[Satellite News 05-04-10] While Sky Deutschland has struggled to connect with Germany’s frugal consumer base since it acquired and rebranded Premiere in 2009, Morgan Stanley Media Equity Analyst Patrick Wellington hailed the pay-TV operator’s new CEO Brian Sullivan and his efforts to build a profitable long-term business model in one of Europe’s toughest TV markets.
    Sullivan “has moved quickly to address service issues, to improve the product offering with HD and a new satellite [personal video recorder], and to build new alliances with some of the cable operators,” Wellington said in a report issued Oct. 3.
    With 340 million euros ($468.8 million) in financial backing from parent company and 49.9 percent shareholder News Corp., the operator’s precarious position has improved, but the competitive history of Germany’s premium pay-TV industry, combined with the fact that Sky Deutschland arrived at a time of relative strain for the German consumer, presents an uphill battle for the operator.
     For a majority of German consumers, pay-TV is defined by Bundesliga soccer programming, and there has been healthy competition from cable and IPTV providers in developing triple-play packages not offered by Sky, which caused the operator to suffer execution issues in the second half of 2009. As a result, Sky’s 2009 revenues and profits fell to 902.1 million euros ($1.22 billion) in 2009 from 941.1 million euros ($1.47 billion) in 2008, with a net loss of 676.5 million euros ($913.2 million).
    Former CEO Mark Williams was replaced by Sullivan in December. “Sullivan’s challenge remains the same as that of his predecessors. It is to create the marketing and product proposition that will persuade the hitherto reluctant German consumer to buy Sky’s pay-TV services. The planned fund raising gives the company more breathing space to carry out its fresh initiatives without imminent fear of breaching banking covenants,” said Wellington.
    Sullivan wasted no time in trying to turn News Corp.’s German investment into profit. In May, Sky Deutschland signed technology development deals with Pace and NDS in efforts to add HD digital video recorder (DVR) services to Sky Deutschland’s platform and manage content. The deal gave the operator access to NDS’ XTV secure integrated technology to power the Sky Plus HD DVR service. Pace also developed an HD unit for Sky Deutschland to support both MPEG-2 and MPEG-4 decoding and provide Sky with full flexibility over the management of its HD and SD service.
    In June, Sky Deutschland expanded its cooperation with German cable operator Kabel BW to combine CleverKabel’s Internet and telephone offers with Sky’s subscription packages for live broadcasts of German Bundesliga soccer.
      UBS Analyst Polo Tang called the move a positive development. “KBW, which has 2.3 million basic cable subscribers, will offer a bundled triple-play package, combining KBW’s Internet and telephony offer with Sky’s premium content. The move is a strategic positive removing longer-term execution risk, as it incentivizes KBW to help Sky gain more subscribers. We expect further cable partnership deals with Unitymedia and Kabel Deutschland which would further reduce execution risk surrounding story longer term.”
    Sullivan’s work was enough to gain the confidence of its parent company, and News Corp. issued Sky its $446 million financing boost in August. Wellington said much of the financing would be used to give the company greater financial breathing space and to drive penetration of its PVR offering. Sky’s PVR has a retail price of 400 million euros ($551.49), made up of an activation fee of 240 euros ($330.89) and an installation fee of 100 euros ($137.87). All  new boxes are HD-capable and are provided on a rental model. Sullivan sees the price coming down progressively to 250 euros ($344.68), “but Sky still has the problem that there are hundreds of different styles of box and EPG in the market,” he said.
    The company also could use the financing to support its planned 3-D TV launch this month. The Sky 3-D event channel also will be available through its cable partnership with Kabel BW, which will carry both the Sky HD-3-D service as well as the recently launched Sky Sport HD 2 channel.
    Sky’s next challenge is to attract new customers, but Wellington said the operator has a long way to go to. About “80 percent of prospects don’t know the Sky proposition beyond Bundesliga. Only 8 percent of Sky customers bought through recommendation by an existing user versus 40 percent at other pay operators. There is still an embarrassment amongst existing customers to being Sky subscribers.”