As a long term Sky TV customer I’ve often been frustrated at the lack of attention the company gives to its loyal customers relative to its interest in winning new ones. While I understand the business goal – winning new customers is always much more expensive than retaining existing ones – as a customer it can leave a sour taste in the mouth. That taste was sweetened this morning by an unexpected call from Sky customer services offering me a new HD DVR, together with 12 months’ subscription to HD channels, all at no additional cost. No set-top box charge, no “set-up fee”, no installation charge, no further commitment. The normal fee for an existing Sky customer to upgrade to this package, as still described today on the company’s website, is £180 - £60 set-up cost plus 12 months of HD channels at £10/month. From £180 to zero – that’s what I call a discount. I couldn’t let the fact that I don’t yet have an HDTV, or my general rule to reject all cold calls, prevent me from accepting this offer. Sky’s latest HD DVR should represent a vast improvement over my 9-year-old Sky+ model, in speed and ease of use, interface and EPG, and storage capacity. I won’t get the benefit of the HD channels, but maybe, just maybe, those free channels will be enough of an incentive for me finally to replace my CRT TV. Sky’s initial financial loss on this, and presumably many other HD upgrades, results from their determination to remain competitive in the years to come. The resistance of many of their customers to subscription fees is high, as shown by our own user research. We found that, while Sky’s overall satisfaction ratings are high, more than a quarter of Sky’s customers would switch to another provider offering the same service for 10% lower monthly fees. We also found that more than a third of Sky’s customers do not rate the company as meeting expectations on value for money. With this new offer, although it is limited to selected existing customers, is aimed at the right spot: to make sure its subscribers are not lured away by competitors such as Freeview HD, Freesat HD, Virgin Media and BT Vision. While none of these alternative providers offer the exact same package as Sky, they are each, in their own way, becoming more competitive in certain aspects. Slowly but surely it seems as though the UK pay and multichannel TV sector is finally opening up to greater levels of competition. Whether Sky’s financials can withstand the impact of these customer retention strategies remains to be seen. David Mercer Client Reading: BSkyB Results Shine But Warning Signs Evident In Customer Value Ratings

After another set of strong financials BSkyB has been showered with praise from financial and media commentators alike. As I indicated at the time, the vast majority of customers plan to keep spending – the same or more – on digital television, in spite of the economic gloom and uncertainty. Sky’s long established premium content and technology innovation strategies have apparently put the company into an invincible position. But delving further into our survey findings a Strategy Analytics report has revealed a key weakness in Sky’s competitive position. Satisfaction with the Sky service is generally strong, but Sky’s value for money ratings are the weakest of the major competitors. Overall we found that more than a third of Sky digital TV subscribers were less than satisfied with the value for money of this service, compared to a quarter of Virgin Media digital TV customers and only 7% of Freeview users. We also found significantly fewer customers of Sky, compared to those of Virgin Media or Freeview, who felt that value for money exceeded their expectations. Of course people could argue that we are comparing apples and pears, since Freeview by definition is a free-to-access service. Perhaps the few people who felt Freeview was not value for money thought that the price of the set-top box or TV set was too high. And it would certainly be interesting to rate Freeview against the value of the television licence fee (£142.50 annually), since most people probably do not associate the two as directly related. But as Sky itself recognises, Freeview does present a possible alternative for price-conscious TV viewers, even if Freeview’s range of content falls well short of what is available from Sky. And our survey suggests that Virgin Media, the other major pay TV competitor, has higher value for money ratings than Sky. This appears to be a sign of hope for the cable company as it seeks to become more aggressive in customer acquisition over the coming months. Twitter: twitter.com/DavidMercer_SA Client Reading: BSkyB Results Shine But Warning Signs Evident In Customer Value Ratings

