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REPORT PREPARED FOR:
SKY TELEVISION NETWORK
BUSINESS MODEL
BY APURV TIJARE
POSTGRADUATE DIPLOMA IN BUSINESS
APMG 8119: DIGITAL ENTERPRISE
ASSOCIATE PROFESSOR DR. ROBERT DAVIS
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AUTHOR CONTACTS
NAME:
Mobile: 022 419 2286 Email: [email protected] Student ID: 1422147
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TABLE OF CONTENTS
REPORT PREPARED FOR: ...... 1
AUTHOR CONTACTS ...... 2
TABLE OF CONTENTS ...... 3
EXECUTIVE SUMMARY ...... 4
INTRODUCTION ...... 5
BUSINESS BACKGROUNG ...... 5
BUSINESS MODEL ...... 8
CUSTOMER SEGMENTS ...... 9
CHANNELS ...... 9
CUSTOMER RELATIONSHIP ...... 9
KEY ACTIVITIES ...... 10
KEY RESOURCES ...... 10
KEY PARTNERS ...... 10
REVENUE ANALYSIS CHART ...... 11
COST ANALYSIS CHART ...... 13
VALUE CREATION ANALYSIS ...... 18
SUMMARY ...... 20
REFERENCES ...... 21
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EXECUTIVE SUMMARY
Sky TV exists in both online and offline world, I am going to study their business model and analyse how it makes revenue, its cost analysis, how the company makes value and delivers it to different customer segments .
Sky TV is mostly into broadcasting of television channels, as a result its product is an intangible object. Even though Sky has its major activities in the offline world it has recently entered into the online world with its service iSKY. It has collaborated with some of the major telecommunication services that are ISP and will provide a way for sky to deliver its TV content via internet to the customers on their phone online. This service is available to the customers using 3g service of the partnered service providers.
Sky TV has come up as one of the best television service provider in Auckland; it has proved this by delivery of value and great quality of service. It has contributed in the development of media industry in Auckland and entire New Zealand. Considering the infrastructure it has the ability to reach most of the homes in New Zealand with the latest technology.
We will have focus on the offline business model because iSKY is just a subsidiary product of the main Sky TV service; it just has a different channel of delivery.
I will cover the business model for sky TV, it will include how the sky earners its revenue, what is the cost structure, what are the key resources and activities that are carried out to deliver value to the customers and the channel through which they are delivered. We will be studying the above points in depth.
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INTRODUCTION
This study on sky network television in the field of broadcasting in done to demonstrate it business model. It focuses on the nine elements of the business model namely customer segment, channel, value, customer relationship, key resources, key activates, key partners and revenue creation.
This is basically based on the business model canvas which is a systematic arrangement of all the nine elements and demonstrates how the each element works to make the business work. It considers the companies cost and revenue sources in the marketplace and how illustrates how Value is created.
The structure of the report starts from the details of the business and the television industry in New Zealand, later we look at the overview of the Business model follows by an in-depth study of the nine elements. At the end we will summarise the report.
BUSINESS BACKGROUNG
Sky is one of the primary televisions broadcasting service in New Zealand. In February 2006 sky entered the free to air television entertainment sector by purchasing Prime Television New Zealand limited for nz$30 million. It provides multichannel, pay-television and free to air television services in New Zealand. Its digital satellite platform has approximately 100 channels including base package having 58 channels of news, sports, family program, general entertainment, free to air channels and radio stations, the premium channels include 6 movie and 5 sports, the rugby channel, games channels mind games, world TV, country 99tv, arts channels and a weather channel. It also provides video on demand service to MY SKY and MYSKY HDI customers, it ranges from movies, art, entertainment, sports, documentaries etc., and it is on a pay per view basis.
The company also does business by sales of advertising time of 26 of its channels. The company is involved in other sectors like online DVD rental and
______Page | 6 publication of 2 monthly subscription magazines SKYWATCH and SKYSPORTS magazine. SKYWATCH comprises program guide and SKYSPORTS has sports content. Further the company provides a MYSKY a digital set top box with hard disk and recorder that gives the user the ability to record live TV.
