Yesterday's unveiling of Amazon Prime Video - a low-cost subscription video on demand service - brings more competition to an area where Sky TV once had a monopoly.

Traditional pay TV platforms with "linear" channels are facing huge challenges. In the US, there is a trend for people to walk away from such services. "Cord-cutters", they call them.

Sky TV, however, has survived. Its strategy in this changing landscape is to market its main platform as a premium product.

But there are more changes and new players to come, with Google and Apple TV ramping up their profiles.


On Wednesday, Sky provided the stock exchange with a trading update, saying it would not meet a six-month-old forecast for the year to the end of June 2017. That forecast had predicted $296 million in earnings before interest, taxation, depreciation and amortisation.

Now, Sky TV expects its earnings to be 5-7 per cent lower than that.

Part of the reason for the trading update was additional costs, resulting from increased competition and higher prices for TV rights.

Sky told me its churn rate - the number of people cancelling subscriptions - had not changed from last year. But the lower profit forecast was also due to people moving to less expensive packages.

Price point

The new Amazon service is at the bottom end of the market, with an introductory price of US$2.99 ($4.21) a month for the first six months. That is about a third the cost of Netflix or Lightbox, which are $13 or so. Sky's Neon service is $20.

Amazon's initial programming offer is limited. The big selling point is the lads' car show The Grand Tour, featuring the former Top Gear team.

Sky costs $49.91 for a basic 50 channels, but can potentially cost more than $120 per month. Then again, Sky has a lot more programming than any of the others.

In my opinion, Sky's biggest problem is its price point, which makes it vulnerable to a new competitor, especially if the local economy falters.


I wondered whether this - and other new developments in pay TV - might eventually lead Sky TV to question its business model.

All consumers must pay the basic $49.91 for channels they may or may not watch, to get top-end content such as sport. The price is a constant reminder that they are paying for something they may not want.

Sky chief executive John Fellet does not see it that way, and said there were no plans to unbundle the service.

Fellet did not see the profit warning or the resulting fall in Sky's share price as providing an impetus for a new structure. He said Sky was a premium option and its churn rate was not large.

"Part of the issue is about having reached the peak of linear television," he said.

It was not as if Sky was not adjusting to changed consumer behaviour, said Fellet. Sky's subscription video on demand service, Neon, was already offering a lower cost option, he noted.

As well, Sky was also offering event and weekly "fan passes" for specific sports events.

Sporty spice

Sky's sport packages are what separate it from competitors.

Sky was briefly challenged by Coliseum, which linked itself with Lightbox and Spark. But that company soon moved offshore to concentrate on overseas markets. Exclusive sports rights provide the biggest impetus for the proposed merger of Sky TV with Vodafone, which would allow the merged company to create video sports packages for Vodafone subscribers.

Decisions awaited

These are complicated times for media companies.

The scale of Sky's share price fall - down 11 per cent the day of the new forecast, with a further fall yesterday - may have been affected by a Commerce Commission delay in deciding on the Sky TV-Vodafone merger. A decision was expected next week, but has been delayed to February 23.

The Commission is also involved in a complex application for the merger of media companies NZME, publisher of the Herald, and Fairfax New Zealand. Both decisions will have a big impact on the future of New Zealand media and the ability of local businesses to compete with global giants.

Tech emphasis

Should the Sky-Vodafone merger go ahead, it would result in a greater emphasis on technology, an area where some industry players say Sky has not been strong.

Fellet has been with Sky since soon after it started. He has been popular with sharemarket analysts and has long been seen as a steady hand on the tiller.

He is expected to leave next year, with Vodafone chief executive Russell Stanners taking over the top job.

Fellet has a reputation as a wily operator, and has taken the position that Sky should not rush in too quickly, and embrace new media initiatives that do not deliver to the bottom line.

Critics say though there are differences, Sky's approach to change has been similar to the philosophy embraced by Telecom, before it was split up to create Chorus and Spark.

■ Disclaimer: John Drinnan is provided with a Sky subscription, courtesy of Sky TV.