Original URL: http://www.theregister.co.uk/2006/02/17/dont_fear_sky/

Don't be scared of Sky

Now's the time to ground the high-flyer

By Alex Cameron

Posted in Broadband, 17th February 2006 15:34 GMT

Comment Wherever you go and whoever you talk to in any of the media, telecoms and television industries, people are absolutely terrified of Sky. Not just scared, absolutely terrified. Not that they'd ever admit it, of course.

The fear of Murdoch extends further than you'd think was possible for an old man, and no company inspires wobbling and trembling in both start-ups, SMEs and venture capitalists alike like Sky does. It is one of the only two companies that the incumbent colossus, BT, fears - the other being Microsoft. Even Bill Gates' merry little band of nerds are hesitant to trifle with Isleworth's finest. The saying goes: "When you throw stones at Sky, they bomb your village". So in the spirit of James Murdoch's recent catchy metaphorical slogan-fest, why throw stones when you can carpet bomb?

No-one can doubt News Corp's power - politicians court the old man's favour as his readership decides who either stays or enters into the corridors of Whitehall. If not the devil incarnate, he's the archetypal power-broker that lives in the secret back room that's always filled with cigar smoke. The $46bn dollar global empire stretches from Australian newspapers to LA movie studios, US television networks, bookstores, Israeli technology and, of course, our own beloved print stables. In the UK, News International controls The Sun, The Times, The Sunday Times and the News Of The World.

A fiery satellite

The bullish culture originally debuted in the 80s through mass sackings, and that that has come to define many of these companies causes trepidation for those with the thickest of skins. It's rare you will ever find anyone who is enthusiastic about going into a meeting with Sky, nor anyone who had a smile on their face afterwards. These people even bully movie studios, hate the BBC, scorn their own shareholders and refuse to pay tax anywhere they operate. You can guarantee that if you decide to compete, or fall out of favour, it will be reflected in the press the next day.

They say you can't do consumer business in the UK without a brand - the British public is obsessed with them, and they are the de-facto standard if you want credibility or trust for your products and services. Sky's brand over-shadows almost everyone else you can think of, as it is simply one of the most powerful in this country, if not the world. Nobody gets Sky from Dixons in the High Street for the cool satellite reception equipment - they get it for the football. I've heard Sky called "Chav TV" more times than I care to remember ("Birds, Beer and Footie"), and many of those times were just from talking to regulars on the Osterley shuttle.

So if it really is Chav TV, then Sky has managed to find a lot of chavs, and a lot of rural farming types - just over 8m at last count, and if James Murdoch has his way, its army of subscribers will swell by 25 percent again to top 10m within a few years. Sky controls almost a third of the UK TV audience. And most people, regardless of their knowledge of the TV industry as a whole, will be able to tell you how it's done it - by monopolising Premiership football, weaponising its encryption system, cross-promoting in its news media, and block-booking pay TV movies.

Sun Tzu argued that to have victory in a hundred battles, you must know yourself, but also know your enemy. And all this robotic preparation for prostrating in front of the mighty Murdoch altar is making the wolf a lot bigger than he is. If Larry Page and Sergey Brin had decided just to pack it all in because Alta Vista and Yahoo were just too established in the search market, we wouldn't have Google today (and it has a market capitalisation more than 10 times that of BSkyB to prove it). Holding Sky up to the absurd level it is at now in the eyes of potential IPTV operators is the equivalent of doing just that. Sky is very good at what it does, but it does not have a divine right to rule the UK television market, nor does it control the greater market forces, as much as it'd like to.

First and foremost, no matter how hard market research companies protest, the UK is a country that is used to getting its TV entirely free (well, at the cost of a licence that applies for any or all platforms) and is very unlikely to ever become a true pay TV market any time soon. Our TV has always been free to receive, free to view and free to interact with. Sky's pay TV model is fundamentally incompatible with British culture, which is why it spends a considerable amount of time trying to erode the case for a licence fee-funded BBC. It also explains the failure of ITV Digital and the success of Freeview - the same people who love pay-as-you-go see the inherent value of a one-off set-top box purchase. It's the way we've been doing it for years, and it's the way most people are most familiar with. Due to this incontrovertible historical precedent, Sky is always having to swim against the tide - it's very, very difficult to compete with free.

I want my free TV

BSkyB as a company is a fat, bloated corporate monster stuffed to the neck with middle management, internal squabbling and mediocre creativity - micromanaged directly by the head honcho. They have shareholders to pacify, and angry vocal ones at that. Smaller companies may not have the size and resources Sky has, but they do have agility and can focus on niche markets Sky could never hope to match. The bigger guys can't release anything else than generalised mass-market, nor can they afford to experiment.

