Physics 1 : Ego 0 at Sky TV

Yes ! What a result ! Some years ago UK satellite broadcaster BSkyB [aka ‘Sky’] boasted they would capture 10m subscribers by 2010. In 2004, my friend Suresh Mistry thought the number looked odd and worked out the ‘physics’ of what was happening. Here’s what he did [click to download slides and the 2005 model on this – you will need the mystrategy software reader …

There are about 23million UK homes effectively reachable for digital TV services – fewer if you ignore the large number of elderly and others who don’t care and never will. At the time of the analysis, here is how they stood … in the tank on the left were about 9.4m homes taking analogue TV only, in three tanks on the right were 4.4m taking ‘freeview’ terrestrial TV, 7.7m Sky subscribers, and the rest taking TV by cable. Each quarter, a number of homes ‘flow’ out of the left-hand tank and into one of the three tanks on the right. In addition, some homes flow between the three digital-service tanks.

Sky was winning under 0.3m new subscribers and suffering annualised churn of over 10%, so their actual net growth was less than 100,000 per quarter. Freeview [understandably, being ‘free’] was growing like crazy – faster than Sky, and with almost no churn.

Now you didn’t need to be a genius [though of course Suresh is ] to realise that if the tank of analogue homes is draining, and Freeview going like a rocket, then Sky’s net win-rate was likely to fall. Still, the constraints of fundamental physics didn’t stop James Murdoch – son of the nice Mr Rupert – claiming they would hit 10m subscribers by 2010.

This might not have mattered, were it not for the fact that the company spent the next 3 years pushing huge marketing efforts and price discounting in a desperate effort to hit the target win rate every quarter. Perhaps someone might work out how much shareholder value this strategy destroyed, as compared with a strategy more focused on value-creation.

One thought on “Physics 1 : Ego 0 at Sky TV

  1. Hi Kim,

    I can’t believe I’ve only just started reading this blog! I’ll endorse and read it regularly. As I do – a site on both the economy/finances and chess (it’s writtem by a GM) you may find interesting. Anyway…

    One interesting discussion on Sky was their strategy last year to squeeze Virgin Media into dropping Sky One and other Sky channels, through pricing these channels so high that Virgin had to drop them. Many people stopped being able to watch their favourite series (e.g. Lost) and got cut-off half way through a series. Virgin pushed their prices up on Sky, who dropped them (Bravo might be one I think).

    Virgin lost customers as some moved to Sky, but not enough and not quickly enough!

    Advertisers were annoyed that their adverts were reaching less people and demanded lower costs. Sky was losing out on advertising revenue and the lawsuit and counter-lawsuit between the companies where dropped.

    Sky and Virgin now provide each other with channels at a fixed cost until 2011.

    So who won? Virgin were shown to be reliant on Sky channels and reliant on virgin customers!

    On a side note the waters were dirted further when a battle between Virgin Media and Sky for ITV erupted. Virgin Media sought to buy the company but were thwarted when Sky secretly acquired a major shareholding and blocked the sale.

    Earlier this year the Government backed the Competition Commission’s ruling that Sky’s 17.9% must be reduced to 7.5% because its shareholding is against the public interest.

    The dynamics of how these to play games are very interesting indeed – but ultimately the customer showed he was King!

    Mike Quigley

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