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Illustration: Robin Charles

Spirit in the Sky

August 25, 2014 | features

Drive south down Auckland’s southern motorway, away from all the architecturally designed corporate HQs and swish media hangouts, and nestled inbetween the industrial estates and nondescript suburban streets of Mt. Wellington sits one of New Zealand’s biggest media success stories, Sky TV. Established in 1987 and originally offering just a few UHF channels, it is now in around 870,000 of New Zealand’s approximately 1.6 million households, it has grown from around 100 staff to more than 1,100, it has a huge range of channels that can be watched on a range of different devices, it shoots 350 live sports events every year, it has seen a range of competitors come and go, and its net profit, cash flow and subscriber growth all reached record levels last year. 

But Sky is not typically seen in such a positive light by a good chunk of the country—and a fair whack of the media. When companies reach a certain size in New Zealand, the locals tend to become sceptical and start wondering if they’ve become too big. So for many years the pervading view of Sky seems to have been of a largely foreign-owned corporate that sucked money out of the country, lobbied successfully to avoid regulation, was slow to innovate, simply rebroadcasted overseas content, stifled competition by sewing up exclusive content and telco deals and rorted New Zealanders with expensive plans as a result. 

And in the world of brands, perception is reality. As the UK advertising sage Jeremy Bullmore said recently: “The brand’s reputation—prompted by an infinite number of brand experiences, brand myths, brand messages—is first created and then resides inside an infinite number of different human heads. Like human faces, no two versions of this reputation will be identical … The art of great brand management, of course, is to mastermind the exposure of hints, clues, cues and other stimuli that an infinite number of people spontaneously and individually arrive at what has been called a consensus of subjectivity.”

Recently, Sky has been putting a lot more effort into making that consensus a more positive one, with last year’s rebrand revealing the new ‘Come with Us’ strapline, a more modern look and a much more colloquial and welcoming tone of voice. That more welcoming tone can be seen dotted around the huge HQ (there’s a ‘you had me at hello’ sign at reception and a ‘hasta la vista, baby’ sign on the way out) and it also seems to have affected its approach to the media, so, unusually, we were given the rare opportunity to speak with five Sky executives—chief executive John Fellet, director of programming - movies, factual and general entertainment Travis Dunbar, director of marketing Mike Watson, director of corporate comms Kirsty Way and head of brand Maurine Talpin.  

Ditching the rep

So, for a hugely successful company that creates joy and sells entertainment, why all the hate? Watson, who started out as a door-to-door salesman with the company around 20 years ago before moving into his marketing role in 2000, admits this perception is partly its own doing, as it has largely kept to itself over the years and, historically, focused more on its customers (and on getting more of them) than on its brand perception. But, as Way points out, the image of a heartless corporate entity is completely at odds with its egalitarian internal culture, where there are a host of 20 year-plus veterans who have worked their way up (especially in the executive ranks), where the cleaners feel comfortable sitting down for a chat with Fellet in his office and where there are no allotted car parks for anyone. And Watson says now’s the opportunity to close the gap between public perception and company reality, just as Air New Zealand has done.  

“It’s reinvented itself from a quasi-government entity into a great, innovative Kiwi success story. It’s our poster boy of what can be done … A lot of people won’t care. And nor should they. They just want to watch TV. But nonetheless, in the back of consumers’ minds, people like dealing with companies they like. And there is no reason why our reputation shouldn’t be ‘great Kiwi success story, I like dealing with them and I like their products’.” 

“We’ve always had competition, but we’ve always won the battles. It’s a long-haul business. And the first ten years weren’t easy … The easiest part is buying the content. The tricky part is figuring out how to make enough money to pay for it.”  John Fellet

Over the years, he says he’s heard a lot of consumers say they “wished Sky was more like its advertising: upbeat, entertaining and fun”. And he puts the flawed view of the company down to a combination of being the only pay TV provider in the country for so long, negative stories perpetuated by competing media (“a bit of the ‘evil Murdoch empire’ kind of stuff”), a general aversion to the notion of paying for TV—an idea that he says has only existed for around 20 years—and Sky’s aggressive hunt for subscriber growth over the years. 

