Sky’s Jeremy Darroch

JeremyDarroch-Sky-417Sky, Europe’s leading pay-TV company, has built its business on three main principles: sourcing and producing the best and broadest range of programming, news and sports; providing content in the most user-friendly means and continually enhancing the viewer experience; and always placing customers’ needs first.

This commitment to content, innovation and customer service has yielded steady growth, first in the U.K. and Ireland, then by expanding into Italy with Sky Italia and finally with Sky Deutschland in Germany. Today Sky reaches some 22 million customers, of which 4.9 million are in Germany and 4.8 million are in Italy.

Alongside a bouquet of international channels are the Sky brands, which include the general-entertainment channel Sky 1; Sky Atlantic, home to genre-defining drama as well as HBO and Showtime series; Sky Arts; Sky Living, which offers some of the most popular U.S. series; Sky Cinema; Sky News and Sky Sports.

This content is offered in a variety of ways and products for linear and nonlinear consumption, from a selection of traditional contract-based pay-TV packages to the NOW TV contract-free streaming service. Last year, Sky introduced the Sky Q box, which allows subscribers to enjoy Sky content throughout their homes on multiple devices and screens, save recordings and watch them on the go.

Sky is one of Europe’s leading investors in content, backing original productions that range from the dramas Fortitude, The Last Panthers and Gomorrah to comedies Mount Pleasant and Stella. Last year the three Skys co-produced The Young Pope with Canal+ and HBO. Sky is also acquiring key sports rights for the three territories and has launched a Sky Kids app to better serve young viewers.

Sky closed 2016 with a 7-percent increase in revenues, which totaled some £12 billion ($14.65 billion) and a 12-percent increase in operating profit to £1.6 billion ($1.97 billion), a testament to the effectiveness of the content-innovation-customer-service strategy.

Jeremy Darroch, group chief executive, is quite pleased with these developments and talks to World Screen about the company’s numerous accomplishments, growth prospects and a future that may see shareholder 21st Century Fox take full ownership of Sky.

WS: You’ve been chief executive for ten years. I read that when you started at Sky, you felt the Sky brand wasn’t strong enough. Are you happy with the branding and the positioning of Sky today?
DARROCH: I am. The business in the last ten years has changed at almost every level. It’s a very different business today than it was ten years ago, much more diverse, much more profitable and with a huge number of customers relative to where we were. At the heart of that is the brand, the promise we make to our customers in all of the markets we operate, but also I think the Sky brand should be a window into Sky. When you see the Sky brand, you should get a feel for what it’s like as a business and the group of people behind it. I’m very pleased with the progress we have made, but as always, we constantly want to renew and improve. I see the last ten years as a basis on which we think how we can keep renewing and rebuilding the business for the future because if you keep that environment, the business will continue to be successful. What we do may change, but how we do it as a brand will remain pretty constant.

WS: Many people in the industry are concerned about the future of linear channels as viewers increasingly watch on demand. What’s your view?
DARROCH: The trick is not to get caught at the extremes. Sometimes people will go to future outcomes or extremes a little bit too quickly. It’s fair to say on demand is growing relative to linear channel consumption and that will continue. There are more ways to consume content than ever before, and that will have an effect on the linear channel business. We see that. In some genres, we can already see some channels not doing as well. So any channel business needs to think about the on-demand world and how it takes its channel and also its content into that world. But the important thing to remember is that these are trends. They are occurring, but they are occurring over time, so I don’t see any singular inflection point. The businesses that will be successful in the future will understand those shifting plates, will see those trends and push into them. And as they push into them, that will give them the option to go quicker or slower according to individual business segments or how things evolve. What I wouldn’t be is a business trying to resist change because I think it’s inevitable. You have to be at the forefront of change, and you have to have at the heart of your culture a desire to step into the future and embrace it. The businesses that will be successful ten years from now will look back and say they were changing and were stepping into the on-demand world rather than resisting.

WS: Can you make any comment on 21st Century Fox’s bid to acquire all of Sky?
DARROCH: Only to say the process is well in place and it’s proceeding pretty well from what I can see. Our job as managers is to just keep building a better business. I think the fact that a company like Fox with all their capability wants to acquire Sky is a testament to our strategy. We will have to see in the next few months how the bid proceeds. Certainly, Fox and Sky know each other very well and have the potential to create a better company.

WS: Why were NOW TV and the NOW TV Smart Box offered and how have they been received?
DARROCH: We got into NOW TV, a separate streaming service, largely because we could see the way consumer behavior was changing.  While the full all-you-can-eat Sky service was brilliant and had a lot of growth ahead of it, there was a new emerging sector of customers who wanted to consume their content in a slightly different way and probably take a little less, initially. They liked the idea of a contract-free flexible service. From that came the idea of NOW TV, which was a way we could offer customers the very best Sky content but allow them to consume it slightly differently from the way we offered it in the past. NOW TV has been well received by customers. It’s rapidly established itself as one of the leading streaming services in the U.K. and in our markets. As we continue to develop that brand, we developed our NOW TV Smart Box and that allows customers to get access to over 60 free-to-air channels alongside the best of our pay content. And for the first time through NOW TV, they can get a whole-home service where they can consolidate all their viewing in the home. We got into NOW TV driven by our consumer insight and our relationship with our customers. It’s a service we thought would complement Sky and speak to all our skills and customer innovation.

