Breaking the waves

Sky’s recent spat with Discovery was resolved at the 11th hour, but the acrimony on both sides was clear, writes Kate Bulkley. 

Big businesses in the TV world (or anywhere else, for that matter) are complicated, nuanced operations. At some point, it’s almost certain they will suffer from a classic case known as ‘the swan syndrome’ – while everything might look serene on the surface, there’s a lot of frantic panic paddling going on just underneath the waves.

Sky’s ‘swan’ moment broke the surface recently and we all got a good look at what was going on. Not only did the pay TV giant’s most recent financial results show a profit plunge of 18% at its UK business for the six months to the end of December 2016, but the churn rate of people disconnecting from its services rose to 11.6%, up from 10.2% in the same period in 2015.

If this were not enough to get the analysts sharpening their pencils, the same week the results were announced, one of Sky’s biggest independent suppliers, Discovery Communications, threatened to pull all its 13 channels, including Eurosport, off of the Sky platform because it claimed Sky was not prepared to pay it enough to carry its services. Discovery accused Sky of leveraging its “dominant market position” to pay the content provider less than it received a decade ago.

These are not unconnected events. Sky’s dominant position in the UK – a market that provides 90% of the pan-European broadcaster’s profits – is facing increased threats on several fronts. Rival BT’s entrance into the sports market has added a deep-pocketed and savvy rival bidder for key rights.

Separately, the amount paid for channels to be on the Sky platform is one area where Sky and any pay TV provider looks to drive a hard bargain, particularly when churn numbers are running high. The Sky-Discovery dispute was resolved at the 11th hour and a new carriage fee deal agreed. The details of which were not made public, but the acrimony on both sides was clear.

What all this shows is the pressure on the traditional linear TV platforms to perform in an increasingly competitive world. Consumers have increasing amounts of choice, not least from big digital players like Netflix and Amazon, as well as home-grown, on-demand services delivered on broadband. Meanwhile, Google, Facebook and others are also adding more and more video content to their offers and becoming more telly-like. Even messaging app Snapchat is getting into the video game, for example, striking a recent deal with BBC Worldwide for exclusive content from the BBC’s Planet Earth II series for its Snapchat Discover platform, content that aired a day ahead of the linear debut of the programme on TV in the US and Canada.

For Sky all this change is happening even as the pay TV giant is about to be wholly bought by 21st Century Fox in an £11.7bn (e13.8 billion) takeover, currently wending its way through the regulatory process in the UK and Europe. Putting Sky together with Fox is part of a bigger strategic plan by Rupert Murdoch and sons to add scale and clout to better compete in individual markets but also against the big digital players like Netflix and Google which have global footprints, deep pockets and big ambitions.

The pressure has never been greater on Sky. So it should come as no surprise that CEO Jeremy Darroch took the occasion of its recent results to announce a new Sky product – a dish-less version of its pay TV offering. Set to launch next year, this will include the full slate of Sky’s TV channels delivered over broadband.

Of course, Sky has dipped its toe in the OTT waters already with its Now TV service, a pay TV-lite product, with an estimated 500,000 subscribers to date, and in Germany Sky has launched an OTT service called Sky Ticket. But this newly mooted full-fat, Sky OTT service is in a whole new ball-park. This  ‘new era’ product will greatly appeal to Sky’s chairman James Murdoch who has always been more of a ‘digital’ guy than his father.

Coupled with recent programming strategy shifts, Sky is embracing competitive realities. While football will remain an expensive but likely must-have feature on Sky’s shopping list, recent big decisions towards factual entertainment and away from factual documentaries and new comedy are part of a plan to create format shows that can be long-running and exportable.

Sky’s head of content in the UK, Zai Bennett, wants a Big Brother-type series that it can re-commission across seasons and exploit on platforms around the world. Bennett called out Vin Diesel’s The Fast And The Furious, saying what he wants is a TV series like that – with the impact of a big Hollywood movie.  The appetite for drama series has never been higher and Sky has six drama series set to air this year at budget of  £25 million each. Perhaps surprisingly, Bennett is also thinking outside of the linear channel box: “We are not a linear channels business. We are a multi-platform business and the linear channels are a shop window,” he said in a recent interview.

Sky is having to transform its business and it’s far from alone; there are a lot of swans out there all furiously paddling.

Kate Bulkley is a broadcaster and writer specialising in media and telecommunications. [email protected]