Distribution of local and international programme content to its subscriber base via digital satellite network is the principle business. In June 2013 sky was the largest pay television platform in New Zealand with over 855.9 thousand customers. It is listed on the NZX and ASX and had a market capitalisation of nz$2 billion based on the share price of nz$5.30 on 30th June 2012. Sky primary revenue is derived from the monthly subscriptions approx. 88%, installation fees and other revenue like advertising and selling program rights.
INDUSTRY OVERVIEW
New Zealand reached the television age quite late compared to others, Britain with its BBC started in 1936 and soon was followed by USA. Australia had is first broadcast in 1956 (ThinkTV, 2013)
The New Zealand government television committee gave green signal in 1959 to this new medium after studying it for 10 years. On 1st June 1960 7.30pm the first official transmission began. The first transmission was of just 3 hours and was received only in Auckland. A year later Christchurch and wellington started getting transmission and the remaining places in New Zealand followed in successive years. (ThinkTV, 2013)
TVNZ came into existence in 1980 with the merger of tv1 and tv2. The first privately owned channel came in 1989 and in 1990 Sky network television became the first pay network. This was the era of furious competition and rise of local content in televisions. Further the broadcasting act permitted over sea investor to have ownerships because of which two US firms Time Warner and TCI took control of sky TV. (Wikipedia, 2012)
The 21st century saw a radical change in the broadcasting industry; sky kept adding several new channels and was reaching its subscribers via satellite. The
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In June 2013 sky had captured approximately 49.4% of the pay television residential penetration. It had a market share of approximately 29.8%. Under the agreement sky digital service has the entire major free to air channels available on its satellite digital service. Sky also does reselling and retransmission for telecom and Vodafone to it 3g customers (ThinkTV, 2013).
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BUSINESS MODEL
A business model illustrates how a business generates, delivers and creates value; it is a part of business strategy. A business model contains a large number of elements that represent the core aspects of the business. Osterwalder & Pigneur, (2013) defines business models as a blueprint that describes how organisation does business. Slywotzky, (1996 ) describes business model as the way company selects customer, defines offerings, and define tasks which it will do and those it will outsource, manage resources, create utility for customers, and capture profits and market. The business model that we have used is based on the (Osterwalder & Pigneur, 2013) business modal canvas. It is basically built on four key factors , Infrastructure - key activities key resources, partner network. Offering - value proposition. Customers - customer segments, customer relationship, channels. Finances - cost structure, revenue streams. Below is a systematic business model canvas diagram made for sky TV
KEY PARTNERS KEY ACTIVITIES VALUE CUSTOMER CUSTOMER PROPOSITIONS RELATIONSHIP SEGMENTS
Vodafone, Broadcasting, Offers, value for Long term relations Mass market- Slingshot, Advertisements, money, the with customers due family homes Other mobile Online rentals packages are built to content Operators, iSKY online TV Business- motels, and priced to Fatso hotels, small or deliver the large business, KEY maximum value CHANNELS RESOURCES
Network, Satellite, network, employees, online content , distributers, programs
COST STRUCTURE REVENUE STREAMS
Programming, subscriber management, Subscription - Residential / Commercial, Advertising, broadcasting and infrastructure, sales and Installation, and other services marketing, advertising, other administrative and depreciation Source: (Business Model Foundry GmbH, 2013)
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CUSTOMER SEGMENTS
Sky’s normal subscription aims at mass market, mostly families and people living in New Zealand. Every person owing a TV is in the customer segment of Sky, as a result they have to have a wide view towards the planning of it resources. Sky’s business subscriptions aimed towards retail stores, small to medium sized pubs or clubs, motels, hotels and, small to large office buildings.