“I guess we felt we were getting a bit of a raw deal and no matter what we said the story tended to be negative, not so much from the other TV companies, but from print media. There’s a sense we do have a great story to tell and the stars have aligned to tell it … But the change has to be internal, otherwise it is empty. There’s always been a belief in certain areas of the business that we should be investing more in our brand story and I think the Sky board and the chief executive are fully supportive of the timing of this. The business has matured, and when you’re so focused on growing the customer base, perhaps the niceties of brand management are not as high up the list of priorities as they should be.”

Fellet, an American pay TV veteran who joined Sky as chief operating officer in 1991, was appointed chief executive in 2001 and has proven himself to be a very savvy strategist over the years, also feels there’s an element of jealousy involved. 

“I had never heard the term Tall Poppy Syndrome until I got here. It’s partially about that. Sometimes it’s coming from competitors that may not be as successful as we are so it’s easy to take shots. But we’ve never let it bother us. We just try to have one more subscriber than the day before.” 

And, with total revenue of $885 million (up five percent) and net profit of $137.2 million (up ten percent) in 2013 (and a 21 percent increase in profit to $166 million just announced for the 12 months to June 2014) it seems to have achieved that goal.

Foreign affairs

Timing is everything in business, and Watson thinks launching the new brand and attempting to beat its local drum a bit louder would have been much, much tougher if News Corp hadn’t sold its 44 percent stake in the company last year. And it probably “would’ve been portrayed as something other than what it is”, too. Also working in its favour, he says, is a generational change that means the resentment to the notion of pay TV—and so Sky—is declining, partially because Kiwis have grown accustomed to the idea over time, and partially because the company has worked so hard to create more value for subscribers through a better selection of content, new channel brands and improved technology—especially its personal video recorder MySky and, more recently, the SkyGo mobile apps and website. This has made the service “a lot stickier” and its churn figures are reflective of that (it came in at 14.4 percent in 2013, down from a high of about 35 percent, says Watson). 

“Thousands of little things click in people’s heads to make it the time to join. It might be Game of Thrones, or Homeland. But once they come across the attitude changes quite dramatically. They’ve embraced the notion of pay TV. And they’re particularly evangelical about MySky. Disconnect rates for MySky compared to the rest of the Sky universe are significantly lower, because it allows customers to get those four or five fantastic TV moments every week.” Mike Watson. 

“It’s about 1.1 percent per month. But I’m in marketing, so we say it’s 99 percent loyalty,” he jokes. And as it’s been able to get on top of churn rates, he says it’s become much less frenetic, shouty and aggressive with its sales campaigns. 

“Retaining customers has a real impact on the bottom line. So adding more value for them is the way to go. The halo effect of that is the advocacy scores have gone up dramatically. Word of mouth is the best marketing of all. And when you’re over 50 percent penetration, if you can get the barbecue conversation to be ‘Sky is fantastic, I like the company and I like the products’, that’s got to have an effect on the people weighing up whether to get a subscription or not … We’re still going to be very assertive in terms of getting new customers but we’ll maybe move retail and brand closer together and not be seen as so desperate.”

Growing pains

So, as new competitors arise and Kiwis grow increasingly accustomed to streaming, has Sky peaked? 

Watson says there are two schools of thought when it comes to pay TV. 1) It gets harder to find growth the higher your penetration. Or 2) the more people have it, the more they start talking about it and it becomes more accepted. He’s hoping it’s the latter, of course, and, with the economy on the improve, he’s confident it can keep growing. 

“It has its natural reach, but I don’t think it’s there yet,” says Watson. 

He says it’s important to clarify that Sky’s growth rate has slowed, but it’s still going up, largely because of the growth of MySky (up 19 percent to 456,000 subscribers last year) and its various iterations. 

“There’s as much interest in video consumption as there has ever been … We’ve come off the back of a recession, so in every market people question the value they get from their pay TV providers. But very few people reject the notion of Sky out of hand. There is a real interest in the category.” 

