As we approach the end of 2005, satellite pay-TV operators are faced with numerous challenges in their bid to improve subscriber numbers and average revenue per user (ARPU) figures, and 2006 is shaping up to be a pivotal year.

Many satellite pay-TV operators will begin to ramp up their high-definition (HD) offerings in the new year and also will face more of a competitive threat than ever before as telcos look to becoming major players in the Internet protocol television (IPTV) space. Also, the conversion from analog to digital signals will continue in all countries as Europe inches towards an all-digital landscape.

In our quarterly update, we look at the performance of satellite pay-TV operators across Europe and analyze their prospects over the next few months.

United Kingdom

No one can accuse BSkyB of standing still. The operator, which remains the benchmark for pay-TV operators across Europe, will enter into the triple-play arena with the October announcement that it will acquire broadband operator Easynet. The acquisition means that BSkyB is, in essence, tackling cable head on with by being able to offer voice, video and data services as a single entity.

The competitive environment in the United Kingdom is heating up in other ways as well. After many years of speculation, ntl and Telewest have merged to create a cable powerhouse, and Video Networks, another telco which offers a triple-play option, has announced plans to become a nationwide player.

Video Networks CEO Roger Lynch recently stated it was the operator’s aim to become the third national player behind BSkyB and ntl and Telewest. BSkyB has close to eight million subscribers where as the cable operators’ stand at about three million. Video Networks is still very small in comparison and only has 34,000 subscribers but at the moment it can only offer services in the London area. It has appointed CSFB as its financial advisor and hopes to secure the funding so it can become a national player. Video Networks has coverage for its Homechoice services for around 2.4 million homes but it aims to extend this to ten million homes. Ironically, there has been speculation in the local press linking BSkyB with a move for Video Networks, especially as BSkyB is serious about entering the triple play arena.

BT also is getting set to launch IPTV services, and BBC and ITV have hooked up to launch Freesat, a free satellite TV offering aimed at areas where it is difficult to receive digital terrestrial television.

BSkyB also took a content hit, losing its monopoly on the broadcasting of Premier League soccer. The European Commission and English Football Association Premier League reached an agreement where no one bidder can win all the rights to the broadcasts. The next bid will consist of six separate packages of live soccer rights, and no single entity will be allowed to hold all six packages. While BSkyB will lose its monopoly, the company could still retain about 80 percent of the live games, which was seen by many observers as the best possible outcome for BSkyB. “The lack of an exclusivity premium could help profitability, but this depends on the level of competition for the packages,” Mike Hilton, a media equity analyst at UBS Warburg said in a recent research note. “We think other potential bidders may now reconsider their plans. ntl has said it would not be interested in acquiring just one package, as it would not be economically viable.”

In terms of subscriber numbers, BSkyB did not post its best quarter, adding about 57,000 subscribers. The disappointing growth means BSkyB is in danger of not meeting its year- end target of 8 million subscribers. BSkyB has a strong record of meeting its subscriber targets, so it would be somewhat of a surprise if the company did not make this one.

BSkyB’s personal video recorder (PVR) offering, Sky+, has surpassed the 1 million mark in the quarter and has around 13 percent penetration of BSkyB’s customers. In other PVR and HD developments, Telewest announced plans to launch PVR and HD services in early 2006 nationwide. The cable operator will use a rental model for the PVR and charge customers between GBP10 and GBP15 ($17.2 and $25.8) a month to rent the HD-ready PVR, called TVDrive. It will have a capacity of 160 gigabytes. Telewest has also announced plans to have HD content as part of its on-demand service. It has already signed a deal with the BBC Worldwide for HD programming and hopes to sign a number of other deals in this area in the near future.

France

Canalsat, the leading direct-to-home (DTH) platform in France continues to maintain its lead over rival TPS. While Canalsat did not release subscriber figures for the quarter, the company passed the 3 million subscriber mark at the beginning of 2005, This kept it well ahead of TPS, which releases subscriber figures every six months and reported nearly 1.4 million subscribers at the end of June.

