Why is Sky launching Now TV, and will it succeed?

Head of digital media analysis and forecasting at Strategy Analytics, Ed Barton on the reasons behind Sky’s launch of Now TV – what it is, why it is being done, and whether it will suceed…

Now TV is an acknowledgement that the UK market for online TV distribution is too big an opportunity to ignore.

With its launch, Sky aims to channel its content through Now TV via a host of flexible charging models, without diluting the premium positioning of the core Sky pay TV brand.

Now TV is looking to target the approximately 13 million homes in the UK that do not currently have a pay TV subscription.

Initially offering films on demand without a long-term subscription, live sports coverage is set to follow later this year. The 2012-2013 Premiership season could be an ideal launchpad for Now TV’s on-demand sports coverage.

So why is Sky launching Now TV, which recently linked up with YouView, the internet TV service?

Slowing growth in the core pay TV business

Following two of the slowest quarters in Sky’s history – subscriber numbers increased by just 15,000 in the first quarter of 2012 – the company needs to invest in businesses with long term growth potential now, given slowing pay TV growth.

Sky’s strategy of increasing what customers get for a Sky TV subscription has served it well for years, however, the long-term subscription model is not going to work in a fragmenting environment in which consumers want more flexibility across a greater number of devices.

Intensifying competition

Sky has to navigate a perfect storm of slowing growth and intensifying competition from Virgin Media and a slew of newer entrants such as Netflix and LoveFilm.

Online specialists such as Netflix are particularly adept at targeting the fast growing market of delivering content to internet connected devices such as connected TVs, tablets and games consoles.

Audiences are increasingly turning to standalone streaming services delivered to online enabled devices for their viewing needs, and Now TV is Sky’s way of ensuring that it has a horse in the race.

Online streaming is now a viable market

Growth in the audience and usage rates of online streaming services make mass market propositions such as Now TV commercially viable.

Illegal streaming services, in particular for live football, are proliferating and Now TV enables Sky to begin monetising this audience by offering a legal alternative.

Some will happily illegally stream matches because they do not want to pay for an entire season when they aren’t interested in 90 per cent of the games. Now TV will offer the option to pay only for the games they want on an à la carte basis.

Taking on YouView and competing pay TV providers

Now TV gives Sky the chance to target the YouView audience and households using competing pay TV services such as Virgin or BT, by distributing content to YouView boxes and other connectable devices.

It will take time for YouView to grow, however, heavyweight backers and ISP bundling suggest that it will become a key feature of the UK TV landscape going forward.

This is a platform which Sky needs to have a presence on and Now TV enables it to do this while ensuring that the Sky brand remains undiluted and representative only of the premium, subscription-based pay TV experience.

Will Now TV succeed?

Now TV is Sky’s vehicle to break out of the constraints of long-term subscriptions and satellite distribution. Connectable devices that once constituted threats have become opportunities, the size of which should not be underestimated.

The number of connected TVs, consoles and tablets in the UK will double to over 26 million in 2015 from 13 million at the end of 2011.

Fortunately for Sky, launching Now TV is not a particularly risky move. It is using the same content rights, distribution technology, sales and customer service infrastructure that underpins Sky TV and Sky Go. Now TV offers a way to leverage investments that the group would be making anyway.

In framing expectations, we should remember that 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 by around 30% in 2012 to top $500 million by year-end.

Although Now TV is likely to grow the overall market, it will be some time before it significantly impacts upon Sky’s overall revenues.

First, Now TV must build awareness that it even exists on the YouView EPG and app platforms on connected TVs and other connectable devices – this is, after all, a new brand.

Then it can begin the arduous process of driving spending on movies and converting illegal online sports streamers into paying customers.