ONdigital box strategy faces long-term risks
Hugo Davenport; Carlos Grande
11/19/98
New Media Markets
Page 3
Copyright UMI Company 1998. All Rights Reserved. Copyright Pearson Professional Limited Nov 19, 1998
As ONdigital struggles to match supplies of set-top boxes with high levels of demand generated by feverish media coverage and heavy promotional spending by both platforms, the digital-terrestrial pay-TV operator faces a number of key questions over its longer-term strategy.
ONdigital is presenting itself as "part of the natural evolution of television", but its plan to gain market share partly by riding on the coat-tails of the larger migration to digital-terrestrial free-to-air services is subject to three significant risks:
People could buy ONdigital decoders not because they are interested in its pay-TV services, but because it is a cheaper way to buy a box in order to view digital free-to-air channels. They could take advantage of the subsidy by taking an ONdigital subscription for a year, then churn, thus paying some 300 in total instead of the unsubsidised 400.
At least one manufacturer is expected to launch a free-to-air only digital terrestrial box, priced at around 350, in the near future. Although this is significantly more expensive than the subsidised price of an ONdigital box, it is less than consumers would pay for the latter without the subsidy.
There is no automatic linkage between rental of an ONdigital set-top box and an ONdigital subscription. While ONdigital said this week that the rental company would not then receive the benefit of its subsidies, boxes will be rented at the same price with or without a subscription.
Stephen Grabiner, ONdigital's chief executive, brushed aside such doubts. He said those who subscribed merely to get a subsidised box for free-toair services would be convinced by the quality of the ONdigital service to retain their subscriptions. As to manufacturers planning free-to-air only boxes, he said: "Good luck to them". The only way the price of such boxes could come down to a price-point where they could compete with the ONdigital subsidised price would be to sell in volume.
On the rental issue, ONdigital believes rental companies are unlikely to ignore the major contribution of ONdigital subsidies to their own profitability in their business planning.
This week ONdigital faced an immediate problem with set-top box supplies. One high-street chain claimed there had been only about 2,000 boxes available throughout the entire country at launch, although this was disputed by another saying it alone had received more than that number.
ONdigital insisted that Philips, which is supplying the majority of its boxes between now and Christmas, had upped production to 2,500 boxes a day and Pace Micro Technology would be producing 1,000 a day within a fortnight. Nokia and Toshiba were expected to have boxes in the market by Christmas.
What is not in doubt is the level of demand. ONdigital said it had received 55,000 inquiries from potential subscribers over the two days of last weekend, on top of the 140,000 already logged, and orders have been taken for some 20,000 Philips boxes.
Danny Churchill, group marketing director for Dixons and Currys, said: "The launch of any new technology - particularly when it's hyped up to the degree that digital has been - is always going to give the impression of shortage because people sweep up whatever's available.
"It takes a while to get to a situation where supply matches demand and the supply chain has been filled up. We're only now beginning to reach that point with Sky Digital, six weeks after launch."
Radio Rentals said it had been "surprised" by the intial level of demand. It is thought that the company anticipates a 10-day lead-time from customer orders to delivery of boxes in the run-up to Christmas.
Both companies will be targeting box supplies into areas of the country where all three of ONdigital's multiplexes are on air. In the case of Dixons and Currys, which have around 900 stores, this is likely to mean around 60 per cent of the country. Radio Rentals will have boxes in slightly over half its 500 stores.
Granada Home Technology, the consumer electronics, said that it had taken strong early sales of Philipsproduced boxes with anecdotal evidence of some outlets selling out. The first shipment of Pacemanufactured set-top boxes also arrived at the company's warehouse this week.
It is the small independent retailers which have been worst hit by shortages of set-top boxes and consumer information from ONdigital.
Some traders cannot even say definitively whether customers will receive the whole ONdigital service as they do not yet have the company's computer coverage model.
A York dealer said: "We have been going out ourselves with a spectrum analyser to see how far the signal reaches. But no-one can say for sure until the customer buys a box and takes it home."
Independent outlets in Birmingham, Leeds, Leicester, Preston and Oxford were awaiting deliveries of boxes and, in some cases, subscription forms, when contacted earlier this week. Two retailers interviewed - both in Scotland - had received boxes, although fewer than ordered.
Equipment shortages make it difficult to estimate early sales, although most dealers report good interest from the public.
Independent retailers said the shortages were comparable to those experienced at BSkyB's digitalsatellite launch. Most outlets said that after an impressive start, sales of BSkyB boxes were "good", and expected to increase in the pre-Christmas run-up.
BSkyB said this week that it would have by this weekend 220,000 Digiboxes "in the market" - either sold, ordered or in the shops. The company would not give an update on sales during November, but retailers say that trading has continued at the pace set in October when 100,400 BSkyB boxes were sold. BSkyB also said the average time between order and installation had now come down to around seven days.
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