CHANNELS
Channels are the way by which the service is being delivered. Sky invests a lot in creating the infrastructure required to transmit the channels from its studio to every subscriber. The digital content transmitted to the subscribers via its digital satellite can reach almost 100% of the New Zealand homes. As per a count done by sky there are 1.3 million house olds that have TV dishes installed in their houses which is almost 80% of the New Zealand’s homes (SkyTV, 2013). Sky has leased seven transponder on the Optus D1 satellite which are responsible for broadcasting all the sky transmissions in New Zealand. There are various subscriptions that provide various services like standard subscription and HD subscription both are delivered through same channels but are processed in different technologies (SkyTV, 2013).
CUSTOMER RELATIONSHIP
Sky usually has a long-term customer relationship because of the nature of its services. People are attracted to the content and form a habit of watching or interacting with the service. As a result they are constantly engaged with the service and tend to keep the same service month after month. The only reason to shift to another service happed because of some problems that the customer may face for the service or company.
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KEY ACTIVITIES
Sky’s key activities are television broadcasting service in New Zealand. It broadcast over 100 channels on its digital satellite platform. Its modifies the content so that it suits the need of the customers. Sky is also involved in selling advertising time of its own channels (SkyTV, 2013; SkyTV, 2012).
KEY RESOURCES
Key resources are the important resources which are required to deliver value and the service. It makes the customer relationships happen, the distribution channels work and the entire company operate. Physical resources like studios, satellite transponders, onsite broadcasting truck, assets etc. are all a part of physical resources. Human resource is also very important because the people are the representatives of the service; as a result the customer link the service to the company person directly as result human resource and management is very important. Customer service centre are the first place where the customer goes when he has any problem or question, the people working in the studio are responsible for the technical work done. They produced the final product that will deliver value to the customer and see that the product is received by the subscribers
KEY PARTNERS
Sky has mostly owned its own primary service. It has majority share in Fatso which provides DVD rental service. iSKY is a new service which give the subscriber the ability to watch TV online. For this sky has partnered with IPS like Vodafone, Orcon, Woosh, Farmside, Xnet, Slingshot so that there can be a seamless provision of service. The TV content can be directly streamed to the user’s device. (SkyTV, 2012)
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REVENUE ANALYSIS CHART
Sky television network receives it primary revenue from monthly subscriptions. The subscriptions packages are priced according to the channels offered in the package. Apart from the revenue generated from the monthly subscription Sky also generates revenue from other sources like advertising and DVD rental. It sells advertising time on 26 of its channels. Advertising is becoming an important source of revenue; the total advertising revenue for this year was 67.2 million. Higher viewer ship has bought growth to the advertising revenue, also the other reasons for growth in this revenue are number of channels and higher per minute prices. (SkyTV, 2012; NZX, 2013)
Other revenues like online DVD rental were started after the acquisition of Fatso. This sector is also having a small contribution to the revenue.
On 30 June 2012 sky earned a net profit of 122.8 million after tax, that was a 2.1% increase on the past years net profit after tax of 120.3 million.
