With Digital Tv And Cash To Spend, Sky Is Feeling Anything But Blue
Kareen Floyd
05/26/1999 Independent Business Weekly
Page 36
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Sky Television shareholders got a sneak preview of options for interactive digital tv at the company's annual meeting last week. Chief executive Nate Smith says Sky has identified three key areas for interactive applications across its services - webcasting, data harvesting and one-on-one interactivity with limited data exchange. Sky, currently negotiating with three potential suppliers for interactive software, expects to announce a software platform for its services next month.
It is also considering options for reinvesting surplus cash, from returning funds to shareholders, making more acquisitions or funding a more aggressive roll-out of its interactive digital services. With the identified key areas for interactive services, webcasting involves transmitting data where viewers can access more detailed layers of information by pressing a button on their remote control. Data harvesting is where viewers press the remote to request or purchase a service.
An electronic flag goes up in the viewer's set top -box and this is "harvested" by the Sky satellite, which then passes it to the advertiser. In this way, viewers can book a test drive in a new car or order goods. One-on-one activity with little data exchange will allow viewers to book concert tickets or place bets.
Smith says a fourth interactivity option, real time one-on-one interactivity with large amounts of data exchange, is best left to the Internet. "The Internet remains the best vehicle to provide the traditional one-on-one, what I call encyclopaedic, type of service, like 'what are the three best restaurants in British Guyana?' "The other three options are well-suited for Sky distribution and tv applications." The three options are also readily understandable for viewers, an important issue when too much technology is not always welcome.
Smith cites an example of attending a New York trade fair in 1962, where video telecommunications technology enabled him to talk to a friend across the fair ground and see him on screen. "The problem with that is they quickly found out that people weren't too interested in being seen by the other party while they were talking." Likewise, "high definition television has been a solution looking for a problem for about the last 15 years," Smith says.
Sky reported a $15.40 million net profit before tax for the year to December 1998. The result comes off the back of operating revenues up 20% to $212 million and advertising revenues up 38% to $10 million. Smith says advertising revenues have doubled in the past two years.
"We think we've got the recipe right for the advertising business and we continue to look to perform strongly." Despite a devaluation in the Kiwi dollar against the United States currency, where Sky purchases its programmes, operating cash flows increased 22% to $62.25 million. Debt due within a one year period has increased from $2.19 million in 1997 to $5.083 million in 1998.
Long-term debt and lease obligations also grew, from $81.59 million in 1997, to $144.13 million last year. Sky says its debt levels are significantly below other major operators in the pay-tv market, so much so it is looking to reinvest surplus cash. Sky chairman Craig Heatley told shareholders the company was in a robust financial position, with "considerable headroom" in funds going forward.
Sky is considering options for those funds, including the possiblity of a shareholders' payout. Other options include more acquisitions, on top of its recent 30% investment in Internet and computer satellite service provider Ihug, or more aggressive roll-out of set-top decoder boxes for digital services. Heatley notes set-top decoder boxes and their compatibility across broadcasters, while a contentious issue now, are likely to go through a rapid shake-down.
Around 95% of components are already the same across all boxes. Heatley expects one box will eventually become the market standard, suitable for all uses. Sky has built its boxes to a world standard format and, while it will not be giving away boxes as an incentive to subscribe, the current $600 price is expected to reduce.
Smith says Sky will refocus on core business this year, pushing for increased subscribers, marketing digital services and reducing seasonal churn. Churn, where viewers cancel subscriptions - usually over summer when television is a less popular medium - increased in the early months of last summer because Sky was focusing its attention more on getting the first 30,000 of its set-top decoder boxes into homes. "I think it shows how, when you take your eye off the ball, the game can get away from you a little.
"We were more focused on those 30,000 decoders than running the day-to-day business," Smith says. Churn was around 3.25% in October, hitting a high of 4% in November and 3.5% in December. Churn figures for this year dropped back, with 2% recorded in April.
Sky had 321,000 subscribers at December last year, with net subscriber growth a little behind target. Smith declined to reveal subscriber targets, but noted net growth was traditionally around 40,000 subscribers a year. With the advent of digital services, Sky must now take into account subscribers migrating from existing analogue services to the digital ones.
Migration does not add value in terms of Sky's overall growth. "We are trying to balance growing the business with accommodating those people who want to come over to our satellite service," Smith says. Migrants and new subscribers are expected this year to add around 60,000-70,000 to the total subscriber base.
Sky focused much of its shareholder presentation on advertising, playing both its own movie channel promo and a video clip previewing interactive digital advertising. The focus drew fire from shareholder Colin Blow, who pointed out most Sky subscribers took the service to escape the commercials. Blow, commenting on the movie channel promo, noted it was loud and long.
"The mute button would be the first one I'd apply." Smith says Sky recognises a lack of advertising is one of its competitive advantages. But it also has natural breaks in programming, where a movie ends at 27 minutes past the hour, where advertising can bring in revenue.
Another money-spinner in the Sky portfolio is joint marketing, or bundling, with compatible products or services. Sky last year trialled the concept in a deal with Countrywide Bank, where new mortagees got a free, limited time, Sky subscription. Smith says Sky believes financial services, telecommunications companies and energy retailers are a natural fit with Sky.
Ihug, for example, could offer free Sky subscriptions to new Internet subscribers. Bundling works, Smith says, because Sky has a large customer base and frequent contacts with it. "We are also pretty insistent about going out and getting new subscribers and what that translates into is we have an incoming 6,000 phone calls a day that we can talk to about the product of the right bundling partner."
Sky direct sales teams make more than 100,000 door-to-door contacts a month and telemarketers phone 120,000 people a month. "We are probably one of the most potent direct marketing tools in New Zealand," Smith says |
