Why Sky has Placed A Strategic Bet On Disruptor Netflix

Today’s announcement that Netflix is going to be part of premium Sky offerings as from November, is a bigger deal for the UK pay-TV operator than it is for the US SVOD market leader. Netflix will form part of a new Sky subscription pack available on Sky Q called Ultimate On Demand. Sky is trialling this as the UK’s biggest on-demand TV proposition, combining its home box office service Sky Box Sets and a Netflix subscription into one offering. The Netflix subscription will be integrated into the Sky billing relationship, underlining the closeness of the partnership between the leading UK Satellite provider and the leading UK streaming video provider.

An immovable object meets an irresistible force

Sky has defied much of the cord-cutting headwinds that have caused so much disruption in the US market since the ESPN-incited cord-cutting hysteria on Wall Street in August 2015. Since 2015 Sky has added 996,000 “retail customers” – a growth rate of 8.3% over the three-year period. However, this is a conflation of all the retail subscription services that Sky offers (Pay TV, Now TV – its SVOD offering, mobile and broadband), and this gets to the heart of why Sky needs to make Netflix a key part of its value proposition.

Sky is slowly losing its core revenue base in the downward pressure on margins as it pushes Now TV and skinny bundle offerings to remain competitive with Netflix and Amazon’s low subscription price points. Amazon Prime Video’s recent move into Sky’s core coverage area of the English Premier Leaguehas escalated the disruptive threat of SVOD, as it increasingly moves away from being an additive consumer experience and pivots into becoming a substitutive one.

Sky faces an existential challenge with reduced subscriber margins and growing competition for its scripted drama and sports content-centric audience. Therefore, a partnership with Netflix – whose audience (source:MIDiA Research 2018 Video Model) has grown by 82% in UK in the previous three years, makes strategic sense. By partnering with Netflix, Sky reduces its scripted drama deficit with the SVOD insurgents, and allows more resources to be deployed towards retaining its flagship sports rights.

What’s in it for Netflix?

Netflix clearly has the upper hand in this deal as it has demonstrated its ability to enter the UK market and grow at a dramatic rate with no need to partner with incumbent domestic video services. However, Netflix has also had to make strategic choices about how it continues its growth story and where its true competitive edge lies, as the financial climate gradually moves beyond the era of low interest rates that has enabled the company to fund content acquisition. Back in May 2017, a MIDiA Research report identified that Netflix had effectively positioned itself as a next generation network in contrast to Amazon, which was developing the capabilities of a next generation operator. As a network, Netflix has a vested interest in partnering with distributors to help facilitate access to content for its audience, and its current direct-to-consumer subscription model is the only audience engagement channel for the company – albeit the most lucrative and disruptive thus far. To date, Netflix has over 60 global pay-TV operator partnerships, so today’s announcement is another iteration on a well-trodden path.

Expect today’s announcement to open up further avenues of collaboration for incumbents and insurgents to retain and grow market share in mature consumer markets.