Telecom, Netflix in crosshairs as Sky TV confirms video-on-demand service

Sky TV [NZX:SKT] is hitting back against new "over-the-top" competition with one of the biggest moves in its history: launching a Netflix-style service that will be open to non-subscribers (a move first flagged by NBR on February 24).

The broadcaster this morning announced a subscription video on demand (SVOD) service that will launch before the end of 2014.

Asked by NBR if it could be described as a Netflix-style service, CEO John Fellet replied, "That's exactly right."

Pricing has yet to be set, but if it mirrors Netflix it will come in around the $12 to $15 a month mark.

The US-based Netflix has surged in popularity over the past few years and now has 48 million paying customers — around 70% of them in the US. The balance of subs are in Europe, where it has officially launched in several countries, and in places like New Zealand, where an estimated 30,000+ have used workarounds (including, for novices, a one-click solution offered by Slingshot) to access Netflix content usually blocked to those outside the US.

Netflix content can be watched on a laptop or PC or, via devices like an Xbox, PlayStation or Apple TV wi-fi box, on a regular television.

Subscribers pay $US7.99 (standard definition) or $US8.99 (high definition) a month for all the video streaming they can eat ($US1 a month increases are about to kick in for new subs). There is no minimum contract term. An $US11.99 family subscription allows streaming to multiple devices.

Decoder option for subs; apps for others
Sky TV's Netflix-style service will come in two flavours, Mr Fellet says. 

One, like the existing Sky Go app, will be accessible through a laptop or tablet, and will launch before the end of this year (presumably with a wi-fi streaming option to get content to a regular TV).

The other will allow the Netflix-style service to be accessed through a Sky decoder (via an over-the-air software upgrade rather than a new decoder being necessary).

The service will be free to existing Sky TV subscribers, and charged for those who are not.

Vodafone will shortly announce a promotional push for Sky's Netflix-style service (which could conceivably include a pledge not to meter its data and/or integrating it with its Vodafone TV service), but Mr Fellet says it is not an exclusive partnership. All ISPs are welcome to co-promote the new service (speaking of which — no, Sky TV is not buying Orcon)

In an interview yesterday afternoon, Mr Fellet told NBR the new service was not specifically in reaction to Telecom's [NZX:TEL] recently announced plans to launch a Netflix-style streaming TV service later this year, or persistent industry rumours that Netflix itself will set up shop in NZ early next year, joining the increasingly capable Quickflix, and the minnow Ezyflix.

However, his working principle was that Netflix or an equivalent player would challenge Sky TV at some point.

"We’ve known for some time Telecom wants to get into the business, but no more than Netflix, Quicklfix, Ezyflix, all of the 'flix'," Mr Fellet said.

"The idea came more from sitting down with non-customers and saying what will it take for you to get onboard."

The CEO said he was happy with Sky TV's penetration in its traditional pay TV market (it recently reported subscriber numbers close to flat at 857,000), but that it had become apparent that it just did not match the "lifestyle" of a growing segment of the population.

"The Sky model still works but when we talk to non-customers, clearly this has demand which we want to fill," Mr Fellet said.

The potential size of the business was still being analysed "but if we could get 10 percent more customers that just took this services we would be pleased," he said. "In order to keep growing we think we need to keep reviewing different business models. We will not be able to go from 50 percent [today] to 75 percent penetration" with the existing pay-TV model."

Three years to break even
Asked about the financial impact of the Netflix-style service, Mr Fellet said, "There’s no way the thing breaks even until year three."

He declined to say how much Sky is budgeting for programming and other costs, citing the fact that negotiations are ongoing with content makers and distributors, and he didn't want to put out a figure that would affect their expectations.

Pricing for the service will be revealed in 30 to 40 days, he said. Logic dictates that it can't be too far from the $US7.99/standard definition and $US9.99/high definition (soon to be $US9.99 and $12.99) charged by Netflix, given a growing number of Kiwis are accessing the US service directly. If it has a decent breadth of content, Sky could probably charge a small premium for the convenience of a local, reliable service (Netflix does not try to block overseas subscribers from countries like NZ, but nevertheless technical changes can lead to multi-day service interruptions — as occurred recently — as ISPs and others in the delivery chain adapt).

Sky has yet to decide whether to have different tiers of pricing depending on the amount of content offered, or high vs standard definition options (in the US, Netflix now also offers a 4K or Ultra High Definition option).

Content: sport off the table
Mr Fellet is also coy on content, in part because negotiations are still underway.

He did repeatedly name-check Sky's Soho channel (home of many premium HBO shows) and movie channels as possible sources of content for the new Netflix-style service.

Essentially, anything currently on Sky TV could potentially be included in the new on-demand, all-you-can-eat service.

The only thing off the table is sport.

People prefer to watch sport live, Mr Fellet says — which is true.

Sky TV's pending service could in theory offer live streaming as well as ondemand streaming of sports events, NBR notes. But keeping them off the table is a sensible commercial move to protect Sky's core business.

Cannibalisation
Speaking of which, NBR asked Mr Fellet what would happen to someone who's, say, paying $78 or more a month for a Sky TV package including movies and Soho.

Will some find Sky's Netflix-style service — which will presumably be charged around the $15 mark — more attractive and defect?

"Yes, but I figure they're going to leave me anyway," the Sky boss says.

Better to cannibalise your own than see their business lost to Sky TV altogether.

And, of course, he hopes to bring a whole new generation of viewers into the Sky camp.

One of Mr Fellet's key points is that while Netflix has gained around 40 million customers in its home market, traditional pay TV providers have not lost 40 million subscribers. Rather, they've been flat.

He also point to the UK, where an estimated 80% of Netflix subscribers are also BSkyB subs.

If there's a similar result here, then Sky TV's new Netflix-style service could work out very well for the broadcaster — at least the Commerce Commission stays off Mr Fellet's back.

How will Telecom respond?
Telecom could now be wondering whether it should double-down on its pending streaming TV service (which will be open to customers of all ISPs).

The company might now be wondering whether to double-down, or stick with its current first-year budget of $20 million (including capex, programming and promotion).

That sort of spending looked reasonable when the service could be pitched against Sky TV as a traditional broadcaster (for context, Sky spent $666 million last year, $289 million of that on programming, and $220 million of its programming costs on content rights).

Now, with Sky about to launch a Netflix-style service, Telecom might want to reassess — although with the proviso that CEO Simon Moutter has said he's unwilling to bet the farm on his company's streaming TV launch, due later this year.

ckeall@nbr.co.nz

POSTSCRIPT: Money in streaming?

Netflix co-founder Reed Hastings recently became a billionarie as his company's share price surged (Netflix [NAS:NLFX] now has a market cap of $US27 billion).

His company recently reported 12-month revenue of $US4.35 billion and $US112 million profit — quite tidy for a company in its early years, though still only roughly a quarter of the revene and profit of CBS, the most-watched traditional TV network in the US.

Like allcomers in the streaming market, Netflix' content is a moving feast.

HBO recently handed its premium content to a Netflix rival Amazon Prime — which could play into the hands of local HBO rightsholder Sky TV as it looks to make its pending Netflix-style service attractive against the real thing.

Complicating things further, video-on-demand punters often mix-and-match. For example combining a Netflix US subscription with a la carte, pay-by-the-series or episode offerings from the US version of iTunes, which is rich in HBO content.

What do you think? Will Sky TV's 'Netflix' style online streaming service overshadow Telecom's offering?  Click here to vote in our subscriber-only business pulse poll.

chris@chriskeall.com