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MP92068

MAPS CABLE AND SATELLITE SERVICES 1998

Overview

Table of Contents

Executive Summary

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EXECUTIVE SUMMARY

BSkyB dominates the multi-channel broadcast market in the UK, with just over 3.5 million subscribers. The company created the market for subscription television services in the UK, and controls the market in pay-TV, sports and movies, as well as the sale of this premium programming on both satellite and cable. The company’s Direct-To-Home (DTH) satellite channels account for 37.7 percent of all viewing and 52.8 percent of commercial viewing in multi-channel homes.

BSkyB’s major expenditure is on programming. Between 1996 and 1997 the company spent £90 million on in-house programming, £204 million on movies, £116 million on non-Premier League sport, £27 million on the Disney Channel and £50 million on Premier League football coverage. It also paid an average of £2.15 per subscriber per month to third party channel operators.

Cable services have, since their inception, suffered from low availability. TV distribution by cable has always been a low margin business, and the industry has been held back by a lack of coherence and industry-wide planning. Nevertheless, in the 1990s, cable growth accelerated. Cable service penetration, measuring the number of homes that take either cable TV or cable telephone services, was 31.6 percent in 1997, and for TV services the penetration level was 22 percent. By late 1997 the industry was worth approximately £8 billion.

Cable and satellite services have benefited in recent years from some audience erosion away from network television. In 1992, cable and satellite broadcasts’ viewing share was a monthly average of 30.2 percent, but this figure has grown to 36.5 percent in 1996. And the trend has tended to favour cable, rather than satellite services, with BSkyB’s viewing share falling from more than two thirds of the cable and satellite total to just under 50 percent.

The introduction of digital technology into the UK television industry is set for mid 1988. The new technology will allow a five-fold increase in the capacity available to broadcasters for distributing television pictures. It will also allow for the development of Pay-Per-View, interactive, and Near-Video-On-Demand services, and for the introduction of electronic programme guides for accessing the whole range of services.

The competitive structure of the cable and satellite services market is determined by the fact that the cable industry is dependent on one of its main competitors, BSkyB, for the supply of much of its programming. Cable companies have to pay 60 percent of the rate BSkyB charges its satellite customers, and in some cases as much as 80 percent, claiming that this makes their television appear more expensive. As a result, many are now being forced to reconsider the balance of their services between telecommunications and television services. The cable industry has also called for a ban on contract provisions which oblige cable operators to offer certain channels to a minimum percentage of subscribers regardless of consumer demand. Some cable operators have chosen to offer rival packages to BSkyB’s, to free themselves from their reliance on the satellite company’s programming provision.

Pressure on BSkyB to adopt less anti-competitive policies is increasing. Regulatory threats include an inquiry by the Restrictive Practices Court to overturn the Premier League football deal that has powered BSkyB’s performance up to now. The regulators have also forced BSkyB to withdraw from British Digital Broadcasting (BDB), the digital joint venture also involving Carlton and Granada, set up to apply for digital terrestrial licences. The regulators’ aim was to avoid BSkyB having the kind of dominance in the terrestrial digital television market that it currently enjoys in DTH satellite broadcasting, and in cable services. But BSkyB has already secured a presence with BDB, by signing a long term carriage deal for its flagship channels.

Clearly, the move to digital broadcasting also has important implications for the competitive structure of the industry. Opportunities will be increased generally, as more capacity becomes available, and telecommunications, computer software and film and TV production companies will all have a growing influence on the market as competing delivery mechanisms and multimedia services emerge. The trend is also likely to be towards the formation of large media conglomerates which will bring together expertise in all aspects of the audio-visual industry.

In the transfer to digital broadcasting, the cable services sector is set to benefit from the fact that its networks are essentially digital-ready. Having networks built from broadband cable means cable operators do not have to worry about network capacity when upgrading from analogue to digital. Cable operators will have to upgrade their existing analogue receiving, transmission and head-end equipment, but the costs of the changeover, for the entire cable industry in the UK, are expected to be in the range of between £150-200 million - not more than 1-2 percent of total construction costs.

BSkyB’s strategy for the change to digital broadcasting is based on positioning its digital service as a gateway to Pay-Per-View movies and sports. The launch of 200 channels which will occur with the change to digital broadcasting will allow BSkyB to broadcast multiple versions of existing channels, with programmes scheduled to begin at roughly 10 minute intervals, allowing viewers to watch the same programme at different times on different channels. BSkyB is planning some 60-80 channels of Near-Video-On-Demand. Digital satellite will have greater capacity than any other medium in the short term to provide Pay-Per-View and Near-Video-On-Demand services.

There is very little history of a Pay-Per-View market in the UK. Only a handful of events have previously been aired as Pay-Per-View in the UK. Pay-Per-View operators are expected to provide two levels of films, priced at not more than £3.99, and to develop different packages of films, with a blockbuster movie running on a rotational basis. Customers in the UK are naturally thought unlikely to want to pay to view films that they might be able to rent on video six months later. The estimated market for Pay-TV in the UK is £1.5 million, and is expected to rise to £6 million by 2001.

The competitive structure of the industry will also be affected by the emergence of Digital Terrestrial Television (DTT). DTT is expected to launch in late Summer 1998. The Independent Television Commission has allocated frequencies for digital broadcasting to the existing analogue terrestrial broadcasters, and six DTT multiplexes have been awarded.