I attended the Westminster Media Forum Seminar in London this afternoon, entitled Pay TV – market prospects , competition and service to viewers. The conference took place somewhere deep in the bowels of the Local Government Association headquarters near the Houses of Parliament. The rising temperature reflected the growing intensity of the debate as the afternoon wore on, while the absence of a view through outside windows nicely reflected the fact that “Sky” was the only major player absent from the debate. The Forum assured us that the “gorilla” had been invited. My overall impression is that these sessions tend to veer too much towards the old “how do we reduce Sky’s power” debate, hence the reason for that company’s decision to decline invitations to speak. We were however treated to comments from expert participants from the regulatory and legal fields, as well as from Freeview, Freesat, BT Vision and Virgin Media Television. Kicking off the debate was Stephen Unger, Competition Policy Director at Ofcom, who summarised the current state of the two investigations currently relevant to pay TV in the UK market. These are 1. the submission from BT Vision, Setanta, Top Up TV and Virgin Media, and 2. the application from Arqiva and Sky to launch Picnic, a pay TV service on the DTT platform. Both investigations are still in progress, and after second consultations a number of preferred options are being considered. According to Unger, Ofcom “believes that Sky has an incentive to restrict supply to other retailers and other platforms, and there is evidence that Sky is acting on that incentive”. Ofcom’s preferred option is to propose a wholesale must offer obligation on Sky. In other words, Ofcom would regulate the prices at which Sky must offer its channels to other platforms. It would be necessary to determine how prices are set as well as certain non-price issues (for example, protecting against piracy). If this option is agreed, it will also be consulted upon, probably by Spring 2009. Later in the day, Jenine Hulsmann, a Partner at lawyers Clifford Chance, made one of the best contributions. She pointed out that competition law is not good at addressing pricing issues. In her opinion it would be “a very great challenge” for Ofcom to establish a pricing mechanism that is acceptable. She also made the point that there would inevitably be one, if not several, appeals once any decision was made, and that these appeals would lead to long delays in any implementation of Ofcom’s proposals. Hulsmann made one final recommendation for content owners who might have contracts with Sky: “Check your contracts for any clause that allows for Sky to renegotiate in case of a change in regulation.” Martin Coleman, a Partner at Norton Rose, observed another challenge facing Ofcom, concerning the definition of channels and their related content. If regulations are introduced relating to “sports” or “movies” “channels”, these must be very carefully defined in order to prevent changes that might circumvent regulations. In other words, a regulation that decides on the appropriate price for Sky Sports 1 showing Premiership football would be little use if Sky decided to remove that content from that channel and show it elsewhere. Ilse Howling, MD of Freeview, and Emma Scott of Freesat, each presented lots of research about the appeal of their respective “free-to-view” platforms. Maybe it was the constant repetition of the word “free” that got to me, but I couldn’t take my mind off the fact that no one had so far mentioned the fact that these “free” platforms would not have come into existence without the government-mandated annual licence fee, and would not be half as appealing without the BBC’s digital channels. So had any of this research addressed the issue of acceptance of or resistance to the licence fee? Apparently not… Emma Scott suggested that Freesat’s research had “never had any negative feedback about the licence fee”, which suggests to me that they had never asked the right questions. Howling at least admitted that the question of cost does come up in Freeview’s research, and consumers do raise the issue of the price of set-top boxes and/or aerial installations and upgrades. But there was no evidence that consumers related Freeview to the cost of the licence fee directly. These two debates – competition in pay TV, and the future of public service broadcasting – cannot be considered in isolation. Together they form one overriding question – “How should television be funded in the digital era?”. Any debate that focuses on a single funding issue is going to reach conclusions of limited value. Considering the bigger picture would achieve a more rounded perspective from all sides of the industry, and may even attract the attention of the absent gorilla. Client Reading: The Television and Movie Industry Explained: Where Does All the Money Go?

Today in London the Westminster eForum held a seminar assessing the progress of the switchover from analogue to digital terrestrial television and the issues arising from the availability of released spectrum, the so-called Digital Dividend. I was particularly interested in comments from Ford Ennals, who has been Chief Executive of Digital UK for the past three years and is shortly to step down from this role. Ford gave us a brief insight into lessons learned from the UK's first stage of digital switchover, which took place in Whitehaven in November last year. Much of the discussion at the seminar focused inevitably on DTT, but I was particularly interested in the impact of analogue switch-off in Whitehaven on digital satellite TV (DSTV). Whitehaven never had DTT until 2007, and only four terrestrial analogue channels and no cable service, so ownership of DSTV was already high - somewhere near 70% of homes. But during the whole switchover process, 40% of analogue viewers chose to install satellite instead of DTT. Most interesting, according to Ennals, the "vast majority" chose to pay for one of Sky's packages, where they clearly had not been paying for TV previously. Sky also benefited from a rapid rise in adoption of Sky+, its PVR service. Jamie Reed, the local Member of Parliament, confirmed that Sky had run a "very aggressive campaign" during the run-up to switchover, in fact too aggressive at one point as it was forced by the Advertising Standards Authority to withdraw one of its claims. At first sight this would appear to be a lucrative opportunity for Sky as the entire UK switches off analogue TV over the next four years. Whitehaven was a relatively unusual example where DTT was not previously available and DSTV penetration already very high. Nevertheless it confirms our previous analysis that the analogue terrestrial switchoff is likely to benefit Sky, cable (where available) and even IPTV providers, as well as the Freeview DTT platform. Client Reading: HDTV and DTT: The Impact Of Platform Evolution Decisions On HDTV Adoption Scenarios