WS: Is there any concern that NOW TV will erode the base of subscribers who do have a contract-based subscription?
DARROCH: No, there isn’t. Today, NOW TV is a highly complementary service to Sky. We launched it as a second brand because we wanted to differentiate it in the market and we didn’t want to confuse the NOW TV brand proposition and promise with the Sky proposition and promise. What we’re finding is that 90 percent or so of customers who take NOW TV weren’t really considering Sky. I think inevitably at the margin there will be a little bit of movement between packages, but the opportunity to continue to grow pay TV in all of our markets as a sector, and also to increase our share of our sector, remains significant. We have found and will continue to find NOW TV a highly complementary service to the Sky service and a way that we can get to more customers.

WS: What has been the impact of Netflix and Amazon so far on the U.K. market in general and on Sky in particular?
DARROCH: In general, both Amazon and Netflix have established themselves and have grown pretty well in the U.K. and Ireland. We find that they are very much add-ons to the main Sky subscription. There is always a reasonable proportion of households and people in the U.K. that like to have access to everything, so they tend to double up on subscriptions. That is a trend that we’ve seen, a little bit like NOW TV, and personally, I see it as a good thing. More people wanting to get into this market is just a sign of the potential that exists in it. We will compete and work with the likes of Netflix and Amazon as we continue to grow the market size over time. I imagine they are pretty happy with how they have done. It’s another sign that the way consumers choose to take their TV and media is evolving all the time and we want to be at the forefront of that.

WS: Sky acquires some sports rights and not others. What is your strategy, and how have you been amortizing the cost of sports rights through different ways of offering sports to customers?
DARROCH: It all starts with having a very clear view of what sports are important to customers and what sports complement each other. In all sports, if you just keep doing more and more, customers actually get less value incrementally, for example, for just having ever more football or ever more golf or cricket. So there is a line between knowing when to invest and when to say we have enough. Across all the Skys we have a clear view of where we invest and where we pass and say we have enough now. Then in any business, you want to create the biggest pool of revenue and the biggest pool of customers, so we have developed daily passes and monthly passes to our sports business, which sell through NOW TV. We distribute a huge amount of sports over mobile networks. We work with partners in all of our markets to get our sports to their customers as well, whether it’s the Virgin network in the U.K. or telco networks elsewhere in Europe. We try to get them to take Sky sports in a way that works for them [and that enables us to] get to more customers. You put all those things together and you have a bigger base of customers and you’re very clear about what’s important. That drives our choices in how we invest, where we spend and where we pass.

WS: Has Sky Q been well received?
DARROCH: It’s done very well. We launched a very different viewing experience and different technology. The first thing we wanted to do was establish it in the tech press because this is where customers initially look to get a sense of how good a product is. We’ve won pretty much every major tech award and that has been very satisfying.

You then start to see word of mouth and consumer advocacy take over. As more people get a service like Sky Q, they start to talk to their friends and families about it, and we are starting to see that happen. We’ve already got something like 1 million boxes deployed in the U.K. and Ireland. We’re seeing customers use more and get more value out of their subscriptions, so the amount of content they are watching has gone up, which is always good to see. They are also starting to use services like our transactional service Sky Store more, so we’re showcasing the very best and latest content in a way that works for customers.

I’m delighted with the progress that we are making with Sky Q and we’ve got a whole host of features to come. But inevitably, when you are trying to get a product to market, there is a point where you have to draw the line and say that’s enough, you have to wait a while and then come back with new offers. So over time, we’ll be introducing things like voice search and voice control, greater personalization, the ability to record six shows while watching the seventh, and a whole raft of things that will add value to Sky Q. We’re very upbeat about its prospects.

WS: Have original productions helped in differentiating Sky’s offer from its competitors?
DARROCH: Yes. A while ago we saw building our originals business as being highly complementary to the brilliant acquired programming we take from partners around the world. So whether it’s the work we’ve done in drama or comedy or some of our factual entertainment, we’ve been able to do bigger productions and have a lot more control than if we were just acquiring the content. From a marketing point of view, we can get behind originals as a business and elevate that content. Much of what we produce can be informed by our day-to-day relationship with our customers. We collect a huge amount of knowledge and data regarding the type of content they would like to see and would like to see us develop. Originals complete that loop of working for customers and understanding their needs and preferences and of saying how do we build a bank of content that delivers for our customers. Originals have worked really well, and it’s something we are going to be doing more of.

WS: What will your level of investment be in originals this year?
DARROCH: We don’t call out an individual number for our originals, but this year our overall programming investment will soon be almost £6 billion [$7.39 billion] across the Skys. In terms of how much we spend on our original productions there is no upper limit; it’s more driven by the quality of ideas. We will have something like 1,000 original hours going into production, with 11 major dramas this year. We have five original comedies, including Mount Pleasant and Stella. So a greater proportion of our content over time will come from our original productions to complement what we acquire from the market.

