Market Insight

Sky and Netflix agree European partnership

March 01, 2018

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Pan-European pay TV operator Sky has announced a partnership with global OTT subscription service Netflix, to make Netflix available on its DTH and OTT platforms.

Sky is to integrate Netflix into its advanced DTH set-top box Sky Q across all of its markets, starting with the UK and Ireland, via a new subscription TV package later this year. A dedicated app will also be launched on NOW TV boxes and the recently launched NOW TV Smart Stick. Sky Q platforms in Germany, Italy and Austria are expected to launch thereafter, in additional to standalone apps on Sky Ticket devices in Germany and Italy and NOW TV in Italy.

Sky Q customers will gain seamless access to Netflix’s content via an integrated user interface, as well as the ability to search Netflix content via the Sky Q search and voice search functionality. Billing will also be integrated, allowing Sky customers to pay for both services under one monthly billing, with Sky offering existing Netflix customers the option to migrate their account. A dedicated app will be available on the Sky Q set-top box for those not migrating their accounts.

Our analysis

Global OTT subscription player Netflix has witnessed rapid growth in the UK and finished 2017 with over 7.6 million paying subscriptions, accounting for nearly a third of broadband households in the UK, according to IHS Markit estimates. It has seen more modest success in Germany and Italy, where it launched in late 2014 and 2015 respectively. At the end of 2017, Netflix had over 3.2 million subscribers in Germany, representing 10% broadband household penetration, while the Italian market has over one million paying Netflix subscribers, which are expected to continue growing at a strong rate over the next three years.

Sky currently boasts a 22.7 million TV base across its DTH and OTT operations in seven markets. The operator launched its advanced set-top box, Sky Q, in March 2016 in the UK and Ireland, which has already gained two million households. The Sky Q service recently launched in Italy in November 2017 and is due to launch in Austria and Germany in the next six months. Sky also plans on launching Sky over-IP in Italy and Austria.

Partnerships with pay TV and telcos is the backbone of Netflix’s growth strategy. Netflix has entered a number of partnerships with pay TV operators globally over the years, with UK cable operator Virgin Media being the first. In fact, Netflix is already available on Sky’s competitors’ boxes in all its pay TV markets, including BT TV in the UK, TIM in Italy, Deutsche Telekom in Germany and more recently Vodafone's Giga TV platform. These partnerships work for both entities of a deal - Netflix benefits from access to paying subscriber bases, established billing systems and combined marketing efforts, while pay TV operators get exclusive content and the retention of eyeballs in return.

While Sky is the leading pay TV operator in the UK, Ireland, Germany and Italy, giving Netflix access to a large, and relatively high spending, customer base, IHS Markit believes that Sky has more to gain from this partnership than Netflix. The operator has witnessed higher churn in recent years, with IHS Markit estimating UK growth largely being driven by its low ARPU service NOW TV, rather than its flagship DTH service.

Partnership Strategy

The announcement to add Netflix on its boxes comes as a part of a string of partnerships made by Sky. The pay TV DTH operator has been diversifying its portfolio through platform launches and partnerships across the media and entertainment sector, in a strategic shift to recognise the increase in competition not just in video, but on other media platforms, and the resulting need to fight for consumers’ media viewing time. The operator announced the launch of music streaming service Spotify on its platform last week, and a partnership with premium audio manufacturer Devialet last year. It has also been ramping up short-form video content on its Sky Q platform, via the likes of YouTube, Vevo and Facebook Video.

Sky also announced improvements on its Sky Q recommendations engine this week, including greater personalisation, kids’ mode, the availability of the Q app on other devices and an increase in its UHD library size. While improvements in the user interface and recommendations go hand-in-hand with the integration of Netflix, the availability across other devices and improvements in UHD would help ensure Sky remains at the forefront amongst its customers and it continues to drive value and engagement.

Content Wars

Sky has built its large subscription base and monetizing model around a central pillar of premium sports, first window movies and big entertainment titles from the US’ HBO and Showtime. However, competition has been rife in recent years due to new market entrants at lower price points, including BT bidding for premium sports, and a rise in the number of video platforms - particularly those providing original content.

