Sky marks time as digital dawns

An unwelcome side effect of BSkyB’s transition to digital this year is the increase in the drop-out rate of subscribers – known in the industry as “churn”.

Sky’s latest set of financial results, for the nine months to the end of March, shows churn reaching a four year high of 16 per cent for the first three months of this year, with pre-tax profits down nearly six per cent to 203.3m.

Sky is now at a unique point in its history when spending cash on recruiting new viewers or keeping existing ones is not necessarily a good thing. With digital just around the corner, the company is having to strike a delicate balance between the need to keep attracting new viewers and holding back until after the arrival of the new upgraded dishes and set top boxes for digital TV.

As David Cuff, broadcast director at Initiative Media says: “Sky is caught between a rock and a hard place. Next year it is going to want to be selling everyone digital. At the moment it is selling Sky analogue. There’s no point in pushing the analogue service. It wants to migrate all existing dish subscribers to digital.”

One of the reasons for the increase in churn is that a number of promotions, giving people free Sky equipment, ran at least 12 months ago, which is the minimum period of time a viewer can subscribe. In exchange for buying goods at certain electrical retailers, consumers received a free satellite system and free installation. One year on, some viewers are stopping their monthly payments.

“The cost of hardware has increased quite dramatically over the last year,” says a Sky spokesman. “A year ago you could have got connected to Sky for 50. Now it costs around 150, because Sky is not putting the same amount of money into subsidising hardware as it was. Digital technology is about to arrive and it is saving its firepower.”

He claims Sky spent less on advertising and marketing in the first three months of this year because it is deliberately not putting the same amount of money into subsidising hardware as it was. But the results show that in the nine-month period Sky spent an extra 44m on marketing. And last month it started a brand awareness advertising campaign through M&C Saatchi, which he describes as the early stages of getting people excited about Sky in time for the digital launch in the autumn.

Continental Research director Richard Helyar points out that there is a “high street factor” in this awkward transitional period – even if a viewer is motivated by Sky’s advertising to ask about subscribing now, helpful shop assistants will probably advise them not to sign up yet.

According to Sky, another reason for the increase in churn is a change in its policy away from a group of consumers known as “perpetual churners”. These are the lapsed who are enticed back with offers such as a couple of months free subscription, who signed off once the offer was finished only to return when the offer was repeated.

The seasonal patterns of supply and demand, where subscription rates fall after Christmas as people cut back on luxuries, is another reason given for the increase. It argues that it was too early in the year for football to have been a factor, although subscriptions do fall at the end of the football season in May, and rise at the start of the season in August.

Lorna Tilbian, media analyst at Panmure Gordon, estimates that churn levels will be as high as 14.5 per cent by the end of this year. Tilbian cites last October’s 3 increase in Sky’s rates as one reason for Sky’s high churn in the past three months.

The rate of Sky subscriber growth may be slowing down, but it is still increasing in total. Numbers rose by 107,000 to 6.8 million in the first quarter of this year, compared to 121,000 in the same quarter last year.

However, direct-to-home additions, or satellite dish sales, rose only 2,500 compared to 44,000 in the same three month period last year. More new viewers are coming to Sky via cable instead of dish, which could hit Sky financially as it becomes wholesaler to the cable operators, rather than retailer direct to the viewer.

According to Stephen Powers, spokesman for the Cable Communications Association, the number of UK homes which have been passed by cable is approaching 50 per cent – about 11 million homes. About 2.5m homes have so far subscribed to cable TV, attracted by cheap telephony and the churn could also be attributed to the emergence of a stronger Cable & Wireless Communications since last September’s relaunch.

An independent industry source also points out that the number of viewers churning off Sky satellite and on to cable is on the increase as cable companies – which are the victim of churn to a much greater degree than Sky – target existing dish homes.

In June, July and August when Sky’s soft launch of digital gets underway, its priority will be to convert its most loyal customers. A spokesman refuses to say what offers might be made, but he describes it as an opportunity for Sky to finetune its marketing and see how consumers react to different inducements before the peak selling season from September to Christmas.

Churn may be a headache for Sky, but as a spokesman says: “Sky’s costs have risen dramatically but its profits are only marginally lower. In this transitional year that is a hell of an achievement.”