Earnings before interest, tax and depreciation increased by 4.4% to $336 million. Results are summarised below:
Fig. in NZ millions 2012 2011 %Inc(dec)
For the years ended 30 June
Financial performance
Total revenue 843.1 796.9 5.8
Total operational expenses 507.1 475.2 6.7
EBITDA 336.0 321.7 4.4
Less
Depreciation 134.1 125.0 7.3
Net interest expense and financing charges 29.4 25.3 15.8
Unrealised losses/ gains and others 0.9 0.6 n/a0
Net profit before tax 171.6 172.0 0.2 Source: (SkyTV, 2012)
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The total revenue was $843.1 million which is an increase of 5.8%, below is a more detailed chart
Fig. in NZ millions 2012 2011 %Inc/dec
For the years ended 30 June
Residential 688.6 648.4 6.2
Commercial 41.4 38.8 6.7
SKYWATCH 13.2 13.3 0.7
Total subscription revenue 743.2 700.5 6.1
Advertising 67.2 62.7 7.2
Installation, programme sales and other 32.7 33.7 3.0
Total other revenue 99.9 96.4 3.6
Total revenue 843.1 796.9 5.8 Source: (SkyTV, 2012)
RESIDENTIAL SUBSCRIPTION REVENUE
It can be seen that there is an increase of 6.2% which amounts to $688.6 million compared to the 2011 $648.4. This revenue is generated from the residential subscriptions only. This is the biggest contributor to the income of sky. There is also an increase of 2.1% in the ARPU (Average revenue per user). (SkyTV, 2013)
COMMERCIAL SUBSCRIPTION REVENUE
This is the revenue earned from giving sub subscription service to commercial places like hotels, motels, bars, hospitals throughout New Zealand. There was an increase in revenue of this sector by 6.7%, from 38.8 million to 41.4 million in 2012. There is a 5.3% of increase in subscription and increase in additional services. (SkyTV, 2013; Yahoo, 2013)
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SKYWATCH
This the monthly subscription of the sky TV channel guide magazine sold for $2.66 per month. There was a decrease of 0.7% in the revenue in 2012. The revenue for the year 2012 was 13.2millin which was 0.1 million less than 2011s 13.3 million. This drop can be because of the decrease in the number of subscribers 2011- 431,702 to 2012- 420,405. (SkyTV, 2012)
ADVERTISING REVENUE
The advertising revenue increased by 7.2% to 67.2 million in 2012. There was an increase of 12.6 % in the revenue earned from pay television advertising from 39 million in 2011 to 43.9 million in 2012. This can be because of the additional revenue generated during the rugby world cup. (SkyTV, 2012)
OTHER REVENUE A decrease of 3% can be seen in the other revenue, from 33.7 million to 32.7 million in 2012. (SkyTV, 2012)
COST ANALYSIS CHART
Fig. in NZ millions 2012 2012 2011 2011
% of revenue % of revenue %inc/dec
Programming 273.7 32.5 255.9 32.1 7.0
Subscriber management 64.6 7.7 65.9 8.3 2.0
Broadcasting and infrastructure 84.5 10.0 72.6 9.1 16.4
Sales and marketing 39.4 4.7 40.9 5.1 3.7
Advertising 19.9 2.3 19.4 2.4 2.6
Other administrative 25.0 3.0 20.5 2.6 22
Depreciation and amortisation 134.1 15.9 125.0 15.7 7.3
Total operation expenses 641.2 76.1 600.2 75.3 6.8
SOURCE: (SkyTV, 2012)
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PROGRAMMING COST These include both the cost of purchasing programming rights and also the operating cost for the programs. The right cost also includes the cost for movie rights, music rights, sports rights, channel rights. cost of operation include satellite expanses, cost of production of live event telecasts, fibre linking costs, in-house productions, taping, post production, editing, and adding other features to programmes. (SkyTV, 2013; SkyTV, 2012) Below is the split view of programme rights and programme operation in the year 2011 and 2012
Fig. in NZ millions 2012 2011 %inc/dec
Programme rights 216.1 209.0 3.4
Programme operations 57.6 46.9 22.8
Total 273.7 255.9 7.0
Source: (SkyTV, 2012)
SUBSCRIBER MANAGEMENT COST
This is cost of installing and servicing the equipment’s set in the subscribers place, these also include the cost of customer service department, general administration and indirect cost associated with the working of the company. The management cost decreased in 2012 by 1.3 million to 46.6 million was due to the 1.2 million decreases in credit control costs. (SkyTV, 2012)
MARKETING AND SALES COST
This is the cost that is used for marketing the current sky product to current subscribers and new customers. This includes subscriber acquisition cost by advertising campaigns, sales commission, direct advertisement and telesales agent, the cost of on air promotions for sky and prime. The cost of marketing for PRIME cost of SKYWATCH magazine production. sales and marketing costs went down even though IGLOO's contributed 2.2 million, by 3.7% to 39.4 million in 2012 (SkyTV, 2012).
