Pay Day

Steve Clarke analyzes how the region’s biggest cable and satellite platforms are facing the threat, and opportunity, of OTT.

Across Europe, pay-TV companies are reinventing themselves to compete with their newer online and telecom rivals. Some, like Sky, are making it easier for their customers to “spin down” to cheaper packages. Others, such as Liberty Global, are bundling Netflix into their offers to keep subscribers loyal and to prevent them from churning. With so much competition and an increasingly restless consumer base, standing still is not an option for European pay-TV outfits in the age of on-demand entertainment.

This trend toward greater customer flexibility is most evident in Western Europe. Here, market consolidation has tended to lead to one or two cable companies in each territory dividing up the market between them.

“By comparison, Eastern Europe still has some way to go,” observes Mohammed Hamza, senior research analyst for media and communications at S&P Global Market Intelligence. “Eastern Europe is made up of small markets, which, in TV terms, have very localized content and are best served by local content owners.”

Europe’s biggest pay-TV outfit, Sky, continues to reassess its business model and diversify its content and distribution methods. It knows that millennials are unwilling to tie themselves into a traditional pay-TV multichannel package, which nowadays is sure to contain online add-ons. Sky recently rebranded its sports channels, which are now dedicated to particular sports, and customers can save money by adopting a pick-and-mix approach.

“European pay-TV growth has slowed down considerably of late,” says Tim Westcott, director of research and analysis for programming at IHS Markit. “In the more mature Western markets, pay-TV growth is either flat or declining. Of course, there are variations from country to country. The U.K. is proving more resistant to cord-cutting than some other European countries, but most of the growth is at the lower end of the market—from Sky’s over-the-top NOW TV service and cheap TV packages bundled in with broadband and telephony.”

The U.K. and Ireland accounted for 88 percent of Sky’s operating profit in the fiscal year ending June 30, 2017. Sky is well-positioned to absorb the chilly winds of online and telecom competition, despite reporting a recent dip in profits; operating profits for the past year declined by 14 percent in the U.K. to a far from inconsiderable £1.3 billion. This was blamed on the escalating costs of buying Premier League soccer rights—an extra £629 million in 2016.

Phone giant BT’s move into TV sports in 2013 has led to hyperinflation in the local football rights market that both platforms are praying will end when the next round of negotiations start. This looks unlikely, especially if the online players emerge as serious bidders.

Sky said it had added 280,000 new customers in the U.K. and Ireland in the fiscal year, including 150,000 new TV products. But churn was increasing, up from 11.2 percent to 11.5 percent over the year. The company said the rate had fallen since March but was still too high. At rival Virgin Media, churn increased from 14.3 percent in the fourth quarter of 2015 to 14.8 percent in the same period in 2016.

Sky reported a total of 22.5 million customers across the U.K., Northern Ireland, Germany, Austria and Italy at the end of June 2017. But competition is constantly increasing. It’s estimated that this year, Netflix has some 10.8 million subscribers in the U.K., France, Germany, Spain and Italy, under half of the Sky figure. However, not all of Sky’s subscribers are video customers. Some customers only take broadband.

“More than any other pay-TV company, Sky has led the way in diversifying its activities,” explains S&P’s Hamza. “Sky has invested in ser­vices, platforms and technology that can expand its distribution capabilities. Whether that’s online,  traditional pay TV, or even taking content abroad, they’ve been diversifying a lot.”

Sky CEO Jeremy Darroch has acknowledged that the pay-TV paradigm is shifting. “It is a competitive world out there,” Darroch told the Guardian this summer. “There is more movement between platforms than in the past. We need to keep focused and keep executing our plans. We have good plans in place.”

These include launching a new online ser­vice in Spain and introducing Sky-branded, broadband-delivered TV in the U.K. This will mean that more Sky customers will no longer need a satellite dish.

The company’s online budget service, NOW TV, has proved popular in the U.K., where Sky is competing fiercely with Netflix and Amazon. Amazon recently concluded its first non-U.S. sports rights deal by outbidding competitors—including current rights-holder Sky—for ATP tennis tournaments by paying a reported £10 million per year in a five-year pact. Meanwhile, Amazon Channels has been available in the U.K. since May.