The question for Sky shareholders is exactly how many battles the company can fight on how many fronts. No-one's resources are infinite, and history has shown that the jack of all trades eventually collapses when the load becomes too much and the market can't sustain its ambitions. What used to be a fairly simple proposition with some masterstrokes of genius (e.g. giving away satellite dishes) is now a sprawling mass of convoluted services that are competing with stronger adversaries in their respective markets. Sky's arrogance will almost certainly be its undoing. This year will see the advent of high-definition video (HDTV), mobile TV, IPTV, Video On-Demand (VoD), video download services, high-speed broadband, and many other technologies. Sky has been desperate to fight them all, and time will tell what the damage has been. It is not fighting the old enemy (NTL and Telewest) any more. This isn't a case of releasing a silver bullet like Sky+.

The problem with fighting multiple battles on different fronts is that it can lead to being quartered, in the medieval sense. When you grow or expand, you take a brave step away from your core competencies. You are drawn out into unfamiliar ground where the chance of you making mistakes is very high, and very costly. Your competitors draw you to the battle on their home ground, rather than follow your lead or defend against your innovation. You are vulnerable through the change.

And that vulnerability is beginning to show. Churn (cancellation) levels are higher than ever, and the cynical majority in the industry reportedly believe the new portfolio of services is a cunning ruse to improve its subscriber statistics as it seems to have reached a difficult commercial plateau in customer acquisition. When you phone Sky to announce your intention to leave, the company's desperate customer support staff will do virtually anything to keep you (word to the wise: if you want a few months subscription free, or to bump up your package, call them up and tell them you're getting Freeview or NTL instead). The UK isn't quite the same dynamic as the US, with its hundreds of millions of households. The reasons for the slow down are simple - it costs too much, the content is getting worse by the day, and you can get better elsewhere.

Grey clouds

And for those among us who are sceptical of the growing disenchantment with Sky, I give you this. A lot of my friends and colleagues have Sky, and many are unhappy, but that's only my anecdotal evidence. Now, I am sure you, my readers, also know several people who are unhappy with Sky, and they in turn will know someone else who is unhappy. So if we all know someone is unhappy with Sky, things are nowhere near as rosy as it would like to make out. That's a hell of a lot of frustrated customers all hungry for something better.

The one credit you can give Sky is that it is keenly aware of its own problems and market challenges, and for a corporate behemoth, has a comparatively fast response to change, which is genuinely rare. It has turned having no return path into an advantage (through premium-rate telephony) and managed to build a formula where it can get a very early payback on its high customer acquisition cost. Recently, we have seen "create your own package" on our TV screens and a monstrously large advertising campaign boasting of content credentials. That kind of defensive behaviour is arguably symptomatic of a company on the ropes. The only question now is when the death punch will come. Sky's executives will tell you they are taking a breath and lying in wait to strike once the whole herd has gathered in its sights. It's a lovely spin, but that's all it is.

NTL is already looking at buying out Virgin Mobile (the virtual mobile carrier powered by T-Mobile's network) to provide the slightly ridiculously-named ‘quadruple play' that is one hallowed step further than the trusted ‘triple play' that Sky is trying to fend off by providing itself. Consolidated cable is a very serious threat, as is competition from the incumbent telco, BT. Sky's strategy of dividing and conquering (investing in Freeview, selling premium channels to its competitors etc) has worked so far, but the renewed vigour of its nearest pay TV rival who can, along with ISPs, exploit its Achilles heel of not being able to provide true video on-demand (general video, not just movies) is a worrying development, whether it is conceded publicly or not.

High above the playing field

A well-kept secret is Sky's "Freesat" service that has been formally introduced to again drive up subscriber statistics, get viewing cards into homes that could upgrade to premium packages, and placate Ofcom. Before the days when such a nice brand was developed for it, anyone could purchase a "Solus" viewing card for their own satellite equipment that would enable them to decrypt public service channels (such as ITV, Channel and Five) broadcast using Videoguard CA scrambling system. Freesat has an ever-growing take-up rate when people realise they can dump the bloated monthly subscription charges to view just the FTA (free to air, or "in the clear") channels that are broadcast over the UK via the Astra and Eutelsat networks. Add a virtual army of telcos and ISPs looking to provide interactive services that are complimentary to existing Free-to-air platforms (Freeview, FreeSat) and the playing field is closing in rapidly. Yes, buying Easynet has given Sky a way of building a hybrid service that uses a broadband back channel, but this again is smoke and mirrors, as will be explained later.

