Sky's unveiling of details behind its proposal to replace free-to-view channels on Freeview with a pay-TV digital terrestrial television service, branded Picnic, has potentially huge implications for the future of Freeview/DTT, as well as for Sky's premium content pricing strategy.
Until now, Sky has regarded Freeview with disdain, despite being a founding partner in the platform. The satellite broadcaster is a firm believer in pay, rather than ad-funded TV models, while Top Up TV's establishment of a pay-TV service on Freeview has been scornfully dismissed.
Yet, times are changing. Freeview's growth - it is now the most popular digital TV platform - and Setanta's acquisition of Premier League football matches, which are being made available to Freeview viewers for £9.99 a month, have got the honchos in Osterley worried about churn of Sky subscribers and the potential limiting of its satellite platform growth.
Picnic, which will incorporate broadband, fixed-line telephony and premium TV sport and film content, has yet to be approved by Ofcom - it is asking for responses from interested parties with a deadline of 14 December. Issues to be addressed include the sanctity of the Freeview proposition - that it costs nothing and hence is an easy upgrade for viewers to make in the run-up to digital switchover - and the impact on the pay-TV market of an already dominant player taking primacy across two digital platforms.
Choice factor
Sources close to the broadcaster say it views Picnic as "an incremental business opportunity to capture an audience that is distinct from satellite" and that there is "room for more choice" on the platform.
This reasoning has some support from analysts. Alan Flitcroft, head of media and entertainment at Ernst & Young, says: "You can argue that Sky is extending the competition and range of services available."
However, Chris Hayward, ZenithOptimedia's head of investment, thinks it might be "a move to bolster Sky's audiences for its own family of channels, post the Virgin carriage dispute". He adds: "I don't think Sky does anything lightly. Sometimes it's frightening how ruthlessly efficient they can be."
It's this very same ruthlessness that other industry insiders see driving the broadcaster's plans for Picnic. One TV rival insists: "At the heart of this move lie Sky's intentions to destabilise market competition on Freeview. By offering a simulcast of Sky Sports 1 on Freeview, it hopes to diminish Setanta's ability to bid high for the next round of Premier League rights."
Another rival says: "No one has a problem with Sky's premium content coming on to Freeview. The problem is that Sky doesn't want to provide the channels to competing operators, because they don't want any retail price competition. They don't want to sell their killer content to other platforms and risk consumers having cheaper options than satellite. That's what Picnic is all about - controlling competition."
However, the pricing of Picnic poses a huge dilemma for Sky. If it wants to hurt Setanta then it must price competitively, but risks cannibalising its own satellite customer base. Yet, Numis Securities media analyst Paul Richards says: "Sky are masters at positioning their products at the correct price point - if anyone can do it then they can."
One Sky observer predicts that some big football matches could be switched from Sky Sports 1 to Sky Sports 2, meaning Freeview viewers only get part of Sky's premium sports offer.
Potential disruption
Other concerns include the confusion that could arise over yet another Freeview set-top box being added to the mix, potentially disrupting a smooth switchover to digital.
Of course, Picnic may never see the light of day. "Ofcom's predecessor, the ITC, has twice blocked Sky before from being a retailer on DTT because it was thought to be anti- competitive," points out one rival. "Why would Ofcom want to reverse two prior regulatory decisions? It would make Ed Richards look pathetic and subservient to Sky."
He adds: "One feasible outcome would be to allow the Picnic channels to be sold on Freeview, but by rival operators. Sky could be forced to sell its channels wholesale, with the clause that its retail rights will be reviewed under the wider market review at a later date."
If this were the outcome of Ofcom's review, Sky may decide that Picnic isn't worth the bother.
FREEVIEW/DTT SERVICES
- Freeview launched in October 2002 as a free digital platform. It offers more than 40 channels and viewers have to buy a set-top box or TV set with an integrated Freeview decoder
- Free-to-air channels currently include: ITV2, ITV3, ITV4, E4, E4+1, Channel 4+1, Film 4, Five US, Five Life, Virgin 1, Sky Three, Sky News and Sky Sports News
PAY-TV
- Setanta: requires a set-top box with a pay-TV slot. Costs £9.99 a month, with access to the Setanta Sports channels. This season it has secured the rights to 46 live Premier League matches
- Top Up TV: requires a special Top Up TV "Anytime" set-top box costing £99.99, with a monthly subscription of £9.99. Offers a selection of TV content that can be watched at the viewer's convenience
- Picnic's proposed offer: will incorporate broadband, fixed-line telephony and three TV channels. Viewers can choose which services to take. Pricing structure to be announced. Customers will need a new set-top box, which will eventually use MPEG-4 technology owing for the future launch of further channels, including Sky News and broadcasting in high definition.
The TV channels are Sky Sports1, broadcast 24 hours a day, Sky Movies, airing a selection of recent and library films from 6pm to 6am and Sky One, airing from 7pm to 6am. Children's and factual programming will air in the daytime. They will replace current free-to-view channels - Sky News, Sky Three and Sky Sports News.