James Murdoch, chief executive of BSkyB, shared his views on the future technical directions for the satellite television operator in a question and answer session following a presentation to analysts. He spoke about personal video recorders, video on demand, broadband, high definition, smart-cards, and the freesat proposition.

For James Murdoch, it is clear that the key benefit of digital technology is in providing greater choice and responding to consumer demand for more flexibility. “Customers are demanding more and more flexibility, in terms of the way they consume media, the way they consume entertainment in the home with their family.” This demand for more flexibility, he suggests, will be an ongoing trend, together with a demand for connectivity between multiple devices, with two or three set-top boxes in many homes.

Sky’s most successful service innovation to date has been with its Sky+ personal video recorder, but with the increase in the number of users of the Sky+ PVR, the skipping of ads is a potential cause for concern. “The advertising community, I think, has to really engage with this issue,” admits Murdoch. “It is starting to engage now as the numbers grow.” Advertising represents about 8% of total revenue for Sky, but the company stresses that it is nevertheless a very important element of that revenue.

“It’s really incumbent on us and the marketing community to think about different ways and innovative ways to continue to bring those brands to our customers in a way that resonates with them. I think you’ll see more experimentation, you’ll see more things like interactive advertising. You’ll see us working with advertisers in innovative ways to reach our customers and really enhance what they’re already buying from us, in terms of just the pure television advertising stream.”

Sky recently introduced a new Sky+ 160 PVR, with increased storage, but has not broken out the numbers deployed. Initially launched as a premium product at £399, all they will say is that this has been reflected in sales. “Those costs will come down over time, and we intend to pass those savings on to customers to drive it. What you’ll see here is really an evolution of the Sky+ platform. We’ve talked in the past about a platform for future development.”

In his presentation, he referred to USB connectivity in the new PVR box as a platform for future expansion but did not elaborate. Potential applications would include downloading content to portable devices, such as that previously previewed by Pace.

Sky also confirmed that their new high-definition box will also be Sky+ based, to be launched in “early 2006”. This will initially be a premium product, providing an opportunity to up-sell to the upper tier of subscribers.

With regard to storage capacity, he said “It should be clear that we plan to launch higher capacity boxes as the cost of storage comes down. There are not very meaningful limits as the cost comes down over time.”

Hybrid services
There was also a hint at the possibility of hybrid services, possibly combining satellite delivery with an on-demand service over broadband, although he stressed that content was more important than technology: “I can see future products that may have higher speed modems in them, combining that with satellite. The key is that the customer doesn’t care.” He later added that “We do see alternative networks in our roadmap. We think it’s complimentary to what you can do with satellite,” but noted that “we’re probably some years away from the kinds of data rates that we need to see”.

Smart cards
There was disappointingly little real news on plans for the second smart card slot that is present in all Sky’s set-top boxes. The company has been linked to plans to roll out its own credit card, but all the chairman would reveal at this stage was that “Our focus is on loyalty programmes, working with credit cards, but what’s most interesting is what third parties might bring to the table.”

When Sky first announced their free to air plans, albeit re-packaging an existing but not well-publicised offering, the market did not respond particularly favourably. Sky points out that it was as soft launch, apparently marketed only where Freeview terrestrial reception is unavailable, but has the company gone soft on the idea altogether?

In the presentation to analysts, Sky referred to the launch of its “freesat” offering, a term on which the BBC apparently has a trade mark. The term was not capitalised on the slides, but in accompanying materials it was described as “FreeSat”.

Commentators have noted that the free offering has not been widely promoted and it has been seen as an attempt to pre-empt a move by the BBC to launch a free to air satellite service. The Sky chairman claimed “The key issue for us in launching it was trying to understand what the demand was like in non-Freeview areas. We were making sure that we wouldn’t interfere with all of our other activities in the marketplace by tapping into some demand that was unexpected.” In other words canabalizing subscription revenues.

Responding to a question about relations with the BBC on the subject, he observed that they clearly have a lot of contact with the corporation, with whom they are joint shareholders in the Freeview terrestrial platform, but said that the BBC is “legally expected to be platform neutral,” a reference to heavy on-air promotion which has been seen as excessively promoting digital terrestrial set-top boxes. He added that “We’re having discussions with them about their next push and we expect them to honour their obligations in that respect.”

On the threat of Channel 4 taking its E4 service free-to-air, or presumably the issue of ITV joining the BBC in promoting a free satellite service, James Murdoch said “We think free to air is a pretty brave place to be for the long term,” referring to an increasingly difficult market for advertiser supported channels. However, he saw Freeview as an opportunity to attract new customers trading up to pay television services, saying “It’s a catalyst for people to upgrade to subscription.” He did not appear to see a market for Sky in pay television on terrestrial television, noting that the current numbers for the Top-Up TV initiative could not provide reliable statistics and noting “At this point we do not have plans for a pay offering on digital terrestrial.”

Video on demand
With the cable companies launching video on demand and personal video recorder products this year, he appeared equally unperturbed. “We think video-on-demand services are pretty interesting, actually. I think that the marketplace has always been competitive and it will continue to be competitive. The onus is really on us to be able to continue to innovate.”

Observing that different systems in the US are finding different levels of success with different products, he teased the UK cable competition, saying that if the cable companies doubled the number of new customers over the next five years they would only add another 200,000 subscribers. Like personal video recorders, he suggested that video on demand had more to do with subscriber loyalty than growth.

Sky is working hard to articulate to the market that its future revenue prospects are not entirely dependent upon relentless subscriber growth. In many ways, the market is becoming ever more complex in its dynamics and getting that message across is increasingly difficult, but it is nevertheless apparent that Sky has a clear focus on its future.