And while he admits there has been an element of ‘damn it, they got me’ in the past, that’s declining. 

“Thousands of little things click in people’s heads to make it the time to join. It might be Game of Thrones, or Homeland. But once they come across the attitude changes quite dramatically. They’ve embraced the notion of pay TV. And they’re particularly evangelical about MySky. Disconnect rates for MySky compared to the rest of the Sky universe are significantly lower, because it allows customers to get those four or five fantastic TV moments every week.” 

That’s what Sky’s own research suggests customers require to justify the price of a subscription. And Dunbar, who spent some time in advertising before moving to Sky to run the movie channel around 20 years ago, says it’s now providing those moments in a number of different ways, whether it’s the premium content on SoHo, the nostalgia of Jones, pop-up channels, new mobile apps or, later this year, an upgrade to the MySky box that will allow customers to watch ondemand content. 

Way says growth is certainly harder to come by now, but the company is currently in a period of evolution “to make that next growth spurt”. And Fellet doesn’t believe it’s anywhere near peaking, pointing out that pay TV penetration in the US sits at around 90 percent. 

“I think we have a long way to go,” he says. “The internet brings forward a lot of challenges but also a lot of opportunities. We would never even have considered doing SkyGo three or four years ago, but we’re slowly moving to a much more ondemand world.”

Those who do stream a lot of content often forget they are still a tiny minority. Even in San Jose and Silicon Valley, the very heart of the internet, Fellet says 94 percent of all TV watched is on linear channels and in the UK, Dunbar says the iPlayer accounts for less than half of one percent of total TV viewing.

“Streaming has a huge high profile and to expand our subscriber base, especially with the younger ones, we’ve got to be there,” says Fellet. “But subscribers are confused with how many options there are. We want to be the trusted entertainment brand and we want them to lean towards Sky.” 

But just because it’s an entertainment brand, doesn’t mean all its advertising needs to be funny, as it generally has been in the past (see sidebar 'A happy marriage'). Fellet says Sky has “never taken itself too seriously or been pretentious about what it is”. But it’s a more mature business now, as reflected by its more serious and cinematic 'Come with Us' brand ad. 

“We still want to have a lot of fun with our advertising when it’s appropriate,” says Watson. “But humour is always a little polarising. So I think we’ve just got to be a conscious that now we’ve got to 50 percent, using humour as a proxy for entertainment is a little bit limiting.” 

A happy marriage

Sky has a long history of quality advertising. And, in what would have to be one of the country’s longest running agency-client relationships, it has just ticked over 20 years with DDB Group.    

“We really trust these guys to create great work,” says marketing director Mike Watson. “And they’ve got a consistent record of doing so. In the early days, and to some degree still, we had a small marketing department at Sky and we considered DDB an extension of that. We were really, really tight, and they’re our one stop shop [it also works with Interbrand and OMD], so we developed a really close relationship because we had to. There’s also a no bullshit approach. We tell it like it is and there’s surprisingly little ego. It has been helpful that there’s so few layers in New Zealand marketing, and in Sky in particular, so we can kill bad ideas quickly. But I think we do make a lot of quick calls on gut feel and we’re prepared to take risks. There’s a few clichés in there, but they’re true.” 

DDB NZ and Australia’s executive chairman Marty O’Halloran puts it down to the fact that it understands Sky’s business so well and has witnessed its evolution up close (DDB started when Sky had 20,000 subscribers).   

“One of the early marketing directors said ‘produce the business results for us from an acquisition and retention point of view and we’re prepared to be quite brave and creative’ … Sky has always had a great understanding of the power of creativity to connect with customers.” 

O’Halloran says pay TV was a difficult concept for many Kiwis to grasp in the early days so DDB had to use its creativity to get Kiwis excited about the premium, exclusive programming that “Sky did such a great job of securing” (DDB’s first campaign featured the line ‘Don’t Miss Out. Get The Picture’). And while there has been plenty of memorable work over the years, both point to the Mark and Marty campaign as the highlight. 

For more, click here.