The main alternative for most people is Freeview, unless you happen to live in a cabled area, when of course you would look at NTL or Telewest. In fact, it's interesting to look at Sky's penetration rate in those areas, as it gives some gusto to the idea that people's motivation for subscribing to Murdoch's platform is less than brand, and more to do with having no other viable option. And Freeview is a very attractive idea. It has its weaknesses, but it's cheap, broadcasts high-quality programming, and has good availability. What it lacks is a return path, or flexible bandwidth for additional channels and services. But imagine Freeview with thousands and thousands of movies you could watch whenever you wanted. Now that's a killer idea, and a Sky-stopper. Now imagine it with unlimited channels, many years of video content, advanced interactive applications and integrated into your telephone, mobile, PC, games console and the internet. That's a killer more deadly than News Corp's "poison pill" takeover defences.

Not infallible

Let's not forget that Sky has made some truly disastrous mistakes in the past. When it gets it wrong, it really, really gets it wrong. Just ask any of the staff who were laid off a few years back after the company's dismal venture into so-called "T-Commerce". It was an abject failure that cost many millions of pounds, and brought home the realisation that people don't even use keyboards to watch TV, let alone buy things on their screen with credit cards like they do over the web. The software on Sky's set-top boxes is made by a Thomson-offshoot called OpenTV, whose ANSI C-based development environment is so tedious that it takes many months to produce any kind of interactive application - which is especially dumb considering TV is a topical medium where content needs to be changed and updated by the second. It was so bad, Sky had to buy a company that made an OpenTV-based WML ‘microbrowser' that enabled it to actually get features produced in a realistic time frame. Not that any of those were remotely cost-effective for anyone to get involved in of course.

Its supposed movie download service was due to launch last September, but didn't make it until early this year, and the P2P system being used (made by Kontiki) is a blatant rip-off of the BBC's iMP media player that simply moves traffic to the edge of the internet from the core, rather than allegedly relieving distribution costs. We probably shouldn't start on Sky's marriage to Microsoft or its belief that Windows Media Centre will be the next set-top box we all use. The latest whim is its business TV portal, where you can produce your own screens and information, or display on Sky-powered televisions everywhere. Quite why you'd be browsing Sky's interactive sections in the office is beyond most of the people I've consulted on it.

But the most wondrously enjoyable fact that should encourage ISPs, telcos and interactive service providers to pull out their weaponry and take Sky on, is that despite all the very smart people he employs all over the world, Murdoch just doesn't "get" the internet. In fact, he's so hilariously out of touch and late to market that he may not get a significant foothold without writing cheques that are way above market value. There's nothing quite like the spectacle of someone trying to buy their way into an industry they fundamentally don't understand. Analysts say he is a cunning, wily old fox that held back from the dot-com boom as he saw the crash coming, and is taking his time to make his moves with the brand new Fox Interactive division. News Corp recently paid over $500m for Intermix, which owns the audience of MySpace, apparently the sixth largest website in the world. Whether that was a lightning bolt of superbly insightful business sense or part of a desperate last minute buying frenzy to keep up with the joneses remains to be seen.

The industry rumours are that Ofcom is going to give Sky a pretty good kicking this year, as it has presumably become bored with slapping BT around. Given Murdoch's ability to get politicians to bend over to grab the proverbial shower soap, it will be interesting see just how hard the knuckle-rapping actually is. There are many in TV-land who believe they are long overdue a telling off for their behaviour. Protests aside, BSkyB has an effective monopoly, as there are no other direct satellite TV companies offering an alternative. But that's not the problem - the problem is that it owns TV channels as well as the platform. How can you not have a conflict of interest in such circumstances? BT has been split up, deregulated, unbundled and thrown about like a rag doll, and even Microsoft have fallen foul of the European commission. But not Sky.

Still gambling

Sky Bet Vegas was launched just weeks after all competitive channels offering gambling-like services were dubiously ordered to cease and desist transmission on the basis that UK law was ambiguous. There are countless other examples of blatant abuse of position having occurred and nothing has been done - from the subtlest wrongful designation of channel numbers on the EPG, to blatant bullying. If you publish channels on a platform you own, your simple daily operational activities will place you in an immediate conflict with your responsibilities as a platform owner. It's no coincidence that the BBC has had to fight tooth and nail to remain in first place on the EPG as the main public service broadcaster. All we can hope is the forces that control the broadcasting of sports events (Premiership football, golf, cricket) will also act to curb Sky's 13-year dominance of pay-TV sports, as fans are already in open rebellion. Reserving one out of six packages of broadcasting rights is nowhere near enough and does not provide "choice" or "value" to anyone.

