BSkyB is probably the most misunderstood publicly quoted company in the UK. Most analysts view them as a media company; our theory is that BSkyB is a platform company and comparisons to Apple, Microsoft or Google are more appropriate than UK media players such as the BBC, ITV or even potential new entrants such as BT.
Figure 1: Sky Delivery Platform
Rule #1 – You have to keep loading extra features onto your platform…
Microsoft historically were tops at this – Windows for some grew fatter and fatter release by release, but in reality every release contained new features that appealed to some. BSkyB have done the same – they moved from analogue to digital, introduced interactive TV, took PVRs to the mass-market, and now are doing the same with HD-TV. As soon as that is complete ,they will move onto the next thing – 3D TV or even true on-demand VOD.
BSkyB seem to be one step ahead of the competition all the time. The only exception to this is Virgin Media networked VOD service, which is far superior to the BSkyB limited caching of programmes to the Sky+ device – currently a big hole in the portfolio. Notice that BSkyB is totally agnostic whether the features are driven by hardware, software or network – their platform contains all three elements.
Rule #2 – You have to design your platform to be the easiest to use…
Apple are the kings of usability – they control both client hardware, software and in the networked world they are taking more control of delivery though not by ownership of underlying assets – think of the parallel with BSkyB using 3rd parties for satellite and broadband delivery.
Very little is thought of BSkyB’s innovation in design – the Sky remote control in its day was a huge advance from TV manufacturers’ efforts. Similarly, they have extended this advantage in the PVR world – still keeping with their own designs. This is just the start of BSkyB’s advantage in usability.
It is not by accident that BSkyB wins awards for customer service – they realise that excellence in usability also needs to consider every touch point with customer – from sales to installation and care. BSkyB have made huge investments here and it pays off – within a couple of years of entering the voice and broadband market, they seem to be winning almost every award on offer.
Rule #3 – You need the lowest cost platform…
This is all about the economics of scale and running a tight ship especially with regard to corporate overheads. Nearly every platform businesses involve huge upfront risks & investment with many years of losses, with a steady ascent to profitability as the platform gains volume & pricing power.
Organisational inefficiency is a disease that afflicts almost all large companies. Very little data comparative data is available here, but I suspect that Sky is far more efficient if costs were normalized and compared to other payTV (eg Virgin Media), fixed (eg BT) or even Mobile (eg Vodafone) competitors for the share of the consumer wallet.
Rule #4 – You need the best content on your platform…
This is probably the most misunderstood element of BSkyB’s business – people still think BSkyB’s advantage is all about exclusive rights to Premier League Football & Movies. The truth for most content owners is that the BSkyB platform is the most profitable mass market route. And the attractiveness grows year-by-year as subscribers and revenues increase compared to their competitors.
People tend to dismiss how flexible the BSkyB platform is to content owners: you can sell your individual rights to your preferred bidder on a particular Sky Channel, for example HBO selling rights to the “The Wire” to a minority channel, FoxFX; you can build your own channel(s), e.g. MTV and Discovery Channels, or get a particular Sky-owned channel to do the production, e.g. sports events.
Strangely, even the major public service broadcasters (BBC, ITV, C4 & Five) are not only happy to have their content attached to the BSkyB platform, but are willing to pay for the pleasure.
Rule #5 – You need to extend your platform into adjacent areas…
Currently the focus on BSkyB is the move into the home broadband and voice market, which is a much bigger market than pure TV. To date, despite the rapid gain in scale profitability is still an aspiration. The defensive qualities of the play are always underestimated, as is how it constrains the freedom of major competitors, especially Virgin Media and BT, to differentiate.
However, it should never be forgotten that moving into adjacent areas is nothing new to BSkyB: the early digital days featured BSkyB investing/losing money in “t-commerce”; a move into gambling via SkyBet has been more successful, but the retail focus of the service was dwarfed by the emergence of a gambling platform play, BetFair; and Sky has investing in online properties, especially football, but it is too early to access the success.
The BSkyB defensive investments pale into insignificance compared to those made by Microsoft in protecting their franchise against the growing encroachment from Google. These defensive investments are also crucial in negotiations with regulators – for every complaint that BT states about the lack of profitability in the payTV market; BSkyB can counter with allegations about the impossibility of making profits in the home broadband & voice market.
Following the Rules
Of course following the rules is extremely difficult – continual innovation and improvement is hard. But the end result is a platform with plenty of levers for growth to play with. Different levers can be used at different times – all of which make the platform more attractive to particular segments of consumers and thereby generate the growth. The underlying dynamic is that BSkyB needs to show customer growth for success – or more importantly the right type of customer growth, ones who’ll happily pay for the extra features. Building the platform, increasing eyeballs, and increasing diversity are crucial. Traditional TV metrics such as share of viewing for an overall channel is completely irrelevant.
Figure 2: Sky Customer Growth and major platform upgrades
Impact on Regulation
UK Regulators, especially OFCOM, have struggled with the BSkyB business model and tend to try to examine market share in very narrow vertical segments – eg the current ongoing PayTV consultation. These ways of looking at BSkyB are doomed to fail. OFCOM is not alone and the EU battles with Microsoft over its platform business are already legendary and still ongoing. We don’t yet have the answer of how to regulate in a platform world, but we do know that a different approach is required.
Most importantly, BSkyB’s platform shows a multi-sided business model in action, bringing value to both upstream and downstream customers and earning decent returns for shareholders.
