The pressure is building on BSkyB chief executive James Murdoch, after the company added just 62,000 subscribers to its Sky Digital pay TV platform in the first quarter of its financial year (July-September 2004).
Although beating market expectations and boosting its share price, the number of new subscribers was 60% down year on year and 40% down on the previous quarter (April-June).
Ever since the BBC launched digital terrestrial (DTT) platform Freeview, Sky Digital has struggled to satisfy the City. With Freeview in 4.4m homes and digital cable getting into gear, BSkyB will have a real scrap on its hands next year.
To avoid a mauling from the City, Murdoch needs to get Sky Digital into 8m homes by the end of 2005 and 10m by 2010. The problem is that Sky, currently in 7.4m homes, is being squeezed. At the budget end, it has to contend with Freeview and Top Up TV, which offers 10 channels for £8 a month. At the top end is a shrinking pool willing to pay £40 a month for sport and movies.
Murdoch's reply has been a huge increase in marketing spend this autumn, which analysts believe to be worth about £20m. The goal is to drive uptake of mid-price packages, with emphasis on a £19.50-a-month family subscription.
The most visible element of this has been a 10-week ad campaign across TV, cinema, press and outdoor, which promotes the range of content offered by non-premium family channels such as Sky One, Disney and TCM.
BSkyB managing director of sales, marketing and interactive Jon Florsheim says this barely scratches the surface. 'The branding campaign is about engaging non-Sky customers in a conversation. It is backed by measures to remove barriers to purchase.'
Key among these is a big push at retail. Sky is rolling out a starter pack called Sky to Go through Argos, Woolworths and Tesco. For £40, consumers get a one- or two-month free subscription, set-top box and dish installation. Sky is also extending its free installation offer, previously restricted to those buying premium sport and movie packages, to those buying mid-range packages.
Finally, it is making big investments in direct marketing. 'We're compiling lists, which will help us target the right package at consumers,' says Florsheim. 'Before we've tended to adopt a one size fits all strategy.'
There is little doubt such activities will have an uplift on Sky's pre-Christmas sales - Murdoch has pledged to add at least 100,000 subscribers by Christmas. But there are risks. First, Sky's emphasis on cheaper packages may encourage premium customers to 'spin down' to less costly packages. The net result is that Sky might hit its targets, but dilute average revenue per user (ARPU). Second, Sky's support for mid-range family packages may not stem the tide of consumers flocking to Freeview.
Florsheim is adamant Sky will hit its 8m target. He downplays the impact of Freeview by saying it does not appeal to the people that Sky is pursuing.
'There is plenty of room to grow; 43% of UK homes have pay TV, and eventually we expect 75%-80% to have some form of pay TV,' he says.
Sky is putting its money where its mouth is. Over the summer, Murdoch pledged an extra £450m investment over the next four years, £50m of which will go on customer relationship management, £49m on above-the-line marketing and a 10%-20% rise in Sky One's programme kitty. So what do analysts make of Sky's strategy?
Thinking long term
Numis Securities analyst Paul Richards expects Sky Digital to add 131,000 subscribers before Christmas. 'BSkyB only started its marketing push in October, so the benefits will not be felt until the second quarter. By mid-2005 Sky's investment should enable it to win customers with targeted promotions.'
Richards is not worried that Sky has sacrificed its strict adherence to ARPU. 'The US shows it is possible to build a profitable business on basic pay TV. That said, the launch of the Sky+ box and the growth in households purchasing a second Sky Digital set could help grow ARPU slightly.' First-quarter results back this, with Sky+ homes rising by 77,000 to 474,000 and the purchase of second sets up 64,000 to 357,000.
In October, Sky launched Freesat- an alternative to Freeview, which offers 200 channels for free after a £150 payment. The launch was somewhat muted, as Sky does not want to actively encourage people to pay nothing. However, Sky would rather have new customers using Sky boxes than being lost to Freeview, says Mediatique director Mathew Horsman. 'Freesat is not Sky's core business. But Sky will take every chance to upsell pay TV packages to new Freesat users.' Horsman says Mediatique expects Sky to 'do whatever it takes to hit 8m subscribers by 2005'.
Longer term, Murdoch's plan depends on the success of its £49m marketing budget in wooing digital refuseniks. 'I don't think Sky will have 10m paying customers by 2010,' says Horsman. 'But we are projecting 8.6m and more than 1m using Freesat. Either way will generate enough free cashflow to see off most threats. There aren't many people who have bet against BSkyB and won.'
DATA FILE - SKY DIGITAL vs FREEVIEW
SKY DIGITAL PENETRATION
1 July-Sept 2003 7.0
2 Oct-Dec 2003 7.2
3 Jan-Mar 2004 7.3
4 Apr-Jun 2004 7.4
5 July-Sept 2004 7.4
SKY DIGITAL PROJECTED PENETRATION
1 Year end 2005 8.0
2 Year end 2010 10.0
1 Oct 2002 0.9
2 Mar 2003 1.4
3 Dec 2003 2.4
4 Jun 2004 4.0
5 Oct 2004 4.4
Source: BBC estimates based on sales
FREEVIEW PROJECTED PENETRATION
1 Year end 2005 5.6
2 Year end 2008 6.9