Why Sky Is Launching a Streaming Service in Spain

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Sky

The European pay TV giant has built "a strategic OTT platform that allows us to go quickly to other markets" and could "go further afield quickly should we want to," says CEO Jeremy Darroch.

Spain is set to become a new European battleground for streaming video services, with pay TV giant Sky on Thursday unveiling plans to launch an OTT service there by year's end.

"We intend to launch a simple and affordable OTT service in Spain, the Eurozone's fourth-largest economy and the market, which has the largest free-to-air headroom in Europe outside of our existing footprint," Sky said. That was a reference to Spain's low pay TV penetration and estimates that only about 12 percent of the country's homes with internet access subscribe to online video services. 

Sky, in which 21st Century Fox owns a 39 percent stake with plans to take full control if U.K. regulators approve the deal, didn't disclose details on pricing and content for the planned service. But it will compete with a stand-alone HBO streaming service, which launched in Spain last year, and Netflix, which started in the country in 2015. Other streaming services competing in Spain are ones offered by operators Telefonica, Vodafone and Orange.

Spain is "an attractive market," Sky CEO Jeremy Darroch told THR. And the launch will add a big market on the continent to the company's service area, which currently is made up of the U.K., Ireland, Italy, Germany and Austria. "We will be in four of the top five markets in Europe," Darroch said.

Spain is seen as a testing ground for Sky before possible further OTT launches in new international markets. 

"We have got strong, growing OTT services either as part of Sky or as Now TV in our other markets already. One of the things we have been doing is building what we call a strategic OTT platform that allows us to go quickly to other markets," Darroch said on an earnings conference call with reporters on Thursday. "That’s something we have completed this year. Spain is the first time where we are going to take that and launch a singular OTT service in that market."

Asked if other OTT market launches will follow, Darroch said: "We’ll get going with that [Spain launch] soon, and then we’ll see how we go. We have the capacity to go further afield quickly should we want to.”

In October, he had said Sky feels no rush to push into new markets, highlighting: "What I always remind people of is just the sheer size of the opportunity we got in the markets that we are in," including tens of millions of people not subscribing to pay TV services.

Launching in more countries could establish a new area of subscriber growth for Sky amid a mature U.K. market and signs of challenged momentum elsewhere. Liberum Capital analyst Ian Whittaker in an investor note on Thursday said about the latest Sky earnings report that subscriber numbers "do not look good, with weak subscriber growth in the U.K. and increased churn in U.K./Ireland and Germany/Austria."

Added Whittaker: "Sky only added 35,000 new customers in the U.K. and Ireland in the fourth quarter, a sharp drop from last year's fourth-quarter 93,000 and even below the seasonally quiet third-quarter number. Churn in the U.K. has also risen again to 11.5 percent (from 11.2 percent for fiscal year 2016), and there has been a sharp increase in Germany (12.6 percent for the fiscal year versus 9.9 percent in fiscal year 2016)." Plus, average revenue per user "continues to stagnate in the U.K. despite price increases at £47 ($61.76), while it has actually fallen in Germany — €34 ($39.87) from €35 ($41.04)."

Asked about Sky's first OTT launch plan in a new market, Whittaker said: "They clearly see Spain as a big potential market especially given the pay TV market there." 

He does not expect a quick rollout in other markets, suggesting that it "will not be immediate, but will be rolled out over the next few years."

Much will depend on content rights, said Enders Analysis analyst Toby Syfret. "It's not something you can easily do overnight," he said. "You can't just switch everything you got on satellite elsewhere into the OTT space, because it all depends on rights clearances." He added: "Sky has a big deal with HBO for Sky Atlantic. It can't just translate to new countries. It depends on what other deals HBO has in place there."

In line with that, Sky COO and CFO Andrew Griffith, on an earnings conference call, said the Spain announcement was "a statement of intent," adding that the company would "come back with more detail." That will include detail on content that will be offered in Spain. "We don’t sit here with a big land bank of content" for the country, he added.

HBO Espana, for example, offers such HBO series as Game of Thrones, Westworld, Veep and Silicon Valley.

"We will leverage our technology assets and brand, and over time — and it will take time — our strong position in content, whether that’s from third parties or content we have created ourselves," Griffith said about Sky's OTT push outside its core markets.

One analysts suggested France, another top European market, could be a future target for Sky, while Syfret highlighted that Sky already owns a stake in streaming service Molotov there. Several analysts said other European market would be a logical focus for Sky given its five core markets are in Europe. 

But Syfret said the company could even set its sights further away from home. "When you have got companies like Netflix and Amazon going around the world, you can see why Sky, and later Fox assuming its deal for Sky goes through, would be looking to develop these services in other parts of the world."

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