Viewpoint: Coming up next… consolidation

Simon Murray, Digital TV Research

Few were surprised by BSkyB’s announcement in late July that it wanted to buy 21st Century Fox’s stakes in Sky Italia and Sky Deutschland – the three companies have been cooperating for some time.

Several ex-Sky senior managers work in Germany and Italy, while the firms share the same technologies. Furthermore, both the German and the Italian operations have adopted successful consumer strategies from the UK. The clue’s in the name.

The deal is valued at US$9.3 billion, with 21st Century Fox intending to retain its 39.1% stake in the expanded Sky. If it goes ahead, Fox will be able to concentrate on content: part of the deal involves the transfer of BSkyB’s 21% stake in the international version of National Geographic Channel.

I doubt that the expanded Sky will multiply geographically beyond the three core markets. Considerable European consolidation has already taken place, so any expansion by Sky Europe would be extremely costly

The combined group has 20 million subscribers across 97 million TV households in five countries. The UK and Ireland provide 11.5 million of the total, followed by Italy (4.8 million) and Germany and Austria (3.7 million). The lower penetration in mainland Europe is an enticing factor for Sky.

Even more mouth-watering is that the UK and Ireland will provide 34.8 million of the 48 million subscription products of Sky Europe. Germany and Austria have only six million and Italy 6.7 million. Tellingly, British and Irish subs buy an average of three products, but the proportion is only 1.62 in Germany/Austria and 1.4 in Italy – that’s plenty of room for growth.

One of Sky’s priorities would be to expand the product offerings such as DVR, HD, OTT, and on-demand in Germany and Italy. The German operation has considerably fewer channels on offer, for example.

So what about triple-play bundles? Sky has had considerable success with its offer, but its German and Italian counterparts do not offer them, and instead partner with telcos.

Content-wise, football rights are hugely important to all three companies. The loss of rights to the local league would severely dent subs numbers. Sky is extremely mindful of this, given that the English Premier League rights are up for auction later on this year. It received a bloody nose when it lost European Champions League rights from 2015/2016 to telco and pay TV rival BT.

However, there is no evidence – yet – to suggest that European pay TV operators are losing subscribers to the SVOD platforms – in fact, Sky is clearly embracing the concept

I doubt that the expanded Sky will multiply geographically beyond the three core markets. Considerable European consolidation has already taken place, so any expansion by Sky Europe would be extremely costly.

Scandinavia and Poland are very competitive, while Russia is a no-go area. Telefonica recently increased its stake in Spain’s Canal Plus, and the French regulators would have a lot to say about a bid for Canal Plus France.

Meanwhile, Liberty Global has expanded into Germany and the UK, is bidding for Ziggo in the Netherlands, and is extending its stake in Belgium’s Telenet. Liberty also acquired a small stake in UK free-to-air network ITV, which has led to speculation about a joint Virgin/ITV bid for the English Premier League rights and murmurs of a wider takeover.

Our forecast at Digital TV Research is pay TV revenues in western Europe will be flat for the next few years. In fact, we expect them to fall in the UK. The main reason is the conversion of subscribers to bundles – bundled subscribers pay less for TV products.

The number of pay TV subscribers to traditional platforms won’t grow by that much either, and this isn’t good news for Sky Europe’s satellite TV platforms. However, the company will always benefit from its control of premium rights, especially football.

Several ex-Sky senior managers work in Germany and Italy, while the firms share the same technologies.  The German and the Italian operations have adopted successful consumer strategies from the UK. The clue’s in the name.

Online provides one area for subscriber expansion: Sky’s SVOD service Now TV has the advantage of screening movies a year before its competitors. However, Now TV provides a much more limited choice of titles than the likes of Netflix.

Operational – and successful – in the UK and Ireland since January 2012, Netflix plans to launch in six more European markets later this year, including Germany and Austria. Digital TV Research estimates that Netflix had 4.3 million paying subscribers in the UK and Ireland by June 2014.

However, there is no evidence – yet – to suggest that European pay TV operators are losing subscribers to the SVOD platforms – in fact, Sky is clearly embracing the concept.

Digital TV Research forecasts that there will be 28.8 million SVOD subscribers (across all platforms – not just Sky) in Austria, Germany, Ireland, Italy and the UK by 2020; up from 10.5 million by the end of 2014. SVOD revenues will grow from US$1 billion to US$2.8 billion over the same period. The game is changing.