The Murdoch Empire suffered a blow today. Shares in his BSkyB (Sky) satellite operation in the UK dropped over 10% today following a rival pay TV network getting the rights to show UEFA Champions League and Europa League soccer games from 2015. These rights were previously shared between Sky and ITV, the main commercial broadcaster.
This is a body blow for one of Murdoch's marketing strategy for Sky. His dominance of the pay TV market in the UK relies on soccer fans subscribing to his Sky Sports channels. His original strategy for gaining this market share centred on wiping out competition. The BBC's income from licence fees and ITV's income from selling time for commercials was not sufficient to cover the huge fees that Murdoch had offered the soccer organizations for showing most of their games. (By law, few "crown jewels" of sport have to be shown on free terrestrial television either live, as is the case with the Olympics and Wimbledon tennis finals or a highlights later as with the Commonwealth Games or the matches at Wimbledon up to the finals.)
Murdoch launched his Sky Television satellite service in 1989 a year ahead of the of British Satellite Broadcasting (BSB). He used the analogue PAL system rather than the new D-MAC digital system mandated for high power direct broadcasting satellites. D-MAC suffered both software delays and BSB had production difficulties with their "Squarial" antennas. These were much smaller than the 90cm dishes required for Sky.
Murdoch's initial trump card was to buy "The Simpsons" for his entertainment channel. The show was ruthlessly marketed. By targeting children with this popular programme, he ensured that they would provide "pester power" to his marketing. Later he would move on to buying up to rights to broadcast major soccer matches to capture the fan market.
TV broadcasts by both BSB and Sky were encoded and a subscriber card had to be inserted into the set top box however they used different encoding systems. Sky's was made by a News Corp owned company in Israel. Allegations later emerged that that company had retro-engineered their rival's cards and had cracked the coding. The allegations go on that individuals acting on the behest of Sky had sold fake BSB subsciber cards, or the coding to produce them, to undermine BSB's income. (Similar allegations were made about pay TV services in other European countries where News Corps had competition) Whatever the cause, BSB went bust and merged with Sky to form the new BSkyB company (usually referred to just as "Sky" or "$ky" to its detractors.)
Using the business model of providing low cost or "free" installations of the satellite dish and box (recovered via the monthly subscription of course), Murdoch established Sky as the dominant satellite TV provider. Until 2008 the only alternative for receiving the unencoded channels also broadcast from the satellite cluster was a generic satellite box. The broadcasts now use the DVB-S or DVB-S2 system which has "now and next" programme data. Sky provides a full 7 day EPG. Generic boxes cannot pick this up making the channel numbering somewhat arbitrary. Sky has ways of retaining subscribers including disabling the recording and playback functions of a PVR if they leave although they do offer a $17 a month service to retain them. "Sky" has become the de facto term for satellite broadcasting in Britain (like "to hoover" is "to vacuum clean")
In 2007 the BBC and ITV formed a joint venture to market a subscription free satellite service called "Freesat" which licenced set top box makers to access their electronic programme guide (EPG). Their business model solely involves the channels paying a fee to be on the EPG with the boxes and dish installations being paid for up front by the viewer. Murdoch attempted to subvert this by selling "subscription free" Sky boxes and dish installations under the name "FreesatfromSky". After copyright claims from Sky, the joint venture was forced their rival to use a lower case f in what is now "freesat". One handy side effect of using the same satellite cluster is that old Sky dishes can be used to provide the signal for freesat boxes. As a freesat PVR costs from about £150, they are attractive alternatives for people "downsizing" to just the free to air channels as the cost is recovered by not paying $ky their danegelt to have a PVR in just over a year.
Until last year Sky had two main rivals in the pay TV market. One was the dominant (after a series of mergers) cable provider, Virginmedia. The other was a system from BT which uses broadband connections to provide internet protocol television (IPTV) services via a "BT Vision" box. These were a hybrid of a terrestrial digital tuner and IPTV box. The viewer had the "Freeview" channels broadcast with additional channels being delivered either by broadband or from the hard drive to which the shows had been sent the previous night when the internet traffic is low. The UK's high definition service, Freeview HD uses a later TV system called DVB-T2 and was launched in 2010. A revision of the receiver specifications in 2011 mean that new sets can receive IPTV using a protocol called MHEG-IC. Some IPTV minority channels have launched using a "portal" provided on a Freeview channel.
In July last year a new variant of terrestrial TV was launched called YouView. These are also hybrid terrestrial TV and IPTV boxes but unlike the Vision boxes are (at the moment) solely HD PVRs [in that content is not "pushed" to the hard drive overnight]. The "unique selling point" is that the EPG goes 7 days back as well as 7 days forward. Programmes from the main Public Service Broadcasters (BBC, ITV, Channel 4 and Five) are available on internet catchup services. YouView integrates these in the "backwards EPG" so a single click launches the IPTV playback of the programme. The boxes can also receive other IPTV services using "apps". Five, for example, has a "channel" for children and another broadcaster, UKTV, has a catchup service for its "Dave" channel, with their other channels probably being added later. (UKTV is a joint venture between BBC Worldwide and Scripps Networks Interactive Inc, a US media company) YouView's IPTV protocol, which is not currently compatible with the Freeview HD IPTV services (!!!), allows for pay-TV channels or other services. Sky market their movie services through it and are about to start a package of their "own brand" satellite entertainment channels.