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ADVERTISING COST
This is the cost of operating the advertising department which is responsible for the sales of both sky and prime channels and includes 20% of sales commission that is paid to the advertising agents. There is an increase of 2.6% to 19.9 million, this is because of the higher advertising revenue in 2012 (SkyTV, 2012)
BROADCASTING AND INFRASTRUCTURE COSTS
This is the cost for transmission and liking the sky and prime studio to other television station in the country. Its includes the cost of infrastructure needed to transmit the channel signal throughout New Zealand. It also includes the cost of leasing the seven transponders on the Optus D1 satellite which provides HD television broadcasting. There was an increase of 11.9 million mainly due to the additional cost of transponder on the Optus D1 costing 7.4 million. An additional 3.7 million were due to the fluctuation in the exchange rate.
ADMINISTRATIVE COSTS
These are the overhead cost of corporate management. There is an increase of 22% from 20.5 million to 25 million. The increase is due to the extra head count and costs relating to ILGOO.
DEPRECIATION AND AMORTISATION
These is the cost of depreciation on the products owned by sky, they can include the subscriber equipment like Arial, set top box and even sky owned fixed assets like television station and studio. There is an increase of 7.3% (9.1 million) this is due to the depreciation of OSB trucks which amount to 7.4 million and the rest is from the decoders.
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INTEREST AND FINANCING COSTS
Costs have increased because of the 56 million debts drawn out to pay dividend on 25 cents per share. Because of this there is an increase of 15.8%. The average cost to sky has increased from 5.6% in 2011 to 5.8% in 2012.
2012 2011
Bank loan 6.7% 6.4%
Bonds 4.5% 4.5%
Finance lease 6.9% 6.9%
Average 5.8% 5.6%
Source: (SkyTV, 2012)
TAX EXPENSES They were decreased by 2.9 million 5.5% to 48.8 million due to the decrease in their profit tax rate from 30% to 28%.
CAPITAL EXPENDITURE Sky’s capital expenditure for the year 2011 and 2012
Fig in NZ millions 2012 2011
Subscriber equipment 57.4 44.6
Installation cost 48.9 50.9
Building 0.9 3.7
HD broadcasting truck 2. 7.5
Other 27.1 28.3
Capital expenditure 136.9 135.0
Acquisition of onsite assets - 34.7
total 136.9 169.7 Source : (SkyTV, 2012)
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There was an increase of 1.9 million in the capital expenditure in 2012 compared to the 2011. The subscriber equipment cost was higher because of the purchase of the 12.8 million equipment MY SKY decoders. Approximately 41000 decoders were purchased in 2012.Other expenses amounted to 27.1 million including the 12.3 million technology and infrastructure addition for ILGOO.
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VALUE CREATION ANALYSIS
It is very important for sky to deliver excellent value to its customers. According to the (SkyTV, 2012) subscriber has to make a evaluation of the value that sky delivers and decide whether to continue to pay for the sky service.
It is committed towards proving a value for money package. When the subscriber registers for the monthly package they continue to watch more and more sky content and the value that they are getting rises up.
The monthly price of the packages is given below:
Monthly price , in NZ dollars 2012 2011 %inc/dec
Basic 46.12 45.00 2.5
Basic + Movies 66.82 65.70 1.8
Basic + Sports 72.46 70.29 3.1
Basic + Sports + Movies 93.16 90.99 2.4 Source: (SkyTV, 2012)
The value can be measured by dividing the average revenue earned per month per subscriber (ARUP) for that year by the average number of hours viewed per month this gives us the average cost per month for sky subscription.
The churn is a very good indicator that shows if the subscribers are receiving the real value of their money. If the churn continues to fall, it shows that there is high value for money being delivered by sky to the subscribers.
The subscriber can chose the services that they want in the package and therefore there is always a movement in the number of subscribers of different services.