Today, Sky likes to say that it is no longer defined by a satellite dish, comparing its various tiers of ser­vice to market segmentation in the automobile sector. “We used a pretty simplistic analogy; within the overall BMW brand family you’ve got the Mini, you’ve got the core BMWs and you’ve got those luxury ones,” the company’s COO and CFO, Andrew Griffith, recently told the Royal Television Society. “So, you’re going to have different products in a more mature market. You’re going to have a more segmented approach. The good news is, that grows the overall market.”

Incumbent pay-TV platforms are facing competition from telecoms operators outside the U.K. as well. In Spain, the main TV operator today is Telefónica. In France, Canal+ has forged a strategic alliance with Orange. Meanwhile, SFR, like BT, has entered the soccer rights market.

Across the five biggest European pay-TV markets—the U.K., France, Germany, Spain and Italy—a common factor appears to be uncertainty. “The market is in a state of flux,” says David Bouchier, chief entertainment officer at Virgin Media, the U.K. cable company owned by Liberty Global. He maintains that since Britain possesses such a dynamic TV market, innovations introduced in the U.K. are often subsequently copied by pay-TV providers in mainland Europe.

As an example, he cites Virgin Media’s decision, announced in September 2013, to add Netflix to its service (the streaming service’s first deal with a pay-TV outfit). This was followed by last year’s announcement that Netflix would be made available to Liberty Global customers in more than 30 countries in Europe, Latin America and the Caribbean.

Last year, Liberty Global CEO Mike Fries said that Virgin Media’s TV subs with access to Netflix “pay more, churn less and are happier.”

“No one was sure what the effect of Netflix would be,” says S&P’s Hamza, “but in pay TV it’s driven the pace of innovation and asset diversification. There is a lot more collaboration between Netflix and European operators. Everyone, except Sky and the other satellite operators, has integrated Netflix into their set-top boxes. Sky and the other satellite operators tend to have their own OTT offers and have a strong content play because they have deals with most of the Hollywood studios.”

However, Virgin Media’s Bouchier, who used to work for Sky, cautions against seeing the European pay-TV market as one homogeneous block. “If you look across Europe, different markets are at different stages of maturity. I know that even within the Liberty family, when I talk to my colleagues in some markets, they will say, ‘We were Communist ten years ago, so having multichannel TV is the latest, new thing.’”

Sky is introducing what is being seen as a version of NOW TV to Spain. This may be a trial for further European rollouts. “We intend to launch a simple and affordable OTT service in Spain, the Eurozone’s fourth largest economy and the market that has the largest free-to-air headroom in Europe outside of our existing footprint,” Sky explained.

Telefónica is watching this development closely. “Spanish pay TV is dominated by Telefónica, whose Movistar+ brand wrapped its SVOD platform into its basic pay package,” says Simon Murray, the principal analyst at Digital TV Research. “The aim was to counter Netflix, and it appears to have worked.”

According to Enders Analysis, of the big five European pay-TV markets, Spain “has the most momentum.” The Spanish market grew by 9.5 percent in 2016, taking the number of subscribers to 6.1 million.

In Italy, Sky Italia’s business is broadly stable. The churn rate has been cut to below 10 percent, down from above 13 percent in 2013. Meanwhile, Mediaset Premium is in meltdown due to heavy losses, and Netflix has yet to establish itself as a profitable entity. Enders estimates that Netflix had 300,000 Italian subscribers last year, most of them free trials.

Europe’s biggest economy, Germany, has historically proven to be far from a pushover for pay-TV firms, not least because of the strength of its pubcasters. But Sky Deutschland is gaining traction, having doubled its subscriber base since 2008. How­ever, pay-TV penetration remains much lower in Germany than in other big European markets, such as the U.K. and France.

Sky’s business in Germany and Austria is the fastest growing, “with revenue increasing steadily at near or above 10 percent,” Enders Analysis reports. ARPU is flat at €35; Sky’s revenue growth is largely driven by gains in the number of subscribers. Churn in the second half of 2016 was 10.6 percent.

In France, Orange is now the largest pay-TV platform, having overtaken Canal+ two years ago; the latter has been declining for around a decade due to cuts that included the loss of some local and international soccer, plus content provided by studios such as HBO. Despite recently investing in more domestic drama—a trend evident across pay-TV firms throughout Western Europe—Canal+ lost more than 100,000 subscribers in Q1 2017, Enders Analysis says, with churn reaching a record 17.2 percent. Canal+’s difficulties have led to a reduction in overall French pay-TV revenues, which Enders estimates fell by 8 percent year-on-year in the first quarter of 2017.

