The Background: The recent switch-off of analogue TV broadcasts in Whitehaven on 14 November provided a timely reminder to UK consumers that they will need to have the appropriate TV equipment installed if they are to continue to watch their favourite channels when the nation switches to digital transmissions in 2012. In response, satellite and cable TV companies are upping the ante in terms both of the content and channels they provide as well as complementary services such as broadband and telephony to entice those consumers yet to join the digital TV revolution.
The battle for the multichannel TV market has got personal. No longer is it confined to faceless corporations fighting it out for subscriptions, as the two principal players, BSkyB and Virgin Media, have taken the fight to one another.
Ever since the Virgin Media brand emerged from the merger of the NTL and Telewest networks in March 2006, Virgin chief Richard Branson has brought his own inimitable style to the TV market. Again the underdog, this time he is pitted against Rupert Murdoch's mighty empire.
This particular spat has not been restricted to market share. A disagreement over content pricing resulted in Sky withdrawing its Sky News and Sky One channels from the Virgin Media platform. In turn, Virgin Media issued proceedings against Sky in April arguing that it is pursuing an anti-competitive strategy designed to weaken Virgin. The case will be heard next year.
Satellite and cable pay-TV was traditionally the most popular choice among UK consumers wanting to watch digital TV in their homes. However, Freeview, the digital terrestrial operator, has now overtaken Sky, with 9.1m homes watching it via their main TV set, up from just 1.8m four years ago. Its main attractions for consumers are its low cost - set-top boxes are available for as little as 拢20 - and lack of long-term contracts.
By the end of 2007 there will be about 12.7m satellite or cable TV homes in the UK, according to Mintel, a 25% increase on 2003. Satellite accounts for about three-quarters of the total households covered and is growing the fastest.
Virgin is at a disadvantage in terms of infrastructure, as its cable network covers only half of all TV households compared with Freeview's 73% and Sky's 98%. But while the modes of transmission may be different, both are developing cross-media strategies.
Sky is in the stronger position in terms of subscribers; it has about 8m and has set a target of reaching 10m by 2010. However, it remains reliant on TV. Despite Sky having begun to extend its services to include broadband and telephony, Virgin is ahead in this area. By bundling its services, Virgin has achieved a higher monthly average revenue per customer of more than 拢42, compared with 拢34 for Sky, according to Mintel.
Sky bundles its products under its 'See, Speak, Surf' deal for 拢16 a month plus BT line rental of 拢11 a month. Virgin, meanwhile, offers bundled options such as 'two for 拢20' or 'three for 拢30'. As well as increasing spend per customer, such offers boost loyalty and Virgin reports lower churn rates for those signing up to three or more products.
Virgin has also ensured that bundles are not limited to the value-end of the market, offering a 'VIP' deal for 拢85 a month, which includes Sky Sports and Movies, a V+ HD PVR, and broadband and phone services.
For its part, Sky, too, has been effective at promoting its premium services, most notably its Sky+ PVR, as well as its multi-room and high-definition services - a strategy that has worked well at boosting the bottom line by increasing profit per customer.
The satellite broadcaster has also introduced Freesat as an alternative to Freeview. At 拢150 for the initial set-up and installation of the dish, it costs more than Freeview, but offers more TV and radio channels. It also allows users to trade up to Sky further down the line with no additional installation costs.
Nonetheless, the storm clouds are gathering. Ofcom is investigating the pay-TV industry to determine whether Sky is restricting or distorting competition. And the Competition Commission is looking into its 17.9% share in ITV, following concerns it has excessive influence in media enterprises. Sky may be forced to sell all, or part, of its stake.
Consumers have typically been enticed into spending extra for multi-channel TV because of the additional content, especially sport and movies, although in recent years this has extended to dramas such as Lost and 24.
It is not surprising, then, that both Sky and Virgin have ploughed significant amounts of money into advertising that is centred on their programming. However, following the recent dispute, much of it has also focused on attacking each other, though Virgin Media recently announced it was abandoning that strategy in favour of promoting its quad-play service next year.
Other communications companies are joining the fray such as Tiscali (formerly Homechoice) and BT, although neither is being marketed so strongly. Both offer their TV services via ADSL over a phone line.
The leading operators are in an enviable position as in 2012, analogue TV will be switched off, marking the completion of the phased transfer to digital in all homes. This will present them with huge opportunities to grow their customer bases if they can convince viewers to opt for their higher-priced versions rather than Freeview.
SATELLITE AND CABLE TV BY NUMBER OF HOUSEHOLDS AND MARKET SHARE
Q2 2007 Q2 2003 03-07
Households % Households % % chg
1 Satellite & Cable TV 12,435,025 57.5 10,557,951 85.4 17.8
2 DTT (Freeview) 9,139,000 42.2 1,790,000 14.5 410.6
3 TV via ADSL 62,000 0.3 10,686 0.1 480.2
Total 21,636,025 100.0 12,358,637 100.0 75.1
Source: Ofcom/Mintel.
BSKYB CUSTOMERS BY TAKE-UP OF ADDITIONAL PRODUCTS (000)
2007 2006 % total
customers
1 Sky+ 2374 1553 28
2 Multiroom 1343 1047 16
3 HD 292 38 3
4 Broadband 716 n/a 8
5 Telephony 526 184 6
6 Sky Movies 4459 n/a 52
7 Sky Sports 5050 n/a 59
Source: BSkyB/Mintel.
ADVERTISING SPEND 2006-2007 (pounds )
DM Online Outdoor Press TV
1 BSkyB 24,749,323 16,106,008 19,476,203 45,917,253 24,960,493
2 Virgin
Media 18,252,090 990,262 13,138,578 19,959,541 12,925,460
Source: Nielsen Media Research.
ANALYST COMMENT - Tim Westcott, Senior analyst, TV, Screen Digest
With almost 87% of the UK's television homes expecting to have converted to some form of digital TV by the end of the year, the prospects for the UK meeting its 2012 target for analogue switch-off are looking good.
Of course, many of the UK's digital homes, even if they have converted their main TV set, still have analogue second or third TV sets in bedrooms or kitchens, so the number of all-digital homes is somewhat lower. But 2012 still seems a realistic target.
Freeview, which overtook BSkyB as the main digital platform this year, is largely responsible for speeding up the UK's drive to digital. It has succeeded where its predecessor ITV Digital failed, by bringing multichannel TV to homes that have resisted cable and satellite. Take-up of similar free digital terrestrial TV offerings have also galvanised the market in Europe.
However, free terrestrial TV has certainly not killed off the pay-TV business. BSkyB, having seen the growth of its subscription numbers flattening, has added services such as Sky+, fast broadband and high definition to its offering.
Virgin Media, meanwhile, has taken the fight to the dominant pay-TV platform with quad-play, video-on-demand and more investment in programming. Other ADSL-based services such as Tiscali TV, Orange and the hybrid BT Vision make the choice even broader.
Looking ahead, satellite will have overtaken Freeview once again by the end of 2011. We expect BSkyB and the BBC/ITV-backed version of Freesat, due to launch next year, to account for a combined 41% of UK TV homes by then, ahead of Freeview's 40.5% and cable just under 14%.