One of the major attractions of cable services for the consumer is the offer of associated discount telephony services. Cable companies in the UK are unusual in being licensed to offer both telephone and television services over their networks, and cable customers using telephone services can make savings on connections, calls and line rentals of up to 30 percent. To date cable operators have installed 2.5 million lines, and almost all new cable TV subscribers take a telephone service where it is offered as part of a package. As a result, cable now has a 9 percent market share in residential telephony. Business telephony, growing from a small base, has grown by 71 percent to the end of 1996. Cable now has nearly 300,000 business lines installed.

BSkyB is attempting to keep up with cable in the area of telephony by offering a discount telephone service. Announced in November 1997, BSkyB says the SkyDial service will offer savings of 20 percent on long distance and international calls, and a 5 percent discount on local, mobile and premium calls, compared with BT’s standard rates. BSkyB claims the service is aimed more at promoting customer loyalty than competing with the cable companies.

Sales of equipment for use with cable and satellite services have begun to lag behind the take-up of services. The industry has recently tried to sell off remaining analogue hardware, before the introduction of digital equipment. Cable and satellite operators also hope to pick up new subscriptions in the process. The main manufacturers of satellite receivers (Pace Micro Technology, Grundig and Amstrad) have maintained their presence in the market, while also investing in digital equipment. Sales of decoders in 1997 were approximately 400,000. BSkyB has placed orders for one million set-top boxes with Pace, Matsushita, Amstrad and Grundig-Hyundai. Matsushita holds the Panasonic brand name, and the boxes will be marketed under that brand.

In the UK, almost 80 percent of households still rely on the four main terrestrial channels exclusively. Research suggests that many are not keen on receiving additional services, and may never want to invest in pay-TV. In the US and in some European countries, which introduced cable and satellite services much sooner than the UK, well over half the population now subscribes to pay television. Here, the homes which do have cable or satellite still spend two thirds of their viewing time watching the main network channels.

One of the most attractive features of cable and satellite services for the consumer is the greater choice of viewing they provide, including the availability of dedicated channels. This is equally attractive to men and women, and especially effective with younger viewers. In recent NOP Solutions research, 80 percent of 15-24 year olds said that a greater choice of viewing was one of the biggest benefits of subscribing to cable or satellite.

NOP Solutions research also shows that within the dedicated channels, film and sports channels are vital to subscriber interest, across all classes. Again, the age groups which consider these to be particularly attractive in cable and satellite packages are at the younger end of the scale, although with film channels, the decline in interest with age is slightly more marked than with sports channels.

Almost half the UK population says it would be interested in buying a digital television box to increase the choice of viewing, but only if the price was right. The most popular price among the public is less than £100. Above £200, which is the likely subsidised retail price, interest declined rapidly.

One of the major problems faced by cable companies in securing their subscriber base has been, and continues to be customer churn (the rate at which customers cancel their subscriptions). The main reason for customers canceling cable subscriptions is their changing financial circumstances. Customers enter situations where they can no longer afford the monthly subscription charges for what they may view as a luxury service. In order to circumvent this, multi-channel providers need to be quick to recognise the possible loss of a customer, and to offer them a temporary downgrade to a cheaper package, for instance.

Recent NOP Solutions research suggests that Internet access and even cheaper telephone charges are still not attracting consumers to cable services. While 61 percent of those questioned saw choice of movies and improved sports coverage as an important attraction to cable and satellite services, only 46 percent thought cheaper phone charges were one of the most important benefits of cable, and only 28 percent of those questioned picked Internet access as one of the most important benefits. This figure fell to only 11 percent for the over 55s.

Faced with the problems of the high costs of the changeover to digital broadcasting, and the need to acquaint consumers with the new services, cable and satellite broadcasters face an uphill struggle over the next few years. The entire UK digital broadcasting market is expected to be worth £4.9 billion by 2005, but analysts predict that user demand for digital services will be relatively slow to build. In many markets, there will be no significant digital broadcasting before 2000. So user demand is not a strong driver for change.

Cable television is likely to grow more quickly than BSkyB, and is projected to account for 56 percent of the multi-channel TV market by the end of the decade. In the cable sector, transactions are expected to be the major new source of revenue in future, overtaking both advertising and subscriptions by 2002, and telecommunications and interactive services are also expected to become bigger markets than TV services. Cable revenues will only start to exceed investment after 1999. The growth in revenues will be boosted by a reduction in spending, as outgoings on constructing the networks begin to slow. Forecast investment in UK cable is over £12 billion by the end of the decade.

BSkyB will also have to bear the financial expense of the changeover to digital broadcasting, and of its investment in British Interactive Broadcasting over the next two or three years. With its sports and film rights, BSkyB is the best placed of all pay-TV players to succeed in the digital age. But it will face increased competition for those rights in the future, and some analysts believe that Pay-Per-View revenues, seen by some as a windfall, are unlikely to generate huge earnings for broadcasters. Nor will interactive services be a prime source of income, at least not in the next five years. For BSkyB, strong growth is predicted from 1999, after a pause in earnings growth during which the company will invest in the transfer to digital technology. After that, pre-tax profits and earnings are expected to increase substantially, hitting £45 million by 2000, and £128 million a year later. Some analysts see profits pushing through the £1 billion barrier by 2005.

But the future of cable and satellite services depends most of all on the consumer’s willingness to accept new services, and to pay for the associated hardware. Given the problems faced by the cable industry in breaking through the penetration barrier, it is clear that consumer demand will remain weak until suppliers are able to demonstrate consumer benefits.

Text © 1998 MAPS

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