Sky is launching NOW TV:

• To extend Sky’s reach to consumers unwilling to commit to a pay TV subscription: currently 11m UK households do not have pay TV

• As a defensive measure against the proliferation of OTT video and TV services in the UK market such as Netflix and Lovefilm which have proven particularly adept at making themselves available via a growing range of connectable devices

• Because it is a low risk strategy: launch marketing spend will be significant however NOW TV is using the same content rights, distribution technology, sales and customer service infrastructure which underpins Sky TV and Sky Go. NOW TV offers a way to increase ROI on investments the group would be making anyway.
  

Sky’s growth is slowing while competition is intensifying

Sky’s core pay TV business is slowing and limited growth potential remains in untapped households and in increasing ARPU of existing subscribers through upselling additional content and services. Competition is intensifying from Virgin Media and a rush of enthusiastic OTT specialists targeting a rapidly growing addressable market of IP connectable devices. Sky’s strategy of increasing the value proposition of the pay TV subscription has served it well for many years however it is not the ideal tool in a fragmenting environment in which consumers want more flexibility across more devices.

NOW TV diversifies Sky’s competitive arsenal

NOW TV is Sky’s vehicle to break out of the constraints of pay TV subscriptions increasing growth potential following two of the slowest quarters in Sky’s history for net subscriber additions (only 15k in Q1 2012). NOW TV will augment Sky’s existing standalone OTT service Sky Go and enables a greater degree of market segmentation without eroding the premium positioning of the Sky brand. It is also a recognition of the viability of a fast growing addressable market of connectable devices in the UK and the increasing traction of alternative content charging models in particular short-term subscription and transactional VOD. Given the emergence of Netflix in the movie space, multiple online catch-up services from UK terrestrial broadcasters, growing spending on transactional platforms like iTunes and Blinkbox and ongoing high usage of illegal online streaming providers, Sky’s strategy acknowledges the reality that there are plenty of competitors ready to grab their share of audience consumption on IP-delivered services if they do nothing.

NOW TV will target devices which would otherwise erode Sky’s share of the audience: platforms which were once threats become opportunities. NOW TV will target connected TVs, games consoles as well as the rapidly growing tablet market. We believe that the number of connected TVs, consoles and tablets in the UK will double to over 26m in 2015 from 13m at the end of 2011. Sky will leverage the expertise it has developed in offering multiscreen and out-of-home distribution to existing pay TV customers, the connected TV expertise of the recently acquired Acetrax as well as a formidable content arsenal in evolving NOW TV.

NOW TV can even target homes which subscribe to competing pay TV services by distributing content through connected TVs, consoles or tablets. It will be interesting to see if Sky could convince customers to acquire their content directly via NOW TV rather than subscribing to Sky channels via a competing pay TV service provider: will consumers prefer to add a Sky channel accessible only via their STB rather than through NOW TV which will be accessible through connected TVs, consoles, smartphones and tablets?

Will NOW TV succeed?

The appeal of NOW TV is greatest in sports and movies where Sky’s content rights differentiate it from other OTT services: Sky enjoys a lock on FSPTW movie rights across all six Hollywood majors and the broadest collection of UK sports rights including Premiership and Champion’s League football, F1 and Test Cricket. Illegal sports streams are widely available online (especially for football) and Sky will look to monetise as much of this audience as possible through TVOD matches on NOW TV. Entertainment will be a tougher proposition given the strength of terrestrial broadcaster catch-up services in the UK lead by BBC’s iPlayer however Sky’s content rights to US programming again constitute a significant point of differentiation from the rest of the market.

However NOW TV is entering a relatively small market by pay TV standards:in 2011 the UK OTT TV and Video market was worth less than $395m and is likely to grow around 30 per cent in 2012 to top half a billion dollars by year-end. While we expect NOW TV to be a significant overall market driver for OTT distribution in 2012 and beyond it will be some time before NOW TV revenues significantly impact Sky’s overall revenues. If NOW TV can break 100k subscriptions by the end of 2012 and has started the arduous process of converting the illegal sports streaming audience to the paid option, it will be performing well.

The imminent release of Google’s first digital media adapator (DMA) in the Nexus Q, the first Google tablet in the Nexus 7 alongside improvements in the Google Play application and content delivery platform signal a step change in the wider war to establish the most desirable super-platform ecosystem marrying content, devices and cloud-based content storage and distribution. Apple has long held a seemingly unassailable lead with a high end, intensely focussed and design-led approach which has driven the most successful device sales strategy in business history. With the latest building blocks in Google’s ecosystem there is at last a danger that Apple will face some meaningful competition.

Previously Google relied on other device manufacturers for Android-based tablets and devices addressing the main screen in the household: Amazon riffed on the OS to create the Kindle platform, Samsung and others commoditised the Android-tablet experience into something meaningless and barely distinguishable from the others while Google TV has suffered the indignity of a relaunch. Although Asus is manufacturing the Nexus 7 the hardware and software is controlled by Google (similar to the dynamic with Samsung manufacturing Google’ handsets). In addition Google TV’s reception, sales and industry impact (crucial for driving interest from App developers and content owners) have been way below the levels a company of Google’ standing should routinely demand. Taking tighter control of the reins of the hardware aspect of their ecosystem is an acknowledgment that a single entity has to control all the components of the platform (software, hardware, content, distribution) in order to compete with Apple’s blue riband experience. Microsoft’s entry into the tablet manufacturing reflects the Redmond giants’ recognition of this reality.