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Lock it in

One of Dunbar’s main roles is to “help identify programming niches and potential core audiences”, and he says creating value rather than just delivering ratings has been a big part of the company’s ethos over the past few years (Sky doesn’t release its ratings publicly, but advertising makes up around ten percent of its total revenue, a ratio that’s remained about the same since Sky started, says Fellet). 

“It’s about creating products and services that are genuinely compelling; evangelical,” Dunbar says. “If you give a burst of value to your consumer it often takes on a life on its own. You can throw as much marketing money at it as you want but you can’t beat self-generating word of mouth and publicity.”

And while pop-up channels may seem like a simplistic innovation, he says they have received huge levels of feedback and engagement from fans of Formula 1, tennis or the Twilight movies.

“We’ve always had family movie output. But instead of peppering it through the school holidays, we super-aggregate it and suddenly it has far greater value … And we’re only limited [to new pop-up channels] by our imagination.” 

"We create a service of real value [with SoHo]. There were a bunch of untethered rights or other shows that had been abandoned [by free-to-air channels]. So we super aggregated them into a channel with a precise audience. And it’s worked. Then it’s become vaguely politicised, which is amusing, because where were they two and a half years ago when these shows were either buried or discarded … That’s the competition, they’re always throwing bombs over our fence. But it’s a bit ripe to say ‘oooh, isn’t it terrible, you can only get it on Sky’, when some of the shows were abandoned early.” Travis Dunbar. 

One of Sky’s major programming successes in recent years has been SoHo, which was launched over two years ago and costs an extra $9.99 a month on top of a basic subscription (Sky wouldn’t release subscription numbers). Some have accused Sky of simply rebroadcasting HBO content and then charging handsomely for it, but the team says it requires talented local programmers to create the channel brand, buy the rights for the shows from the likes of HBO, Showtime, FX and other independent sources and then schedule them. And Dunbar says Sky also spends a lot of money screening those shows in New Zealand as quickly as possible following their overseas broadcasts in an effort to limit piracy. 

A new series on the Consumer website about New Zealand’s lack of access to content started off with a story about how it would cost $245.70 to watch season four of Game of Thrones in HD. “If that’s the only show you’re interested in, then that’s $25 per episode. Notably, last season Australians could buy single episodes on iTunes and Quickflix for AU$3.” Some argue Sky still operates under an old, pre-internet distribution model of exclusive rights that are sold to different markets. But when asked whether it would be willing to potentially cannibalise its existing subscription revenue by offering a cheaper online-only service, Way said last year: “No, not at this time. [SkyGo] is an added value product for our customers. But we’re always evolving”. Consumers certainly pay for the privilege of dining at what Watson analogises as “Sky’s buffet”, but he says it comes back to creating those four of five great TV moments every week. 

“We create a service of real value [with SoHo],” says Dunbar. “There were a bunch of untethered rights or other shows that had been abandoned [by free-to-air channels]. So we super aggregated them into a channel with a precise audience. And it’s worked. Then it’s become vaguely politicised, which is amusing, because where were they two and a half years ago when these shows were either buried or discarded … That’s the competition, they’re always throwing bombs over our fence. But it’s a bit ripe to say ‘oooh, isn’t it terrible, you can only get it on Sky’, when some of the shows were abandoned early [on free-to-air].” 

The naysayers may roll their eyes, but Dunbar actually sees Sky as something of a saviour, rather than an anti-competitive harbinger of doom, because when a show on free-to-air doesn’t attract the eyeballs required to attract the advertising, those shows have a habit of disappearing. But Sky, “for want of a better phrase, has rescued a number of shows” like Breaking Bad, Homeland, Rescue Me and Damages

Talpin also looks on the bright side of Sky and says pay TV is fuelling what many are calling the golden age of TV. “You look at the cost of making a show like Game of Thrones [an estimated US$6 million per episode]. It’s costing three or four times more per episode [than a traditional network or cable show]. And there are so many other incredible shows, with the best directors and quality that has until recently been limited to the cinema. You can’t make content like that unless people pay for it.” 