As telcos and other online providers entered the French market, Canal+ was forced to rethink how it sells its services and, belatedly following Sky’s lead, has begun to offer more flexible packages. “In France, people signing up for a pay-TV offer weren’t taking Canal+,” says IHS’s Westcott. “As a result, the company completely missed out on the growth at the lower end of the market.”

Meanwhile, SFR has invested in its own pay-TV channels. These include SFR Sport, which is bundled as part of its premium broadband packages. Beginning next year, SFR Sport has exclusive coverage of Europe’s Champions League.

In Scandinavia, the early availability of high-speed broadband gave a big boost to OTT services. But unlike Canal+, MTG, which operates the Viasat pay platform, as well as Viaplay and Viafree, realized early on that it would have to provide its own online packages or risk being marginalized.

“Although the market is saturated, we are still growing our revenues by encouraging people to trade up,” explains Anders Jensen, the executive VP of MTG and the CEO for MTG Sweden. “There are a lot of DTT households that are migrating to fiber.”

Any cord-cutting and shaving that has occurred so far in Sweden has yet to hit MTG’s bottom line. However, Jensen is cautious regarding what might be around the corner. “We are conscious of the fact that it will change in the not too distant future.”

So far, MTG has resisted the temptation to introduce à la carte services. Instead, the company continues to beef up its exclusive content, investing in sports (including the U.K.’s Premier League, the Champions League, Swedish soccer and ice hockey) and high-end, homegrown drama.

MTG also continues to diversify by investing in online gaming. This year it bought Kongregate, a U.S. cross-platform games publisher and developer, for $55 million.

Netflix’s success in Scandinavia has had a big effect on traditional pay providers, but so far Amazon Video (only an English-language service is currently available in Scandinavia) remains peripheral to the market. “We expect that to change,” Jensen warns. “And we are following the situation carefully.”

The U.S. streaming giants have built their businesses on giving audiences exclusive, predominantly scripted shows like House of Cards, The Crown, Stranger Things and Transparent. The incumbent pay-TV companies have responded in kind.

“European production of original series by subscription services is booming,” Enders Analysis reports. “They are regarded as essential to stand out in a more competitive market and to define a brand with unique content and a local flavor.”

The increasing importance of original content (especially drama series) to European pay-TV platforms is especially evident in the U.K. Here, Sky’s recent flagship shows have included Riviera and Jamestown. Even Virgin Media, which traditionally markets itself on fast broadband speeds, has recently begun to screen exclusive scripted fare. “Every quarter we deliver an exclusive series,” Bouchier says. “In our on-demand environment, our original programming is consis­tently in the top five.” Meanwhile, sister company all3media—owned by Liberty Global and Discovery Communications—is producing shows for Virgin Media. “It’s fair to say that this business has a clear superiority in broadband, and maybe we were a bit neglectful of our TV proposition,” Bouchier adds.

Enders calculates that Virgin Media’s revenue from TV subscriptions is declining, while growth is coming from telecoms services. Bouchier, however, insists that regardless of the onward march of Netflix and Amazon, legacy pay-TV operators have a healthy future.

“There is room for all of us,” he says. “The pay-TV market is a broad church. The old and constant key value drivers will always remain premium sports, kids, diversity programming across different genres and the flexibility of subscriptions. You may see more flexibility in that area, in the way that programming is saved, i.e. server-delivered via the cloud. The core components of what pay delivers—choice, variety, premium channels and a cutting-edge viewing experience across multiple screens—is something we will continue to do.”

Bouchier predicts that five years down the line, social viewing and personalization will become increasingly important. Surely, however, as competition gets even hotter, there will be casualties?

One analyst thinks that several middle-ranking channels that rely on carriage fees from pay platforms, rather than advertising, could disappear from viewing menus across Europe. “Pay-TV operators are having to be more selective about what they take,” he says. “In the future, we might see fewer channels in the U.K. and other parts of Western Europe, including Germany and possibly the Netherlands.”

Whether or not this prediction turns out to be true, there is no doubt that all pay services need to think smart. “Ultimately, in such a competitive market it comes down to a mixture of strategies,” S&P’s Hamza warns. “These need to be constantly innovated, or people will end up churning.”

Pictured: HBO’s Game of Thrones.