To make an ecosystem meaningful, the progenitor has to reward customers for owning, buying and using multiple aspects  it. Again the benchmark is Apple which has expertly leveraged multiple aspects of its ecosystem to feather, embellish and improve the functionality of Apple devices, iOS, iTunes and iCloud in its now characteristic and seamless manner. Google is now trying to ensure inhabitants of its ecosystem will start enjoying similar benefits:

• Google Play, Google’s App and content store and the default content retailer for Google devices has been improved. Movies may now be purchased (previously TVOD only) and TV content has been added. Heavyweight content owners partnering Google Play include NBC Universal, Sony Pictures, Disney, Bravo, Paramount, Virgil Films, and Sundance. Electronic magazine subscriptions have been added to the store with Conde Nast and Hearst the first announced partners. Currently this US only but a territorial rollout is a given.
  

• the digital media adaptor Nexus Q plugs into a TV and enables owners of Android-based handsets and tablets to stream music and video. Intriguingly Nexus Q will download and stream a separate copy of the media itself – this is different to Apple’s Airplay where the content is streamed from an iPad or iPhone to Apple TV for playback on the main screen. It begs the question whether the functionality works for media not acquired from Google Play.

• ecosystem inhabitants who store their digital media in Google’s cloud have another two devices controlled by Google to browse, buy, store and stream media to including, crucially, one targeting the main screen in a household. Google’s ownership of the media locker, hardware and OS should reassure the market that investments made in acquiring and storing content on the platform will be safe for the long term: there are no other companies in the ecosystem whose commercial priorities will diverge from Google’s cf, Ultraviolet, Samsung, Nokia.

However issues which need addressing for Google’s strategy to thrive include:

• How aware is the audience of the cloud-based storage and distribution functionality offered by the major platforms? Do customers even care about cloud-based media storage and distribution and to what extent does it drive content sales? These remain largely unresolved questions which the digital media team at SA will address in the next digital consumer survey. It is seemingly a given that easy access to content (both purchased and, crucially, owned content including pirated content) adds to the value proposition of a device which is why this is becoming a key pillar of device and content ecosystem strategies. Apple’s approach has been to drive iCloud usage for personal data as an unobtrusive way of backing up personal data and photos in what looks like a Trojan horse to drive eventual usage for content. With 125m users of iCloud announced at WWDC Apple has made a flying start. Content rights deals for full cloud-based storage and distribution are still an issue and may hamper territorial rollout.

• The pricing for Nexus Q is too high at $299 when an Apple TV is $99: the device does not exist in a bubble and the value proposition is simply not competitive at $299 against what is close to impulse purchase pricing. And at some point Apple will raise the bar for targeting the main screen (starting with Airplay Mirroring): Google should have aimed at surpassing the Apple TV rather than catching up with it, which it has failed to achieve anyway.

• While the presumably not huge constituency of existing Android handset and tablet owners who want a DMA will be pleased, Google has limited the sales potential of Nexus Q by requiring ownership of an Android device for basic functionality.

• The dearth of other content options apart from Google Play and Youtube is an absurdity we can only assume will be addressed shortly. Third party services with significant audiences who will expect their connected living room devices to enable access in the US include Netflix, Hulu, and Pandora amongst many others. Availability of the most common content streaming services has become a negative differentiator for connected devices.
  

• The absence of any mention of Google TV is puzzling: using Nexus Q to deliver Google TV to non-enabled TVs seems like a natural fit. Perhaps this is how the product will evolve.

At this point it is worth asking what the endgame is for each of the ecosystem progenitors. It used to be so simple: Apple did all this to sell devices, Google to sell advertising, Microsoft to sell software, Amazon to drive retail sales. While worrying about giants such as these generally calls for us to pull out our smallest violins, the prospects for more specialist companies looks bleaker in a world of tightly controlled ecosystems. Specialists like Nintendo risk being forced into ever shrinking niches: will we ever see Wii and DS level volumes again? Nokia’s trajectory is firmly established while ecosystem evolution lags at Sony, Samsung and LG however at least the jury is still in discussion. Telco’s risk being forced into their long dreaded fate of providing the dumb pipes delivering the value which drives someone else’s profitability.

And with increasing complexity and multiplying commercial imperatives for each component of an ecosystem the route to the consumer becomes ever more complex and circuitous for content owners: rights deals today bear no resemblance to a much simpler world of content distribution even five years ago. Content owners must avoid commoditisation in such an environment as the music industry discovered long ago and undifferentiated news providers are discovering today: fungibility is death for content. Movie and TV content owners are fighting the good fight by creating artificial scarcity through windowing and controlled broadcast distribution networks and while the model is under pressure at the margins, the core remains rock solid, built upon the love only hundreds of billions of dollars of box office, DVD, retrans and advertising revenue can confer.