take the argument over a couple of channels into a completely different direction.

The very best outcome for Virgin would be that carriage would be regulated and someone like OFCOM would decide pricing. However, the vast majority of other channels would also try to get their carriage regulated and guaranteed – channels that Virgin Media don’t want to carry or don’t have the capacity to carry. What needs to be regulated for one also needs to be regulated to another. OFCOM nowadays takes a more "free market" approach than any of the past "great and good" regulators.

I also think there are more than one or two ISPs who would like the same wholesale access to the Virgin Broadband as they currently enjoy with BT. This would be a huge loss of differentiation to Virgin. The smaller ISPs will definitely be able to get away with a portrayal of themselves as a consumer champion against the huge bully of the Virgin Media empire. In fact, I know a couple who would do it just for the free publicity even if they thought they had zippo chance of success. Oops, wasn't that the Branson marketing strategy in days bygone?

The next problem is that I think Sky are gearing towards an “We want to bill direct for our customers like Virgin Media currently allow other content providers and we allow other people to bill direct on our network” argument. This is a very powerful argument and one that Virgin Media will struggle to argue the toss against. Sky will argue it is their choice as a content owner whether they make content advertising funded or subscription funded. I spoke to someone about this possibility last night and they said “Don’t be ridiculous, it won’t be worth the effort for Sky to charge someone 3p/day for Sky One, Two, Three, Arts, Sky New, Sky Sports News and HD content. Virgin Media would be able to charge Sky a fortune for conditional access”. Of course, Sky wouldn’t put these channels together in a single bundle – they would bundle Sky Movies, Sky Sports and Sky basics together as one. And they would get the list of customers that they could churn onto their triple play offering.

If Virgin Media ask OFCOM to investigate the content carriage market, they could get a result which would make their life hell. It is a huge gamble that they shouldn’t be making. Funnily enough, this is outcome that BSkyB are pushing for.