Analysts Discuss Benefits and Risks of BSkyB's Online Video Service Now TV

Computers Laptops iPads - H 2012
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Computers Laptops iPads - H 2012

While the U.K. pay TV giant can take on streamers Netflix and LoveFilm, some fear cannibalization, cord cutting and "a potentially dangerous move away from the bundled approach."

LONDON - BSkyB's launch of standalone online video service Now TV this week will allow the U.K. pay TV giant, in which Rupert Murdoch's News Corp. owns 39 percent, to take on online streamers Netflix and's LoveFilm.

But it will also expose the satellite TV firm to such risks as cord cutting, a la carte pricing and a potential cannibalization of its established customer base, according to analysts.

Ted Hall, analyst at Informa Telecoms & Media, said that the Now TV launch comes with opportunities, but also built-in risks.

"As a product for the post-10-million-subscribers era, it is a different kind of pay TV proposition, one that removes the barrier of a long-term commitment in order to attract a new audience," he said. "The allure of such freedom could be stronger than Sky intends, with cost-conscious satellite customers now presented with a more flexible alternative – still accessible on the living room TV set – which they can switch to without having to desert their long-trusted pay TV provider."

In terms of packaging, the analyst also sees dangers. "Now TV also represents a potentially dangerous move away from the bundled approach to selling pay TV – the packaging of popular channels with those that are less desirable – towards an a-la-carte model," he wrote. "With Sky Movies – and later Sky Sports – now available without a basic-tier subscription, as well as on a pay-as-you-go basis, consumers are finally being introduced to the cherry-picking model they always wanted, the model [pay TV] operators have typically resisted for fear of disrupting the established economics of pay TV."

Hall's solution is balancing possible risks and rewards. "The key will be to keep Now TV on a leash," he said. "If Sky allows it to become too good, too much like its full subscription service, the operator will stand to lose a sizable number of customers.

Sanford C. Bernstein analyst Claudio Aspesi said that "in general, the management of BSkyB is excellent at thinking through issues like this."

In terms of pricing of Now TV, he said "they needed to balance protecting the bundling of premium and basic content, so prices could not be too low." On the other hand, the company "could not price so high that they would have no impact on Netflix and LoveFilm."

That is why the Now TV price points "seem to be in the middle, and risk only achieving "compromise" results," he said.

Echoing others, he predicted that the pay & play model will have trouble making money after taking into account transaction costs, customer service and other costs. "Historically, pure pay per view has had limited impact on the U.K. TV market," Aspesi said.

For the monthly subscription package, he and others said the real question will be how many consumers will be ready to pay up from the low Netflix and LoveFilm prices once they sample BSkyB's deeper offerings, including more recent film releases.

"Ultimately, I would assume that Amazon is more likely to commit the resources needed to compete - whether by trying to acquire better (more current) content or by widening their price gap or both," said Aspesi.

Barclays Capital Markets analyst Julien Roch projects that both LoveFilm and Netflix will end 2015 with 2.5 million subscribers and Now TV with 1.0 million.

"We believe that 2012 will be the year that Internet TV takes off in the U.K. as the evident success of existing players, such as LoveFilm is complemented by the launches of Netflix, YouView, BSkyB’s NowTV and potentially Apple’s iTV," he said. "This should continue to drive U.K. pay TV penetration higher."

The subscriber battles will be fought both on the pricing and content fronts, he suggested. "Of the three players with subscription offers available or soon to be launched, we expect LoveFilm (£4.99 a month) and Netflix (£5.99 a month) to be priced at a significant discount to Now TV  and consequently demonstrate a higher overlap with existing traditional pay television subscribers consistent with what is happening in the U.S.," Roch said.

But Hall warned that there is a risk that BSkyB may cannibalize its own pay TV subscriber base. "While Sky has wisely resisted any temptation to compete with Netflix and LoveFilm on price – a move that would have significantly undervalued its premium first-window content – what started out as a defensive move against the new over-the-top players in town could backfire if cannibalization of its core business takes hold," he said.

Strategy Analytics' Ed Barton said the Now TV launch is BSkyB's acknowledgment that its core pay TV business is slowing amid intensifying competition. "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 it has a horse in the race," he said.

In 2011, the U.K. broadband TV and video market was worth less than $395 million, he estimated. It is likely to grow around 30 percent in 2012 to top half a billion dollars, Barton projected. "Although Now TV is likely to grow the overall market, it will be some time before it significantly impacts Sky’s overall revenues," he said.

But he predicted challenges and a "significant" impact for Netflix and LoveFilm ahead. "Neither has grown a big user base for standalone streaming yet, so it will make a difficult market even tougher," he said.

Twitter: @georgszalai