Watch and learn 

Brands are great time savers; shortcuts in consumers’ minds. And Dunbar says the role of its own channel brands will be increasingly important in the future. He foresees much more mobility, flexibility (many subscribers already organise their viewing through MySky) and add-ons (“I’m one of the guys who watches all the extras on the Tarantino blu-ray set or a behind-the-scenes on how they shot True Detective,” he says). But curation is still crucial. 

“When you say ‘it’s a SoHo show’, we want it to resonate … Jones is a great example of the curation role. If you look at each of the shows individually you’d say it’s a stretch to get a lot of viewership of that. But Jones is a shortcut in my mind when I’m in the mood for retro. And the same goes for the other channels. So I think it will be a mix of content you will pull and content that will be pushed to you.” 

Sky has also recognised the need to create a Netflix-type product that would be separate from Sky and serve the early adopter market.  

Dunbar gets frustrated with the way the debate has been framed, primarily because Netflix is cheap and “is effectively a long-tail library service of shows and movies”, rather than first-run big budget shows, as is often shown in the media. 

“That’s got a value for [Netflix]. So that’s an area we’re looking at in terms of our development and we’re obviously not alone,” he says. “But ultimately this mythical pot of uber-premium content that people abstractly refer to is a falsehood.” 

Netflix has started producing its own premium content, however, with House of Cards and Orange is the New Black both seen as critical and commercial successes (and both screening here late at night on free-to-air channels). So would Sky follow its lead? 

“We would love to. But co-producing makes more sense,” says Fellet. “A good example was Top of the Lake [between BBC2, UKTV and Sundance]. That’s somewhere I could see us. But what typically limits local content is the size of the market.”

Competitive tension

For some, one of the major reasons Sky has been so successful is because the game has been rigged in its favour. Australia’s Foxtel sits at about 30 percent penetration, but anti-siphoning rules in that country mean a certain amount of sport needs to be shown on free-to-air. In the UK, pay TV penetration was 54 percent in 2012, with BskyB owning 37 percent of that. But there are very few pay TV players around the world with as much dominance in the market as Sky in New Zealand. 

“We’ve always had competition, but we’ve always won the battles,” says Fellet. “It’s a long-haul business. And the first ten years weren’t easy … The easiest part is buying the content. The tricky part is figuring out how to make enough money to pay for it.” 

While free-to-air channels have a very different, ad-funded commercial model, Watson says Sky still competes with them for rights (in the case of Igloo, it works with TVNZ). TiVo also entered the market but quickly failed because, as Fellet says, “it got a silver medal in three different categories”. The Commerce Commission, which released its report into Sky last year, seems to agree that it faces competition, saying “there appeared to be sufficient content of all types available outside of Sky’s exclusive contracts to put together an appealing pay TV package. These contracts were similar in nature to other broadcaster contracts with content providers”. It did, however give Sky an official warning for its historical exclusive agreements with telcos that had the “purpose, effect, or likely effect of substantially lessening competition”. 

“However, due to market developments, the key commitments Sky has with [retail service providers] are unlikely to continue to have the same effect. For example the new sports pay TV product from Coliseum and the recent exemption granted by Sky to Telecom to market this product [Vodafone renewed its deal with Sky, but Telecom pulled out to focus on its own IPTV product, which was originally launched as ShowMeTV but changed its name to Lightbox and is set to launch officially this week]”.

Fellet says there has never been more competition, whether from MyFreeview, free-to-air channels bidding for shows that would traditionally screen on pay-TV, new free-to-air channels like Sommet Sports and Choice TV, content offers from the big global tech companies or local over-the-top options like QuickFlix, EzyFlix or Spark. And that, he says, means there is more pressure on Sky to speed up its innovation to stay relevant.

“There are only two articles that ever appear in the newspaper: Sky is a monopoly and should be heavily regulated and Sky is yesterday’s technology and won’t be around a year from now,” says Fellet. “I think both are overstated and the truth lies somewhere in the middle.” 

