Sky admits "we need a makeover" as share price tumbles

net1

James Murdoch, CEO of Sky, admitted the company needed a makeover as its current strategies were delivering "diminishing returns". Speaking as the group's results were posted, Murdoch said Sky had to become a more inclusive brand and begin a "conversation" with those yet to be turned on to pay-television. In Q4 Sky added just 81,000 subs, compared to 133,000 for the same period a year ago. Many analysts had been hoping for a return to 100,000+ growth after the disappointing 66,000 addition Q3 was followed by a heavy marketing campaign. Shares crashed over 15 per cent in early trading. Murdoch admitted Sky had misjudged how to win more subs and said he no longer wanted to go with the "Free" and "cheap" approach as this simply brought forward willing converts. This rethink also seems to have clouded the attitude to Freesat; originally spun as an answer to Freeview and a key marketing tool to spin people up to pay-TV, it was now more low key and will only be launched as a trial in areas where Freeview has poor reception (Sky says this means 52 per cent of the UK compared to Freeview's figure of 27 per cent). Murdoch said he believes "equilibrium" will be reached in 2010-2012 with 80 per cent of homes having pay-TV, this will follow a surge in FTA digital as switch-off is approached but with many then converting to pay. But he does accept that the proposition of top tier movies and sport, that has built the market so far, can't take it any further.

Part of the problem is an old Sky sore; the product is liked by those who get it, but the brand is often not liked by customers and reviled by non-customers. Murdoch's answer is to "reintroduce" the brand and there will be a 40 per cent + increase in above the line promotion in 2005. There will also be new "access points" with packages priced between £10 and £20 and a big increase in the budget of Sky One for "must see" programming. This spending would be partly funded by a 10 per cent saving in sport and movie costs.

Of course, this strategy is bound to lead to a decline in ARPU which Murdoch says will still climb to the magic £400 annually by the end of 2005 (currently £380) but will decline thereafter while the acquisition cost per subscriber is set to increase from £200 to £220. He said Sky would drop ARPU as a performance indicator and replace it with profitability per subscriber.

As well as marketing, packaging and pricing, Sky is looking to new technology to boost the business. Much focus is on Sky + which now has 397,000 users. In October a new box, the Sky+ 160, with a 160 Gb drive and USB ports for home networking will be introduced. Murdoch said he sees the PVR as delivering virtual VOD and being at the heart of in home connectivity. He denied Sky was actively looking into DSLTV and said, so far, the picture quality wasn't good enough.

To support the new products, marketing and ultimately 10 million subscribers, Murdoch also announced a £450 million of infrastructure spend, including revamps of the HQ and the call centres.