Most of the commentary on BT's announcement of its second quarter results focused on its BT Vision numbers - 60,000 customers - and whether this was below or on target (BT suggests it is going to meet its target, although there is dispute as to what that target really is). These debates are missing the key point, which is how much revenue BT Vision is generating. On this question the company maintains an ominous silence. The point being, of course, that you can be a "customer" of BT Vision without paying the company anything at all, beyond the basic broadband access fee. In fact, BT can be in deficit to a customer who chooses to take up the offer a free DVR (set-top box with recorder) and uses it simply to watch and record off-air Freeview. The BT Vision VOD service works perfectly well in my own experience, although the tortuous setting up of the service earlier this year might have driven many customers to cancel their order. Once BT confirmed that my line was able to support video, everything was fine, but at times it was giving very mixed messages - one day my line was adequate, the next it wasn't. Once it's up and running, choosing and watching VOD programmes is easy enough, although I haven't chosen to do so very often as they are nearly all pay-per-view. And that is the point: VOD was going to be a major revenue stream for BT, but it has not released this key information. It likewise remains silent on the question of how many of its "customers" are actually paying, and how much, for any level of subscription service. Until this vital data is released the BT Vision jury remains out.

As one country finishes its analogue switch-off, another begins. On Monday morning at 8.45am Sweden’s Culture Minister, Lena Adelsohn Liljeroth, switched off the country’s last remaining analogue terrestrial transmitter at Hörby in Skåne. Two days later, in the UK, the same process is just beginning. This morning 20,000 households in Whitehaven, in Cumbria in northern England, woke up to find that BBC2 was no longer available on the analogue terrestrial service. Actually, if everything went according to plan, this should not have surprised any of the residents of this small coastal town. Over the next month the remaining analogue channels (BBC1, ITV and Channel Four) will also be removed, leaving room for the replacement DTT channels offered by Freeview. Is this a case of the UK falling behind? It would be easy to play the blame game as different European countries progress at their own pace towards an all-digital future. Sweden in fact is the fourth country (after the Netherlands, Luxembourg and Finland) to end analogue terrestrial TV, and a number of German Laender are also digital-only. The UK may just be beginning the process, but it is not the slowest. France and Spain have yet to begin switch-off, and Italy has just revised its schedule. The irony is that the countries that have succeeded in moving quickly towards switch-off are not necessarily the most successful in promoting digital TV. In fact, the UK still has the highest penetration of digital TV in Europe (more than 80% of homes have at least one TV able to watch digital channels). The secret in the Netherlands, Sweden and Germany is that many homes there have not used analogue terrestrial TV for many years – they use analogue cable TV, and continue to do so. It is in the less cabled countries – such as France, Spain, Italy and the UK - where switch-off is most challenging. Even though digital penetration in the UK is high, the switch-off process will be arduous. Converting all the second and third TV sets, as well as recorders (VCRs and DVD recorders) to digital will not be a trivial task. If Whitehaven proves successful, the UK's 2012 deadline will looking increasingly realistic. sub=addfavbtn&add=http://www.strategyanalytics.com/blogs/dmercer">

A couple of items recently that suggest Europe is accelerating towards a high definition TV future. First, it has been reported that Canal Digital, one of Scandinavia's two major pay TV providers, plans to "switch off" its SD (standard definition) TV channels. Jarl Søderman, deputy CEO, is quoted as saying the company will "take down" its SD channels in 2008, and that it is no longer buying new SD channels. Canal Digital, owned by Norway's Telenor, has certainly been one of the more aggressive of Europe's digital TV providers, having been one of the first to launch regular HD services in 2005. But if this report is accurate, it would make the company the first in the world to switch completely from an SD to an HD platform. I will certainly be checking the fine details with Canal Digital - there are real question marks over whether any channel, let alone 100 or so regular entertainment channels, will be able to offer true HD content around the clock within the next year. The second development has been the publication of the CSA's (France's regulator) summary of the contributions in response to the consultation on HDTV on digital terrestrial TV. Of 18 contributions, only two (representing unions and regional and local media interests) object to the introduction of HDTV. This is probably more a reflection of the fact that France seems to have decided, regardless of any consultation procedure, to go ahead with HD-DTT in any case. UK viewers expecting to see HD on the Freeview DTT platform will recognise a stark contrast: the UK is consulting instead on whether spectrum freed by the switch-off of analogue broadcasting should even be used for television, or instead be allocated to alternative communications providers.