While Watson believes competition is great for expanding the market, he says it’s not always of benefit to consumers, pointing to a situation in Italy where one pay TV provider had rights for AC Milan’s home games, and another had the rights for its away games, which required fans to pay more to sign up to two companies if they wanted to watch all of them. Given the various technical issues originally faced by Premier League Pass, which won the rights to the English premier League off Sky last year, some would argue that shift has added cost and frustration to the lives of football fans, too. 

It’s clear that Fellet and the team don’t believe the company gets its due when it comes to innovation. As he said in last year’s chief executive’s letter, “Sky is disruptive technology” and, over the years, he points to a number of successful innovations, many of which required massive capital investment. 

“We did a UHF box in 1990. We launched our satellite box in 1997. Four or five years later, we launched MySky. Two or three years after that was MySky HD. You also have to upgrade the TV stations and develop new boxes and new technology like SkyGo. BskyB has 20 million subscribers to spread that out. We only have 870,000.”  

A sporting chance

Coverage of the ‘Big Four’—rugby, cricket, league and netball—is a major lure for subscribers. But, after online broadcaster Coliseum cut Sky’s lunch by winning the EPL rights and put in bids on the 2015 Rugby World Cup and Formula 1, is there a danger it could happen again? 

The All Blacks have more than 2.5 million fans on Facebook and New Zealand Rugby conducted an experiment last year when it broadcast two tests live on YouTube in countries where the rights hadn’t been allocated exclusively to a broadcaster. It was pleasantly surprised with the results (it’s thought both games attracted views in the six figures), but some felt it was a shot across the bow of Sky, which provided the feed.  

“[The All Blacks] still need to be on the platform that has the greatest availability,” says Fellet. “Around the world, not many are bypassing pay TV … Manchester United has its own channel, but the live game is on BskyB. Its channel offers little backgrounds, so the club does it. But they also run on BskyB.”

Sky also offers high production values, commentators and a heap of institutional knowledge. And Way says scale also provides a benefit: “We’ve got a big base that we promote to so people watch and tune in. They get paid because we’ve got a big audience.” 

Sky is currently negotiating its contract with governing body SANZAR (it expires in 2015). And a source close to New Zealand Rugby says selling rights to the highest bidder is still the easiest and preferred option. But after the YouTube trial, GM of public affairs Nick Brown said it was “looking at some more digital opportunities to build on this in the future” and it’s thought it has been looking into the possibility of further expanding the team’s global reach by broadcasting through allblacks.com. 

Sky recently signed a six-year extension to its broadcast deal with NZ Cricket

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Supply and ondemand 

So, in an age where online and ondemand viewing is growing rapidly (albeit from a low base), what will Sky—and the wider TV industry—look like in the future? Will viewers be driving the bus? And, with the MySky box upgrade later this year, is Sky’s content likely to be delivered over the internet?  

“It’s like the first wave of video stores in New Zealand, when you spent an hour and half foraging around and you still weren’t sure which movie to rent,” says Dunbar. “In this golden age of TV, when there’s an unprecedented amount of content being made and more opportunities to watch it, curation becomes increasingly important. I was in advertising prior to getting into TV. And one thing I learned is when you submerge people with choice they find it hard to make one.” 

Fellet says the company is open to change and it’s not locked into any particular platform.

“My guess it will still be a similar mixture and part of the toughest issue around that is content discovery. Right now the best content discovery method is ‘I kind of like the shows on Discovery, so I’ll watch Discovery’. Eventually we’ll crack that. But no-one around the world has cracked it yet.” 

Watson agrees, and says one of the reasons TV has been so successful over the last 50 years is that “I turn it on and it always works. It’s easy.” It’s still early days in streaming’s evolution, and while he thinks there will be a few more over-the-top players arriving on the scene, they need to heed his advice: “Just make it friggin’ easy for me.” 

Dunbar says the algorithms are getting more advanced and Netflix is a great example of that. As such, he says a big focus of Sky in the next few years will be to get more information about its customers and move from a household view to an individual view so it is able to recommend better products, help customers and add value.  

So, does that mean its working on a programme to insert chips into subscribers’ brains?  

“Not yet, but we’re certainly following it with interest,” Fellet jokes.  

This story was originally published in the May/June edition of NZ Marketing

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