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Sky TV flags strategy shift toward on-demand services

Sky TV flags strategy shift toward on-demand services, value-adds

By Sophie Boot

March 26 (BusinessDesk) - Sky Network Television says it's moving to provide more on-demand services as it works to retain its sports rights and stabilise core earnings.

Earlier today, long-standing chief executive John Fellet said he plans to retire within the next year, after 17 years running the country's dominant pay-TV company.

In an investor presentation released to the NZX this afternoon, Sky said it plans to introduce upgraded set-top boxes with on-demand functions and the ability to support higher-quality content, along with IP-only set-top boxes which deliver content via fibre instead of via satellite and an app-only platform. However, it said it hasn't fully designed all of these, but wanted to highlight its options and how its current platform can change to offer a range of products at different prices.

Last month, Auckland-based Sky said it had lost 37,359 customers in the six months ended Dec. 31, including the 10,608 it shed with the closure of its Fatso DVD rental unit, leaving it with 778,776 subscribers at the end of 2017. The reduction in customer numbers trimmed subscriber related costs and Sky spent less on programming. First-half net profit rose to $66.6 million from $59.3 million a year earlier as sales fell 5.5 percent, and the company cut its interim dividend in half in an effort to cope with the rapidly changing environment.

In the commentary accompanying the presentation, Sky said it wants to target customers who it says have a variety of choices and sometimes subscribe to multiple services, such as Netflix and Lightbox, to access the content they want. Viewing experience accounts for 66 percent of customer sentiment, the company said, and it needs "a great solution for content discovery and to showcase the best content".

"Having undertaken a robust review of our strategy, the objective of the session is to provide the investor community with more clarity about how Sky is moving forward after the terminated Vodafone merger, and how we are competing in the increasingly digital content market," the company said. "Our core focus as a pay television operator continues to be to secure exclusive content that matters to New Zealanders. Sports and blockbuster movies remain important, and premium drama is now as relevant as those two pay-TV mainstays."

Sky said it won't move away from linear channels overnight, "but over time we expect on demand to grow significantly at the expense of linear." Customer experience will be updated with a range of apps to be "on-demand centric", include Sky and third-party content, and have personalised recommendations, Sky said. It will be more portable and accessible through a variety of devices, with flexible payment models

Sky said it expects to stabilise core earnings from its recent pricing changes, and to add incremental customers, as it focusses on managing its cost base. While it said the financial analysis was "for illustrative purposes only and is not guidance", the company said it loses $17 when customers "spin down" to less expensive packages versus $62 when customers churn, or leave it altogether. New customers come with a $45 net margin, it said.

The company said it expects to renew its contracts for sports, which are Sky's big drawcard for many customers and account for about half of its programming costs. The cost of the sports tier add-on under its new pricing structure, at $29.90 per month, is lower than the sports program costs, the presentation shows.

Of the SANZAAR rights renewal negotiations, the presentation says Sky has "nothing to gain by discussing its plans in public" and will make no comment, though it repeated that Sky is "an attractive, experienced and proven partner for NZ sports bodies". Negotiations should start this year and the issue is strategically important, it said.

The presentation stressed the importance of premium drama, with Sky holding the New Zealand rights for popular HBO shows such as Game of Thrones and its upcoming spinoffs, Westworld season two, and Big Little Lies season two.

Sky said the global over-the-top players, such as Amazon and Netflix, "are complementary to pay TV" and "their original content spend doesn’t match Sky’s aggregated power". Sky said its key drama suppliers spend over $US8 billion on production each year combined, and it estimated that Apple spends US$2 billion, Amazon US$4 billion and Netflix US$7 billion on all production.

The company said its key content supply is already committed, and the company's size and penetration still appeals to key distributors.

Last June, Sky and Vodafone terminated their merger agreement, which aimed to create the country's largest telecommunications and media group, and withdrew an appeal against the Commerce Commission's rejection of the plan. Today, Sky said it won't get into the broadband market on its own as it "does not need to become a telco to succeed", and Vodafone had "unique appealing characteristics" it can't replicate by entering the broadband market, such as scale, brand, global expertise and mobile assets.

The company's shares recently traded down 2.6 percent to $2.26, and have fallen 40 percent in the past twelve months.


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