BSkyB pays the price of Freeview’s success

BSkyB’s decision to launch a free-to-air digital package is its first venture outside pay-TV, but is Sky running the risk of confusing the public over digital TV? asks Amanda Wilkinson

Though firmly entrenched in pay-television, BSkyB is changing its strategy and is launching a product for the many digital refuseniks who do not wish to shell out a subscription fee to receive more television channels.

The company is introducing a free-to-air digital package that will give viewers up to 200 radio and TV channels for the one-off cost of &£150. The price includes a Sky digibox, mini-dish, initial viewing card and installation. The service, which has yet to be named, will be launched later this year and will be sold directly to consumers rather than through retailers.

Since its launch, BSkyB has made it perfectly clear that it is in the business of pay-TV. However, a slowdown in subscriber growth has led some to query whether BSkyB’s subscriber base – currently 7.3 million – is reaching a plateau.

BSkyB added only 66,000 subscribers during the quarter ending March 31, but the company maintains that it is still on track to reach its target of 8 million in 2005.

Starcom MediaVest executive buying director Matt Blackborn says: “Its rate of growth has dramatically slowed and it needs to kick-start the business. This is a way of doing that.”

Some analysts believe that one of the contributory factors to that slowdown is the rapid growth of Freeview. The free-to-air digital terrestrial service offers users 28 channels through a set-top box that can be acquired for as little as &£50, although a number of homes require an aerial upgrade which can cost about &£100.

Freeview, which launched 17 months ago, claims to have attracted more than 3.5 million households – more than the UK’s two cable operators put together. NTL’s TV service is used by 2 million households, while 1.28 million use Telewest Broadband’s.

By offering an alternative to Freeview, BSkyB will have a captive set of customers to which it can market its own pay-TV products via the Sky electronic programme guide, direct mail and cross marketing on its own channels.

BSkyB, which is a partner in Freeview along with the BBC and Crown Castle, has in the past claimed that its pay offer did not compete with Freeview and that the latter appeals to those who do not want to commit themselves to a monthly subscription fee. However, those Freeview users who do decide they are prepared to pay for more channels no longer have to change platforms to BSkyB’s digital satellite or to cable thanks to the launch of Top-Up TV, which offers a number of channels on a pay-as-you go service through a digital terrestrial platform.

There are also other commercial and political reasons for BSkyB to launch a free-to-air digital satellite service. The Government has plans for the analogue signal to be switched off by 2010 if more than 95 per cent of households can receive digital TV by then. Many doubt that the 2010 time scale will be achievable. About 53 per cent of households receive digital TV in one form or another, but there is reluctance among a portion of the population to pay for digital TV.

While Freeview presents an alternative, it is accessible in only 73 per cent of households. The BBC recognises that this leaves 27 per cent of households unable to receive all of its licence-fee funded digital services without signing up to some form of pay-TV. It recommended to the Government that a free-to-air digital satellite service be launched.

In April, BBC marketing director Andy Duncan appealed to all broadcasters to join the BBC in establishing such a service. However, this initiative has now effectively been overtaken by BSkyB’s announcement last week.

Duncan says: “We welcome BSkyB’s move as it helps more people to get our digital services.”

It is no surprise that BSkyB wants to go it alone, as it was unlikely to give up control of the platform. It remains to be seen how heavily the new service will be marketed.

A briefing note from UBS claims that BSkyB was forced into the move by “political pressures” associated with government plans for switch-off and by a desire to get “ahead of any efforts by the BBC to offer a free satellite service”. It doubts that BSkyB will market the service heavily for fear of cannibalising its existing pay service, and makes the point that the channel line-up is of “poor quality”, with as many as 40 of the available channels being home-shopping ones.

But Numis media analyst Lorna Tilbian believes that BSkyB’s motives are commercial and that it will support the new service with marketing.

One industry insider says: “It is a high-risk strategy targeting people who have gone for free TV hoping that they will move over to pay. I don’t think BSkyB will be pushing the service aggressively. Its chief executive officer James Murdoch just needed to say something strategic to the City.”

Numis analyst Theresa Wise believes BSkyB’s new service is a direct swipe at Freeview and is designed to slow its growth and to prevent pay channels switching to free-to-air, thus potentially damaging the satellite operator’s subscription revenue. She says: “As Freeview reaches more and more households so the platform will be more attractive to pay channels as the economic model of increased advertising will allow them to migrate to it.”

But some TV buyers question whether viewers will be attracted to BSkyB’s new service. One says “In reality the offer is not as good as it would at first appear. It does not include many channels that are available on Freeview such as ITV2, UKTV History and FTN, but it does provide access to channels such as Reality TV and Golf TV.”

However, MindShare director of investment Nick Theakstone says: “If this package does not work then BSkyB will strengthen it, but it won’t want to undermine those packages that people are already paying for.”

One BSkyB insider has already hinted that the package could be beefed up closer to launch later this year.

The line-up will predominantly be made up of channels that are broadcast unencrypted, allowing them to be picked up by satellite users who have not signed up to a pay-TV package. In addition, it will include encrypted free-to-air channels Channel 4, Five and ITV1, which will be accessed using the Sky viewing card.

This is the same channel line-up that is available to users of the old satellite solus cards, which allow viewers to watch unencrypted channels as well as free-to-air channels broadcast on BSkyB’s digital satellite platform without the need for a pay-TV package.

The cards had at one point been funded by the BBC, which last year decided to broadcast all its channels on an unencrypted basis, meaning the cards are no longer available. There has been much debate over how such cards should be funded, and the number of users has fallen to about 211,000 due to the cards lack of availability.

Under BSkyB’s new offer the viewing card will only be guaranteed for two years. Thereafter those who sign up may at some point have to pay for a replacement card if they wish to continue to receive Channel 4, Five and ITV1 on digital satellite without signing up to a pay-TV package.

With this uncertainty, BSkyB’s new service may end up confusing consumers even further about digital TV.

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