BSKYB takes sky-high gamble with pay TV

LONDON — That notorious risk-taker Rupert Murdoch is rolling the dice again Sept. 1.

He’s betting that about 750,000 Britons are willing to dig into their pockets to pay for a mix of existing channels — previously delivered free — and new services.

British Sky Broadcasting’s switch to an all-pay operation as of Sept. 1 is the latest strategic move by the increasingly profitable direct-to-home satellite operation.

BSkyB chief exec Sam Chisholm hails the multichannel initiative as “the model for expansion in the rest of Europe and around the world — you’ll see packages springing up all over.”

In Britain, this is just the start of multiplexing. Within a year, the number of channels will expand from 18 to 30, said BSkyB director of marketing and distribution David Chance.

But some skeptics say BSkyB, 50% owned by Murdoch’s News Corp., has overpriced the package and that quantity — 14 channels by early next year — cannot guarantee quality.

And no one knows how many people who previously bought a dish believing they wouldn’t have to fork out anything for the basic channels will feel cheated.

The risk is also being borne by those programmers in the package that aren’t owned or joint ventured with BSkyB.

The basic tier will cost T3.99 ($ 6) per month initially for those who signed up before Sept. 1, rising to T6.99 ($ 10.50) from Jan. 1.

At the regular T6.99, that works out to T83.88 ($ 125) a year — slightly higher than the BBC license fee levied on all TV homes.

But it’s free to those who subscribe to the premium services — the three movie channels and Sky Sports — which cost up to T19.99 ($ 30) a month.

It’s a gamble

“Of course there is an element of risk — every stage of Sky’s evolution (since it launched in 1989) has been a gamble,” said BSkyB director of programs David Elstein.

But Elstein figures that the lure of the multichannel package will boost dish sales to the extent that “even if we lost 200,000 dish homes, we could make that up in a month.”

Stock analysts believe the losses will be outweighed by the gains. “The people whom Sky will lose will be the generally light viewers, so that won’t hurt their advertising revenues,” said Guy Lamming of brokers James Capel.

“Sky will get bucket loads of money from new subscribers. It’s a good collection of programs and I think people will be prepared to pay for it,” added Lamming, who values BSkyB at T2 billion ($ 3 billion).

The broadcaster recorded weekly operating profits right through the fiscal year ending June 30, and revenues grew by more than 60% due to continued growth in subscribers, News Corp. reported Aug. 25. It sustained heavy losses until the previous year.

Apart from Sky One (entertainment) and Sky News, the lineup includes Bravo, Discovery, the Children’s Channel, U.K. Gold and MTV, plus start-up services the Family Channel, U.K. Living, Nickelodeon (a Viacom-BSkyB co-venture) and country music warbler CMT Europe.

Home shopping purveyor QVC (in which BSkyB is partnering the U.S. channel) launches Oct. 1. The last two entrants, Viacom’s Nick at Nite and VH-1, will come on stream early next year.

The new BSkyB channels will have a delayed start on cable. Programmers had to negotiate carriage terms with cable operators, and most are aiming to launch Oct. 1. The cable systems are worried because they’re already charging their subscribers more for the basic service than dish owners will pay for the new package.

Looking overseas

BSkyB execs won’t drop any hints about other likely additions, but it’s thought that another sports channel is in the works, and that a number of U.S. cablers like the Sci-Fi Channel, Lifetime and Disney are eyeing the BSkyB system as an entree to Europe.

Currently about 2.7 million homes subscribe to one or more of BSkyB’s premium channels. The new package is aimed at the 750,000 satellite and cable homes that don’t subscribe — and the 18 million homes that so far have ignored the cable/sat revolution.

The shift to all-pay channels suggests that by itself, advertising can’t support the existing BSkyB channels, let alone the plethora of new programmers. BSkyB derives only 20% of its revenues from advertising.

“This is fundamentally a subscription-driven business,” said Chisholm.

Dish protection

It’s also part of BSkyB’s strategy to protect and promote the dish market against the growing advance of cable, where revenues are shared with cable operators.

“For too long we’ve had the free-to-air channels and the premium services, with nothing in between,” said Elstein.

These new channels “could not happen” if they were not underpinned by BSkyB’s existing subscriber universe and subscription management system, Elstein contends. He acknowledges the fresh competition could cannibalize some of BSkyB’s viewers and ad revenues, but believes that overall they will strengthen the satellite broadcasting business.

The upshot will be more dish sales, more subscribers for BSkyB’s premium channels and a broader social profile among the sat audience, he said.

According to Chance, churn rates should drop because the premium movie tier has the added attraction of the multichannels.

Sky News and MTV will remain in the clear, at least for now; latter won’t get a slice of the subscription revenues until it becomes encrypted.

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