Tech

Leila Abboud is a Bloomberg Gadfly columnist covering technology. She previously worked for Reuters and the Wall Street Journal.

Netflix grabbed all the attention again this week as it went live in another 130 countries. But, in Europe at least, there's one man who can challenge the TV and film streaming service's relentless advance: Rupert Murdoch.

The billionaire's Sky Plc seems to have found a workable model in the U.K. of how a traditional satellite pay-TV company can meet the threat from cheap web-based rivals -- essentially by mimicking what they offer. It should now bite the bullet and expand this approach to other big European markets, taking the fight to Netflix and Amazon.

Sky's British online video service NowTV lets Internet subscribers buy premium soccer matches and access to popular dramas such as Game of Thrones and Mad Men for a fraction of the cost of its bigger satellite packages. 

A big concern among investors was that this would lead to customers spending less on Sky's content and thereby hold back revenue and profit. Fears about the similar phenomenon of "cord-cutting" -- where subscribers abandon big and expensive cable TV deals in favor of "skinny" packages -- caused U.S. media stocks to fall last year.

But Sky's performance in the U.K. shows that making its shows available to a much bigger audience is offsetting any decline in more expensive packages (for now, at least). And, in contrast to the U.S., only about a third of people in Europe use pay-TV, meaning Sky is less likely to cannibalize existing sales and profit.

Launched in the U.K. in 2013, NowTV costs between 6.99 pounds ($10.18) and 10.99 pounds a month with no contract. This compares to Sky's high-end packages that cost between 70 pounds and 100 pounds a month. But as the following charts show, Sky has managed to move into Internet streaming without doing damage to the average revenue it makes from each customer, while subscribers have become more loyal.

Sky High
Sky's average revenue per U.K. user (Arpu) has held steady over past two years
Sky Plc
Sticking Around
Sky's getting better at keeping hold of U.K. customers
Sky Plc

So it seems sensible that Sky should export the model to other European countries. Admittedly, its launch of similar streaming services in Germany and Italy, where it also owns big satellite operators, has been less than stellar so far. It should persist nonetheless and look at other markets.

It's already developed much of the technology it would need, so the extra spending would be marginal -- think tens of millions of pounds not hundreds.

Sky's Upward March
U.K. sales and earnings have risen over past five years
From Bloomberg data. Ebitda figures for 2011-2013 are for Sky Plc as a whole

As the U.K. shows, the benefits could be significant. Although Sky, annoyingly, doesn't disclose how many subscribers are signing up for NowTV versus its bigger packages, customer numbers are growing in the U.K. Sales and profit have risen steadily, explaining why the company's shares have outperformed its European peers over the past year.

UBS analyst Polo Tang estimates that if Sky goes pan-European with online video it could double its potential market to more than 200 million homes, from about 90 million today in the U.K., Italy and Germany.

That would also let it spread the cost of developing original TV over a bigger customer base, like Netflix.

Sky spends about 5 billion pounds yearly on programming to serve 21 million subscribers in Britain, Germany and Italy, with the bulk going on live sports rights. It's doubled investment on original content, such as Gothic horror series Penny Dreadful, in three years to 600-700 million pounds annually.

Netflix plans to spend $6 billion on content this year and has about 70 million customers globally.

And it's not even a question of having to prevail in Europe. There are enough potential customers to make sure Sky could prosper alongside web-only peers. In Britain, it's found that 40 percent of NowTV subscribers also use Netflix and 20 percent Amazon Prime. Even getting a slice of the action must be worth the effort.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Leila Abboud in Paris at labboud@bloomberg.net

To contact the editor responsible for this story:
James Boxell at jboxell@bloomberg.net