The difference should become more pronounced going forward. Canalsat continues to add subscribers, though 20 percent of the additions now come through its DSL services rather than via satellite, while TPS has seen its numbers drop. TPS also has lost the broadcast rights to the French Football League to Canal+, the majority owner of Canalsat, putting further downward pressure on TPS subscriber figures.

The two DTH providers also face growing threats in the market from other broadcasters. France has one of the most advanced IPTV markets in Europe, with operators such as France Telecom, Free and Neuf Cegetel all offering services. Digital terrestrial television also was launched in France in 2005 and is on course to reach 1 households by the end of this year. With digital television penetration still relatively low in France, a huge opportunity remains for satellite pay-TV operators to boost profits and subscribers.

It looks as though deals with telcos will be needed to boost the performance of the satellite operators in the metropolitan areas of France. Canal+ has deals in place with the telcos to offer their content services via an IPTV offering, but Canalsat CEO Guy Lafarge has not ruled out an acquisition similar to the BSkyB-Easynet deal (SN, Nov. 14).

Spain

Digital+ reported a strong performance throughout the last 12 months. The operator ended September with about 1.9 million subscribers, adding just a shade less than 250,000 subscribers during the year.

In terms of market developments, there has been some significant cable consolidation with the merger between Ono and Auna now complete. Ono, one of the main pay- TV rivals to Digital+, hopes that by merging with another cable player, Ono will be in a better position to attack the pay-TV market. With digital terrestrial television yet to really begin in Spain, the competition is more between satellite and cable than in most markets, although Telefonica with its Imagenio IPTV product offering is positioning itself to challenge both Ono and Digital+.

Germany

Premiere continues to impress in the German pay-TV market. At the end of September, the operator had more than 3.4 million subscribers. During the 12-month period, Premiere added close to 400,000 subscribers and expects net subscriber growth of between 150,000 and 190,000 in the quarter, bringing Premiere to around 3.6 million subscribers at the end of the year. Premiere also was scheduled to launch HD services Dec. 3 with three channels.

There has been some cable consolidation in Germany, with Ish, Iesy and Tele-Columbus combining into a single player. At the end of June , the three operators had about 8 million basic subscribers among them but only 140,000 digital TV subscribers.

Italy

Sky Italia continues to be the fastest growing satellite pay-TV operator in Europe. At the end of September, the operator had 3.4 million subscribers, adding 570,000 subscribers throughout the 12-month period.

However, Sky Italia will be facing more competition in the digital television market in Italy. Telecom Italia (TI) has announced plans for launching IPTV service in early December. The service, dubbed Alice Home TV, will initially be available in four cities — Rome, Milan, Bologna and Palermo — with 4 million households. TI is investing 350 million euros ($410.5 million) in its IPTV service and plans to take the service nationwide by the end of 2006 as well as offer a comprehensive video-on-demand. At this stage, TI does not have a deal with Sky Italia to distribute content as France Telecom does with TPS and Canalsat in France.

Piero Muscara, president of the Nexta consultancy in Italy does not believe that Alice Home TV initially will be much threat to Sky Italia. “A lot will depend on how much they understand the market and how much they are prepared to invest in content,” he said. “At that point, we might evaluate it as a real potential threat to the marketing position of Sky.”

Portugal

TV Cabo, the leading Portuguese pay-TV operator, posted a disappointing performance in terms of satellite subscribers. At the end of March, the operator crossed the 400,000 figure, but in the last six months, TV Cabo has lost subscribers. At the end of September, the company had 389,000 subscribers. The company also has struggled with its cable operations. At the end of September, it had 1.1 million cable television customers, which represents a 4 percent decrease from the end of September 2004.

Nordic Region

In the Nordic region, Viasat has been a much stronger performer than market rival Canal Digital during the last year. In the 12 months ended Sept. 30, Viasat added 111,000 new subscribers and now has close to 750,000 subscribers. Canal Digital added 76,000 subscribers in the same period but still has 130,000 more subscribers than Viasat.

–Mark Holmes