I was one of the first customers to sign up to Sky's pioneering DVR service, Sky+, back in 2001, as I previously blogged. Sky's excellent customer records have now allowed it to remind me of this fact by sending me a letter inviting me to spend more money with them. Specifically they are inviting early Sky+ adopters to upgrade to Sky HD and Sky Anytime, the new "push download" DVR service. The clincher in the Sky letter is that "Sky Anytime ... is unfortunately not available on your current Sky+ box". I can apparently choose to pay Sky either £149 for a new HD box, or £79 for a SD box that will be compatible with Sky Anytime. Both would come with free installation. Given that I have not yet invested in an HDTV display, the HD option doesn't seem sensible. So why would Sky Anytime tempt me to spend £79 on a new box? Sky has told me nothing about what content Sky Anytime will offer, and I remain to be convinced that push downloads are an adequate competitive solution to true VOD for non-VOD platforms like satellite or terrestrial. So I will pass on their invitation on this occasion. If I had been ready to upgrade to HD, I suppose the £149 might have been tempting. But judging from friends' experience of the Sky HD service, I remain sceptical. One near-neighbour has just become what must be one of the first Sky customers to churn from HD back to SD. After being caught up in the initial wave of HD hype and a new flat panel TV purchase, he decided the £70 a month for the various Sky sports, movies, extra box and HD options was simply excessive. So there is at least one Sky HD box owner not receiving HD channels right now. Sky has just reported its highest churn rate in many years - it seems that even new services like HD and Anytime are not enough to keep every customer happy, and free-to-air services like Freeview are becoming ever more attractive compared to the higher ARPUs demanded by pay TV providers.

Today's DTG summit was a clarion call to politicians and regulators to ensure that the UK's digital terrestrial platform would carry HDTV signals in the future. Margaret Hodge, Minister of State for Industry and Regions, recognised that HD was a "contentious issue", but left the meeting too soon to hear just how contentious a subject it could be. Speakers suggested the government should take the decision of how to allocate spectrum back from the regulator, Ofcom, but Hodge was "not sure that Parliament is the best place to decide on consumer priorities". Before leaving, she left a glimmer of hope by suggesting that the spectrum decision "is not about maximising money for the Treasury". Personally I would want to get Gordon Brown's confirmation of that opinion before taking it as a matter of policy. The UK's digital TV industry, as represented by the DTG, in fact primarily represents those with an interest in promoting digital terrestrial television, as opposed to alternative digital television platforms such as satellite or cable. Principal supporters are the public service broadcasters, and consumer electronics manufacturers and retailers. This constituency is very concerned, and understandably so, that the DTT platform, so successfully established under the Freeview model, could lose out on the next innovation wave driven by HDTV. Ofcom is currently consulting on the best way to allocate spectrum freed up by the switch-off of analogue broadcasting. There was a distinct feeling at the DTG meeting that the prospect of this capacity being allocated to HDTV was more or less zero unless a significant change in regulatory approach is taken, as richer companies such as mobile operators will always be able to outbid opponents in any spectrum auction. One speaker after another put the case for free-to-air HD on DTT, including Sony, DSG (Dixons Stores Group), Channel Four and the BBC. Dixons' John Clare gave perhaps the strongest argument by citing recent (February) research that showed more than 40% of buyers of HD-Ready TVs plan to watch HDTV on the terrestrial platform. His argument that Ofcom needs to examine the most recent research before coming to a decision is certainly compelling. As we said in our recent report, France has taken the lead in Europe by clarifying the HD DTT direction. As the BBC's Tim Davie put it, the UK is heading for a situation where the 2012 London Olympics will be available to all French viewers, free to view and in HD, but not to UK viewers. This is the sort of argument that is likely to get politicians thinking, if anything will.

Good job I'm not a gambling man... Virgin Media's cable subscribers lost access to Sky's News, Sports News, Sky One and Sky Two channels this morning. Sky is banking on 10s of thousands of them cancelling their cable deals and installing dishes as a result. Virgin Media is hoping it can reinvigorate its VOD service (Virgin Central) by putting it on the same channel as the one vacated by Sky One. The good news for outside observers is that this heavyweight battle is likely to continue for many more months, if not years. Sky has taken a markedly more aggressive stance on a whole set of competitive issues in recent months, presumably as the threat of competition has increased. Virgin Media is clearly a major opponent, and has strong positions in broadband, telephony and mobile to fall back on. Its weakness lies in being restricted to its cable network for TV services, although that is likely to change as it rolls out "off-net" TV using IPTV. FreeView, BT Vision and other providers are also putting pressure on Sky. It's tempting to want to call an outcome to the whole saga, but there really doesn't seem to be one. The UK's competitive environment is likely to encourage increased polarisation between vertical providers looking to bundle their customers into multi-service broadband/TV/mobile deals. Assuming the regulators stand back and let it happen, the battle to win and retain customers is only likely to get more intense.