WS: With the success of The Young Pope, if the project is right, will there be more co-productions among the three Skys?
DARROCH: Yes, co-productions across the Skys definitely will be the case, but also developing and producing with our other partners, like HBO, Showtime, Amazon and ARD in Germany, on multiple productions. This allows us even greater scale, and through a partner we can get to markets where perhaps we don’t have an opening ourselves. That leads to bigger productions, and the bigger the production, the bigger the budget and typically the more we can do. We enjoy working with others. We think that the combination of us and some of the big distributors elsewhere in the world just leads to a better outcome, and I would expect to see more of them.

WS: Nobody knows what the outcome of Brexit will be, but are you concerned that the co-production area might be impacted?
DARROCH: Not significantly. Clearly, we are moving into a less certain period for Europe, and the U.K. will have to work through that. One of the things that we’ll be seeking to do is to be flexible. We see so far no diminution of customer appetite for the type of quality content that we’ve done. We’re a very big business. We are very well funded so we have the ability to keep committing to the things that we know are most important to our customers. Our focus for the U.K. will be making sure that the environment, whether it’s for producers or other talent, will continue to be an attractive place to create content.

WS: Speaking of Europe, are Sky Deutschland and Sky Italia on track to reach the goals you have set for them?
DARROCH: They are, and I’ve been delighted by the progress we’ve made bringing the Skys together. We’ve pretty much reached all of our initial goals for the businesses. All of the Skys share a common culture and ethos about how they go about business, and they are working well together. Both Sky Deutschland and Austria and Sky Italy are great businesses. They have great teams, are very enthusiastic and are doing well. Germany is one of the biggest, if not the biggest, pay-TV opportunity anywhere in the world. So if we grow penetration of pay television in Germany, it’s a big market, Europe’s richest market, where we think we can have a long tail of growth, which is why we are so focused there.

And our business in Italy, while a more challenged economic environment, is doing really well. We grew our revenues by 4 percent in the first half year. We were delighted with that result. The creative and cultural backdrop of Italy and the team there is a powerful creative force—they add to the whole of Sky. I’m very pleased with the progress we have made; we just have to keep pushing on and doing more.

WS: I have family in Italy and the U.K. and they have Sky. When I visit I am so envious of the offer and service they have, which is so much better than what U.S. cable companies offer!
DARROCH: [Laughs] That’s great to hear! One of the reasons for that is that all of the Skys have always been so focused on our relationships with customers. Being in so many customers’ homes every day, we have this huge research capability. We are talking with customers all the time. Taking that insight and crafting services has been the goal of the business. You can see some of the outcomes of that effort and so far that’s the thing that drives the business.

WS: Has the way customers interact with Sky changed over the years?
DARROCH: Yes, it has very much so. We’ve seen a trend—probably most developed in the U.K., but we’re certainly seeing it in Italy and just starting to see it emerge in Germany—of an appetite among customers to consolidate more of their services with Sky. We spend a lot of time working on customer service, and they like the service proposition that we offer them. So when we go back to customers and say we’d like to sell you something else, maybe broadband or mobile, which we are launching in the U.K., or Sky Go, which is our mobile TV service, they are very happy to consolidate some of those household services with Sky. That has enabled us to broaden. They like us when we do more, particularly on screen. If you were to take a channel like Sky Arts, [it is offering] the level and quality of arts created today. When we do that and customers see something that is a little surprising to them, they tend to respond well.

Having said all that, they just want us to keep getting better at the things they really care about. What do they care about? They care about great TV more than anything else. They care about technology that enables them to get the most value out of their subscription—things that are easy to use, are robust and reliable, and if they have a service problem or question, an infrastructure that sorts things out very quickly. It’s interesting, when you think of us as a scale business, at one level it’s very, very big and very complex, but actually, when you distil it down, it typically boils down to three or four things that you have to keep doing well.

WS: As you look ahead 12 to 24 months, Sky has so many businesses, where do you see growth opportunities?
DARROCH: You said it, one of the challenges we face is that we have so many ways that we can grow, so optimizing them and getting the balance right will be important. Certainly adding more customers across all our markets across Europe. It’s important to remember that growing pay-TV market penetration in Europe remains the single biggest opportunity. We think the opportunity for growth in Germany remains very, very strong. We’re launching into mobile in the U.K.—that will be the next big leg of communications business in the U.K., and that’s a market that so far we haven’t competed in and we’re just getting going there.

We have a brilliant targeted-advertising service, Sky AdSmart, which allows us to target ads directly into customers’ boxes. That’s done very well so far. We’re working with something like 1,000 advertisers already. We get pre­miums for our advertising, and our advertising partners get internet-quality targeting, but to the TV screen, so it’s very powerful. I see growth in our major innovations, the streaming services in particular and Sky Q across Europe. We’ve got a fantastic kids’ app that we launched in the U.K. and Germany and will launch in Italy. So there is a plethora of opportunities, some bigger some smaller, that we are focused on, but all are anchored to the core things we do, which are really about TV and innovation. If growth opportunities flow from that, then they’ll be based on our core capability and we’ll do it very efficiently. There will be lots more to come in the next 18 months. It’s going to be an exciting time.