Sky is launching NOW TV:

• To extend Sky’s reach to consumers unwilling to commit to a pay TV subscription: currently 11m UK households do not have pay TV

• As a defensive measure against the proliferation of OTT video and TV services in the UK market such as Netflix and Lovefilm which have proven particularly adept at making themselves available via a growing range of connectable devices

• Because it is a low risk strategy: launch marketing spend will be significant however NOW TV is using the same content rights, distribution technology, sales and customer service infrastructure which underpins Sky TV and Sky Go. NOW TV offers a way to increase ROI on investments the group would be making anyway.
  

Sky’s growth is slowing while competition is intensifying

Sky’s core pay TV business is slowing and limited growth potential remains in untapped households and in increasing ARPU of existing subscribers through upselling additional content and services. Competition is intensifying from Virgin Media and a rush of enthusiastic OTT specialists targeting a rapidly growing addressable market of IP connectable devices. Sky’s strategy of increasing the value proposition of the pay TV subscription has served it well for many years however it is not the ideal tool in a fragmenting environment in which consumers want more flexibility across more devices.

NOW TV diversifies Sky’s competitive arsenal

NOW TV is Sky’s vehicle to break out of the constraints of pay TV subscriptions increasing growth potential following two of the slowest quarters in Sky’s history for net subscriber additions (only 15k in Q1 2012). NOW TV will augment Sky’s existing standalone OTT service Sky Go and enables a greater degree of market segmentation without eroding the premium positioning of the Sky brand. It is also a recognition of the viability of a fast growing addressable market of connectable devices in the UK and the increasing traction of alternative content charging models in particular short-term subscription and transactional VOD. Given the emergence of Netflix in the movie space, multiple online catch-up services from UK terrestrial broadcasters, growing spending on transactional platforms like iTunes and Blinkbox and ongoing high usage of illegal online streaming providers, Sky’s strategy acknowledges the reality that there are plenty of competitors ready to grab their share of audience consumption on IP-delivered services if they do nothing.

NOW TV will target devices which would otherwise erode Sky’s share of the audience: platforms which were once threats become opportunities. NOW TV will target connected TVs, games consoles as well as the rapidly growing tablet market. We believe that the number of connected TVs, consoles and tablets in the UK will double to over 26m in 2015 from 13m at the end of 2011. Sky will leverage the expertise it has developed in offering multiscreen and out-of-home distribution to existing pay TV customers, the connected TV expertise of the recently acquired Acetrax as well as a formidable content arsenal in evolving NOW TV.

NOW TV can even target homes which subscribe to competing pay TV services by distributing content through connected TVs, consoles or tablets. It will be interesting to see if Sky could convince customers to acquire their content directly via NOW TV rather than subscribing to Sky channels via a competing pay TV service provider: will consumers prefer to add a Sky channel accessible only via their STB rather than through NOW TV which will be accessible through connected TVs, consoles, smartphones and tablets?

Will NOW TV succeed?

The appeal of NOW TV is greatest in sports and movies where Sky’s content rights differentiate it from other OTT services: Sky enjoys a lock on FSPTW movie rights across all six Hollywood majors and the broadest collection of UK sports rights including Premiership and Champion’s League football, F1 and Test Cricket. Illegal sports streams are widely available online (especially for football) and Sky will look to monetise as much of this audience as possible through TVOD matches on NOW TV. Entertainment will be a tougher proposition given the strength of terrestrial broadcaster catch-up services in the UK lead by BBC’s iPlayer however Sky’s content rights to US programming again constitute a significant point of differentiation from the rest of the market.

However NOW TV is entering a relatively small market by pay TV standards:in 2011 the UK OTT TV and Video market was worth less than $395m and is likely to grow around 30 per cent in 2012 to top half a billion dollars by year-end. While we expect NOW TV to be a significant overall market driver for OTT distribution in 2012 and beyond it will be some time before NOW TV revenues significantly impact Sky’s overall revenues. If NOW TV can break 100k subscriptions by the end of 2012 and has started the arduous process of converting the illegal sports streaming audience to the paid option, it will be performing well.