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The tables below show the penetration of value packages,
MYSKY Penetration 2012 2011
Basic + Sports + Movies 38% 42%
Basic + Sports 39% 35%
Basic + Movies 8% 9%
Other 15% 14%
DIGITAL Penetration 2012 2011
Basic + Sports + Movies 25% 28%
Basic + Sports 41% 39%
Basic + Movies 7% 8%
Other 27% 27% Source: (SkyTV, 2012)
There is a interesting way in which sky monitors its affordability, it prepares a Big Mac index for pay TV services. It actually calculates the number of big Mac hamburgers one can buy at the cost of the sky subscription. It has compared different countries and the rates. This also shows that there’s a maximum value of the product at a very affordable rate (SkyTV, 2004).
Source: (SkyTV, 2004)
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The main value proposition of sky is that there are very few family entertainment options available at as little as 53 cents per hour. This gives the customer affordable type of entertainment that can be enjoyed any time with its family or alone. It also offers a wide range of genre like sports, movies, news etc. because of this the customer gets all this entertainment needs fulfilled. (SkyTV, 2013)
SUMMARY
From the above data it can be seen that Sky has a very solid business model and has been very successful at its core business activity. With its packages and services sky is able to deliver a high value service to its customers. It needs to see that the same story and value is delivered by the staff to the customers (Magretta, 2002).
Major revenue of sky comes from the residential subscription. $688.6 million out of $843.0 million are received from this subscription. The MYSKY decoder is a killer application to co-create value for the customers. Its enable to company to deliver an enhanced TV experience. The second biggest contributor is advertising and the rest like SKYWATCH, commercial subscription and other revenues are also contribution to the revenue. (SkyTV, 2012; SkyTV, 2013)
Sky programming cost involve in purchasing the programming rights and also the cost of operation of those programs. There are other costs like subscriber management, broadcasting infrastructure, sales and marketing, and other. These totals to $641.2 million which is 76.1% of the total revenue. (SkyTV, 2012; SkyTV, 2013)
Sky has been constantly developing and introducing new services which have been improving the value of the company Services .The company has high interest in providing exceptional experience in sports content, as a result it has 6 sports channels. Services line DVD rentals, ILGOO are some of the sector of sky that can really boost the business. If sky wants more customers to join their network they need to have a stronger ecommerce oriented business model and services like iSKY should be expanded and enhanced to a very higher level.
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ISKY online are yet to catch-up, there are 231,665 are registered to the iSKY and watch over 127000 hours of online content. The company need to develop and enhance this product as it has got a high potential.
REFERENCES
Business Model Foundry GmbH. (2013). What's Your Business Model? Retrieved from Business Model Generation: http://www.businessmodelgeneration.com/ Magretta, J. (2002). Why Business Models Matter. Harvard Business Review. NZX. (2013, september 5th). NZX Main Board (NZSX) Sky Network Television Limited Ordinary Shares (SKT). Retrieved 2013, from www.nzx.com. Osterwalder, A., & Pigneur, Y. (2013). Business Model Generation: A Handbook for Visionaries, Game Changers, and Challengers. John Wiley & Sons. SkyTV. (2004). Annual report. Sky network television limited. SkyTV. (2012). Annual Report. Sky network television limited. SkyTV. (2013). Annual results. Sky network television limited. SkyTV. (2013). Business Overview. Retrieved september 5th, 2013, from Sky.co.nz: http://www.skytv.co.nz/Default.aspx?tabid=157 SkyTV. (2013). Interim Result. auckland: Sky television Network. Slywotzky, A. J. (1996 ). Value Migration. Harvard Business Press. ThinkTV. (2013). History of NZ TV. Retrieved 2013, from Thnik TV: http://www.thinktv.co.nz/about-tv/the-business-of-tv/history-of-nz-tv/ Wikipedia. (2012). Television New Zealand. Retrieved from Wikipedia: http://en.wikipedia.org/wiki/Television_New_Zealand Yahoo. (2013, september 6th). Sky Network Television Ltd. (SKT.NZ). Retrieved from http://au.finance.yahoo.com/: http://au.finance.yahoo.com/q?s=SKT.NZ
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APPENDICES
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