The Sky takeover of Easynet was in itself a very curious purchase. From the outside it seems logical - it has its own nationwide 21CN-style MPLS-based fibre network, considerable existing investment in local-loop unbundling (just fewer than 200 live exchanges), a consumer subsidiary, is respected by the city, and has had a close and trusted relationship with Sky in the past. Buying the company immediately gives them an entry point to provide broadband services. But is that really the case? Easynet is also fundamentally a B2B company, supplying just over 20,000 business customers across the country. UK Online was infamously late to market with DSL, has been dogged with provisioning problems and has a very high cash burn rate (e.g. national advertising campaigns etc), all with very few subscribers to show for it in comparison to rivals. Easynet's network as a whole is poorly managed and not ready for video services - in fact, most analysts are deeply sceptical that the money Sky intends to invest in expanding its LLU operations will actually be even remotely enough to get the job done. The figures just don't add up.

Make me a piece of your channel

One very common misconception about Sky is that it owns more of the infrastructure than it does. Ultimately, it owns the brand, a few channels and the encryption system - not a trivial treasure chest by any stretch of the imagination, but a lot less than most people assume. It doesn't own the satellites, the uplink kit, the set-top boxes or the other critical parts of the delivery chain. It has created a nice-looking little menu system that is installed on one of any number of set-top boxes that collates all the available TV signals being broadcast (their EPG), and the mechanism to decrypt some of the channels that have agreed to scramble their video output with their conditional access (CA) system.

Starting your own channel on Sky is a fairly straightforward affair if you have £500k or so disposable income a year - after obtaining a broadcasting license from Ofcom (issued on demand for petty cash), building your studio and playout facilities, arranging an uplink from an earth station and space on a satellite transponder, Sky is obliged to include you on its platform by statute (anyone can pick up and view your broadcast signal anyway). For that, you pay a fee to be included on its menu. That channel number on the EPG costs less if you encrypt your content so only Sky viewers can watch.

The fact it's so easy to launch a digital channel is slowing poisoning Murdoch's European jewel. Let's face it - Sky is 400 channels of crap and a load of movie repeats. It's a few ripe apples in a barrel of rotten ones. It could save itself years and years of customer complaint time with one simple addition to the menu - a small option named "delete this channel". A huge list of channels (with 80 more due in 2006 alone) is a crass illusion to breadth and depth of content. Sky is far from it - it's a banger race car park of heavily-repeated, washed-up, poorly-produced trash. Scrolling text messages on screen, dating services, programmes using desktop PCs for on-screen graphics and poor audio don't constitute TV, they are extraneous dross that shouldn't be seen in a control gallery, let alone a national TV network.

The latest news is that the car-crash-in-slow-motion Video Networks are positioning themselves to be bought by Sky for a cool £200m (comes with free 45 per cent churn rate). Sky already owns around four per cent of the company and provides the creatively named "Sky By Wire" service direct to HomeChoice subscribers. It was part of a consortium several years ago that offered the then CEO Simon Hachhauser just over £1bn for the company. Presumably, the best thing for Sky to do would be to wait until it completely implodes and then asset-strip in the most brutal fashion. Buying out Bulldog's subscriber base to combine all three ISPs (UK Online, HomeChoice and Bulldog), would then give it close to 150,000 broadband TV subscribers. The blind seem to be becoming quite adept at leading the blind.

Ghostriders in the sky

Now isn't the time to be scared of Sky, it's the time to attack while it's vulnerable. The military say that to have victory you must act in the greatest concentration, and what could be any greater force than an entire industry of telcos and ISPs launching services in Sky's blind spot - in the very niche areas it is infamously bad at and cannot compete in. We may not have the open markets of Europe or the audience figures of North America, but one company does not have exclusive rule over an entire country's entertainment, especially if it is effectively bludgeoning most of its customers into submission by giving them no alternative. Having bite requires a new model, and imagination - the world is not as Sky defines it, it is what we make it.

What do I want to watch? Probably less than 10 per cent of what Sky's dismal, failing waste of a platform has to offer.

© Digital TX Ltd

Digital TX Limited is a London-based provider of technology and consultancy solutions for interactive digital television and broadband media. Alexander Cameron can be reached at alex.cameron@digitaltx.tv.