The Netflix deal comes so close after the securing of premiership rights that the timing is likely not a coincidence. While Sky had partnered with BT shortly before bidding opened, there was surely much unease stemming from the possibility of competition from the likes of Amazon. A further competitive move came from Sky's entry into original movies, with same day release on its TV platform as theatrical release, and cinema only internationally. Overall, Sky is to spend £7 billion on content in 2018. While its competitors provide access to movies content, Sky continues to hold first window rights across all major studios.

Interestingly, the two carriage deals in quick succession  – Sky and BT’s reciprocal one for premium sport and now Sky’s with Netflix – now means that key content is somewhat uniform across all major pay TV operators in the UK (Sky, Virgin, TalkTalk and BT). This means that product differentiation via pricing & packaging, bundling, and the quality of broadband and technology offerings is now more important than ever.

Sky is yet to announce new pricing and packaging structures, however has stated it will combine content from both services in one. At the end of 2017, Sky simplified its pay TV offering to a large basic package, named Sky Entertainment Pack, while providing HD, box-sets and kids content as monthly add-ons. The decision to keep kids and box-sets as separate and flexible packages may be an indicator of its future strategy with Netflix, and the likelihood of Sky combining such packages with Netflix.

An analysis of TV series content revealed that of the 2500+ unique shows across both services, there was very little overlap between Sky and Netflix, with only around 80 TV titles and 40 kids shows appearing as catch-up or VoD library content on both services at the same time. This is an impressively small number considering that the two platforms share almost 70 distributers or content producers, with a definite trend for content in a later ‘window’ as compared to Sky.

For Sky, this provides a crucial differentiation between its higher priced entertainment packages, and the lower-cost Netflix catalogue; especially important where the new interface places content side-by-side. While Netflix, as any a-la-carte channel does, will compete for airtime - Sky will be able to justify its premium range of fresh broadcast content, hit drama and first-run US series.

Both Sky and Netflix will also benefit in terms of UHD content distributed on the Sky platform. Netflix currently has almost double the title count of Sky at 330, compared to 150; with Netflix also able to provide coverage across slightly more genres. However, Sky is looking to double the number of UHD content over the course of 2018, as well adding HDR content on the platform. With much of Netflix viewing being browser, mobile tablet and older DMA based, it is debatable as to which platform will receive the most UHD views, especially regarding the confusing proposition presented by chipset and OS compatibility. The Sky Q platform lends itself well to a one-stop consumer hardware solution – allowing Netflix to make the most of their top-end content as well as placing the combined available UHD/HDR content, which again has very little overlap, firmly out of reach of rivals BT and Amazon.

Device Strategy

The decision to be a distributor of Netflix comes at the same time as making the Sky Q App available across connected devices, although the devices are yet to be announced. Since its launch in March 2016, the Sky Q app has been limited to the tablets and smartphones, potentially in a bid to protect revenues from its multiroom subscription service, which demands a premium of £14 a month and boasts a wireless mini set-top box.

While the Q app mirrors Sky Go for most Sky Q customers, for those subscribing to multiroom access the app allows streaming from the set-top box as well as the ability to download and watch recordings on the devices. The move to expand device reach ensures Sky content will be available on other devices side-by-side with Netflix; Sky will not make Netflix available via the Sky Q app or Sky Go on its own. However, this does pose the question of whether Sky will continue to charge a £14 premium for access to Sky Q in another room on its mini-box.

This device strategy coincides with Sky’s decision to launch the NOW TV Streaming Stick, which is expected to see a pan-European launch. Sky has made its intentions for European expansion apparent with the launch into new markets with OTT service Sky Sport in Switzerland and Sky Espana in Spain in 2017, raising the possibility that the streaming stick will be used to leverage video uptake in its expansion.

Given Netflix’s history of tactically not developing areas such as hardware in order to appear less threatening to partners, these gaps in Netflix’s arsenal are not simply areas of oversight, but are indicative of Netflix’s game-plan. By not developing a range of genres and monetization models Netflix does become more vulnerable as a standalone service, but at the same time becomes a safer, much less threatening choice of partner when compared with an ecosystem with multiple points of contact (e.g. VoD, sports, apps and music) such as Amazon.

Research by Market
Media & Advertising
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