More importantly, BT have started a new TV service with the intention of eventually replacing all their BT Vision boxes, which cannot receive the broadcast HD channels, with YouView boxes. These can be re-programmed to also use their "multicast" IPTV protocols which vastly save internet bandwidth for their "linear" extra channels. This is marketed as a package with telephone and broadband services. Their BT Sports channels will sent to their subscriber's YouView boxes although for the moment only if the broadband is via fiber rather than copper wire. (BT Vision boxes have a decryption card slot so those subscribers will get the BT Sport 1 and 2 channels via encoded terrestrial broadcasts. Sky subscribers can add the channels as they are also available encoded on satellite.)
The telephone and broadband market is very different in the UK compared to the USA. BT, the privatized nationally owned company, owns almost all of the infrastructure however it is required to "wholesale" telephony and/or broadband to other companies, including Sky. Virginmedia are not required to do this and market their own cable TV, internet and telephone packages. These triune packages are heavily marketed as cost saving compared to buying the three separately however in reality they are the big earners for the companies. They also help tie the subscriber to the company as leaving would involve some complications in either changing equipment or having to get a dish or terrestrial antenna installed.
Murdoch was attempting to become the largest provider of these TV/BB/phone bundles, centering on the lineup on the Sky sports channels and the low cost of adding broadband to your Sky subscription. Murdoch saw the future of TV as not in limited terrestrial broadcast channels but with multi-channel cable and satellite services. The digital TV system proposed for the UK (DVB-T) would allow multi-channel services and Murdoch ensured Sky was part of the consortium that formed Freeview. He appears to have missed the boat or misunderstood the impact of IPTV - Sky was not part of the YouView consortium. However in were two telecoms providers, BT and TalkTalk which are both providing IPTV/BB/phone bundles using YouView boxes, albeit that they have different unique channels for their subscribers. Both use a "free box" tied to a minimum subscription period model, similar to that used by Sky. (The city of Hull for historical reasons has a telecom monopoly company. They and Isle of Man Telecom have similar YouView/BB/phone bundles locally. A third national telecoms provider is believed to be about to announce a similar deal.)
Extra IPTV services provided by the BT and TalkTalk appear on the subscriber's EPG so again it is seamless to change between a broadcast and an IPTV channel. (Currently these "linear" channels cannot be recorded as the software is not yet implemented - shades of healthcare.gov!). Any OfCom licenced IPTV channel can be added and this is an incredibly cheap way for new players to enter the market. Space on terrestrial muxes and satellite transponders is very limited and transmission and uplink/network distribution costs are high but all a new station needs are sufficient server and internet connections to provide a service. Some already use the Freeview HD system using MHEG-IC. These are "portals" to companies that offer several different channels. To give an idea of the potential and predicted number, DigitalUK has already allocated a block of 200 numbers on the Freeview EPG for use by IPTV. The potential for maximum choice has moved from cable and satellite, where Sky squats on a huge number of transponder spaces, to the internet connected television. (As I understand, that block is not far short of the maximum number of spaces for software reasons on the Sky EPG)
The UK consumer is faced with a range of choices when looking at a PVR. First there is the choice of a Freeview recorder - with or without HD. Somebody with a satellite dish might want the subscription free freesat option. On the other hand, if they want an integrated catchup service, they would buy a YouView box (or a similar concept internet connected satellite box). Then comes the pay providers and their "free" boxes - Sky, Virgin Media, BT and TalkTalk. For the most part, many will be looking not at the technology but at the content they will be able to watch. Each has unique channels so it will be which is the most attractive. Here Sky has relied on first run ("up to a year ahead of rental") movies, imported major series like "Crown of Thrones" on its general entertainment channels, a few of its arts programmes but most of all, its sports channels and in particular its soccer matches. Last year, the English Premier League split its game broadcasting rights with both Sky and BT winning although BT had the minor share. The loss of these European matches, arguably having much broader appeal than many IPL games, is a very big blow to Sky, as the 10%+ drop in its share price and a much smaller drop in ITV shares indicate.
In response to the loss of the soccer broadcasting rights, Sky have indicated that they will be making more home grown comedy and drama shows for their general entertainment network. This re-focus is, I would think, a very risky move. They already have three established rivals in these genres in the form of the terrestrial public service broadcasters BBC, ITV and Channel 4 (Five is essentially a "publishing house", buying in its entertainment programming). The BBC in particular has vast experience and a well used route to develop shows, in particular its comedies. These can start on radio and move to one of its TV channels. They can be tried out on its minor "digital" channels, particularly BBC Three which is a "mixed genre channel for young audience". In analog days, new TV shows "tried out" on BBC Two and moved to the main BBC One if successful. Channel 4 has a remit in its Royal Charter to innovate and has come up with such series as "Queer as Folk" and "Shameless" that were remade by US television. ITV is probably currently best known in the USA for "Downton Abbey" and they also made the "Poirot" series starring David Suchet. Whether Sky can match these efforts remains to be seen.
My perhaps jaundiced feeling (although many in the stock market seem to share it) is that Sky's "unique selling point" has been blown out of the water. I doubt if it can reconfigure itself as a copycat BBC pushing general entertainment and US shows and still be attractive as an overall subscription offer.
The result of course will be more "churning" of subscribers with BT getting the benefit. Fewer subscribers of course mean fewer people taking up the broadband and phone option - the other profit center. Fewer subscribers means less in the pot to bid for broadcasting rights in future. Don't you love it when Murdoch's own tactics are used against him.