Will Sky Deliver?

Thursday 5th October 2000

You're engrossed in Sex in the City on the telly, and you suddenly remember you have to send an email to Auntie Edna in Christchurch. Oh, and you're starving, too. You wait for the ad break, turn the computer on, log on to email, send, disconnect, then ring the curry delivery place down the road. By that time you've missed at least two fake orgasms. Drat.

Your troubles will soon be over, according to Sky TV.

"Within six months Sky customers will not need a computer or an Internet connection to email friends. They'll do it with their television using a wireless keyboard," boasted Sky's founding engineer, Brian Green, in March, when Sky announced its plans to launch the British-made, Murdoch-owned, Open TV technology. "Virtually anything is possible, from playing interactive games to ordering movies, pizzas, setting up bank accounts, trading stocks and ordering concert tickets. The options are limitless."

The thought is exciting: could TV finally supplant the PC as the preferred tool for Internet access? And could Sky be the preferred supplier with its yet-to-be-launched service? Investors must have thought so when they sent the share price rocketing up from about $4.00 in mid-March to a record high of $5.20 in early April. That's despite the company incurring a $27 million loss in the year to June through (mostly) its bulk purchase of the new digital decoders needed for the interactive service.

The technology has been big news overseas. In the couple of weeks after Open TV listed on November 23, 1999, the share prices of three overseas licensee companies - BSkyB, EchoStar and Austar - all rose at least 20%, and the price of a competitor, France's Canal + was up 42%. All later consolidated as reality set in.

At home, currency-related negative news - lots of Sky's programming contracts (including the All Blacks) are in US dollars - has taken over from TV technology hype. Sky TV's share price had subsided back to around $3.80 as Unlimited went to press.

But muted excitement remains. "It's the biggest thing for Sky since it got the All Blacks," says Deutsche Securities analyst Roger Armstrong. The killer app is email, he says. It won't earn them money but it will be crucial in winning and retaining subscribers. Exactly how many Armstrong can't say, but as of June this year, eight months from launch, over three million UK homes had Open TV technology. The company is one of the country's top five providers of email services with 900,000 regular users. It estimates that by 2005 each Open subscriber will bring in £350 ($1050) per year.

"Do we think it will work?" asked a London-based Deutsche Bank analyst in a report in December. "Yes." There is a market of individuals who want to order goods and services from home, and want to send emails without having to buy a PC, the report says. "TV is lean-back technology. It is demographically and generationally ubiquitous. The PC is still associated with the workplace and the study. In the home, the TV is still 'where it's at'."

Media mogul Rupert Murdoch certainly believes in it. Britain's BSkyB (40%-owned by Murdoch, and which also has a shareholding in Sky via INL) has just spent £394 million to gain an 81% share-holding in the company that makes the Open TV software. Will it replace the PC? Unlikely. Sky's Open TV product will have only limited Internet capability, and even so, no self-respecting teenager would send a steamy email from the living room.

On the negative side, in terms of Sky's share price, investors are already counting on the interactive plans. "I think the current share price already reflects Open TV's influence to a degree," says UBS Warburg analyst David Lane. He reckons anything over $4.10 means people are assuming that Open TV is not just working but "will generate some earnings for them".

That's quite an assumption because, exciting as the technology sounds, a number of questions remain, not the least being "when?" For a decade now this sort of TV-based interactivity has been promised - and sometimes trialled - mostly by US cable channels, but also here by Telecom's failed First Media. Telstra Saturn's Wellington cable rollout has yet to deliver any level of interaction. Sky, too, has delayed the email rollout while it tries to make the technology work with its decoders. "The plan is to download the Open TV software straight into the digital decoders from the satellite ... if we can just make the stupid things work," says a confident but slightly frazzled chief executive, Nate Smith. He's not picking a launch date.

Advertisers onside
Once Smith cracks the email problem, it is be looking at boosting its pay-to-view movie capability. Next year Sky plans to put a hard drive into its set-top boxes which will be able to download, among other things, as much as 20 hours of movies each night for viewers to choose from the following day. If that technology works, all Smith has to worry about is whether the service will actually fly.

First, he has to convince advertisers to use the new medium. There's precedent. In the UK Open TV's biggest fan so far is Domino's Pizza. Each week it receives £50,000 worth of orders via TV - three times higher than the company gets from "old-fashioned" Inter-net orders. Domino's aims to sell a third of its total pizza output via interactive TV or Internet sales within the decade.

Smith hopes the potential for interactive advertising - where a viewer will see an ad for a product and be able to buy it immediately - will lure ad customers from the other networks. "We would certainly take a look once it's here," says ASB Bank's chief information officer, Garry Fissenden. "To us it's another channel, another way we can reach out to our customers."

Hey, big spenders
"It's the most exciting thing to happen in TV in the past 30 years," says Martin Gillman, head of ad agency Total Media. He reckons Sky's digital TV subscribers - and therefore the first potential Open TV users - are a good catch for advertisers because they generally watch more television, have bigger households and, therefore, potentially spend more money.

"We're receiving all sorts of pitches, not just from advertisers but from companies wanting to create fashion, games or lifestyle channels and programmes," Smith says.

Open TV's link with Murdoch's News Corp is crucial, Lane says. "It has bought software companies that are concentrating solely on developing games for Open. If you were going to have any partner in this business, you couldn't pick one much better."

What about the competition? Sky TV's advantage in having the digital pay TV market in New Zealand neatly sown up - in the year to June 2000 it increased its subscriber base by 63% to 375,000, of which 162,000 are digital - won't last for ever. Telstra Saturn has borrowed $900 million to expand its network into Auckland and Christchurch and, once it gets interactivitiy going, will have the advantage of two-way connections from its side, Sky can beam programmes into your home directly, but will have to use tele-phone wires to get messages out again.

Ihug is also potentially in the running, as director Nick Wood expects to launch an interactive TV advertising product next year, with programming coming later. "It's all waiting for the next generation of set-top boxes. They're due out in the first half of next year and we'll definitely look at something then."

TVNZ's much vaunted digital TV project is still in limbo though TVNZ and Sky TV are reported to have sat down recently, for the first time in years, and agreed to work together on one box. However, Smith told Unlimited no deal with TVNZ can happen until TVNZ allows Sky to broadcast One and TV2 to its decoders.

Threats from the sideline
Spoiling all their parties could be products from left field. Take Sony's new baby, PlayStation 2, due in New Zealand by late November. Working as a game console, DVD player and a CD player, it will later also become an Internet device.

Sky's proposed pay-to-view video capability could also come under threat from the much-touted Microsoft gaming console Xbox - reported to have video recording and Internet capability built in.

These new technologies are "some of the risks we're trying to get our head around," says analyst Lane. "From a financial point of view Sky has just taken a hit rolling out digital boxes, they've got another one to roll out with hard drives in them - how many times can they afford to do that?"

As many times as punters buy boxes, responds Smith. "Look, every time we install a box it costs us $500. In a year's time we will have collected $600 in revenue from that machine. The fact that we've sustained such a big loss is a sign of growth, the financial community knows and accepts this."

paul@unlimited.net.nz

Sky's busy year

In the year to June, Sky has:

lost $27 million compared with last year's $4.4 million profit;
built subscriptions 63% to 375,000 (162,000 are digital);
increased revenue 11% to $263 million;
canned its Ihug merger;
added live cricket to sports coverage;
launched pay-per-view movies, bought 80% of the Kingz soccer team and formed a music joint venture with US-based AEI;
created an interactive division
and ... had trouble making its new Open TV software function.

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