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Tuesday, June 05, 2007

Sky Content Acquisition

Surprise, surprise Sky has acquired the rights to Prison Break from Fox in the States. I actually am quite in awe of this strategy of buying rights from popular TV series shown on terrestrial TV. It certainly creates another good reason for some of the refuseniks to move over to the paid side. Of course, I say this theoretically because every eyeball seems to have a price in the TV content game and the price of the Prison Break deal was undisclosed. But for the sake of all BSkyB shareholders, I hope that James Murdoch got a good family discount.

On a less flippant note, content acquisition is one of reasons why I believe that Sky will never earn some of mega-operating profit margins that some analysts have in their future earnings models for Sky. I honestly believe that Sky will surely and steadily keep investing in content until they have become the #1 group of entertainment channels. This is a long run strategy and may only be accomplished once James Murdoch reaches his pensionable age, but I think that Sky will persist.

The first reason that I believe Sky will keep margins within acceptable levels is political expediency. Sky will probably be under regulatory pressure for ever in the highly politicised UK TV industry and high margins attract long, turgid and expensive competition commission inquiries. It is a better strategy to grow the revenues through organic expansion keeping margins at a reasonable level.

The second reason is historical behaviour: Fox have over the years grown from being the worst US network to being on equal footing with the orginal networks these days. This has been accomplished in the old fashioned way by commissioning more hit shows than the rest. I expect Sky to use a combination of buying in shows from the US and commissioning shows in the UK to accomplish the same. I think the critically successful Hogfather and Kemp on Gangs is the start of the journey rather the end.

The third reason is digital switch over: the viewing behavioural change that this will bring to the UK market is immense and almost certainly will be value destroying for ITV, C4 and Five. I think in the medium term Sky will have an ad-supported general entertainment channel which will certainly rival C4 and Five. I also think that this will be used as the sampler and promotion engine for the satellite payTV service which will steadily increase penetration in a similar way as the US cable TV industry. Demographics and the Long Tail of public taste work in favour of the payTV model and against the public service broadcasting model.

All of this makes me wonder if Sky will be shedding crocodile tears if the politicians rule against them launching a DTT payTV service and make them dispose of the ITV stake. By the time the appeals will have run through the UK and European Courts we will probably be knocking on the door of the next decade, DSO will be in full swing, Virgin Media will still be limping along and BT will be on their third attempt to design a working alternative business model for payTV market.