1. business and industrial

JEREMY DARROCH SPEECH AT MEDIA & TELECOMS CONFERENCE 2015*
Date and Time: 17 March 2015 at 10.40am GMT
Venue: London Marriott Grosvenor Square
Hosts: Deloitte, Enders Analysis and BNP Paribas
*text modified for website
INTRODUCTION
Good morning and thank you for inviting me here today.
The theme of change in our industry is one that we’ll hear a lot about today: new
technology, new possibilities and of course new challenges as well.
In some other sectors, change can mean stagnating revenues and a fight to resist
disruption. But our market is growing. Customers’ appetite for high-quality content
is far from sated. They are prepared to spend more for services they value. And
technology is removing the barriers to meeting untapped demand.
As I think about this environment, my over-arching view is that it plays to Sky’s
strengths as a business. We have always used new technology to drive
improvement. We are led by customers and an understanding of what they want.
And, in a changing world, we constantly position the business to take advantage of
new opportunities at scale.
Part of doing that is seeing change as a constant and embracing it. We’ve always
believed that, if we want to remain successful, standing still is simply not an option.
So today we are changing in ways that are faster and more far-reaching than at any
time before.
Compared to this time last year, Sky today is a very different company. Four months
ago, we completed the acquisition of our businesses in Italy and Germany. As an
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enlarged group, we are focused on exploiting the expanded growth opportunity
that is now ahead of us.
So over the next 20 minutes or so, I’d like to talk to you about how Sky is positioned
today and the long-term potential in our marketplace.
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SKY TODAY
Across all of our markets, we’re seeing really good momentum as customers
respond to the quality and breadth of what we offer. More customers are choosing
to take more products from Sky and loyalty is increasing.
Within this overall picture, our UK business is performing very well. Last quarter, we
had our highest product growth in four years and highest customer growth in nine.
The steps that we’ve been taking to diversify our business are paying off. Today, our
revenue growth is increasingly broadly based. As well as adding new products and
customers, we’re, opening up new revenue opportunities and growing our adjacent
businesses.
This is helped by the way in which over-the-top distribution is opening up new
segments of the market. With multiple products and services, today we are able to
offer something to every household in the markets in which we compete.
All of this gives us a strong platform on which to build as we continue with the
integration. While it’s early days, we’re making good progress and have found plenty
of ways to start sharing expertise across markets.
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EUROPE’S LEADING ENTERTAINMENT COMPANY
By bringing together three leaders in their respective markets, we are creating
Europe’s leading entertainment company.
Although we now have 21 million customers across five countries, the new Sky is not
just about bigger scale. It is also about building a great organisation and
positioning the business for the future. Getting this right means we will extend our
competitive advantage, drive revenue growth and increase our capacity to invest.
Central to any high-performing organisation is a shared set of values and a clear
sense of purpose. We start in a strong position as the three Sky businesses already
share a powerful brand and a culture of continuous improvement. We know that
success comes from a single-minded focus on customers and a mindset of
embracing change.
This approach is resonating well. In Italy, for example, Sky is rated as the secondstrongest brand in media and technology, with only Apple ahead of us. And in the
UK, Sky is the brand that more than a third of households believe is best placed to
bring together their entertainment and communications needs. That’s far ahead of
any other company.
By joining together, we will be able to share our strengths and expertise to serve
customers even better. We want Sky customers, wherever they are, to enjoy the
best service in the marketplace. And our primary focus will always be on the needs
of those customers on the ground.
We see our strong local identity in each of our markets as a source of real
advantage. Because this country is where Sky first got started, some people here
have a tendency to see the whole group through a UK lens. But the reality is that in
Germany, Sky is seen by customers as a German brand. In Italy, it’s an Italian brand.
This is a testament to the excellent work that the management teams in those
countries have done over a period of years. And it’s something that we will be
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careful to nurture as we bring the businesses together. In an increasingly global
marketplace, our ability to combine a local identity with the benefits of multinational scale is a valuable asset.
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EXPANDED OPPORTUNITY
When we consider the long-term potential for Sky as a multinational business, we
see five broad areas of opportunity. In totality, they give us the chance to build a
much bigger, stronger and more profitable business.
First, we will exploit the substantial headroom for pay-TV growth across our
markets. With more than 60 million households to go for, the potential here is very
attractive. Building on the strong demand we see today, we will use the
combination of DTH and OTT services to target different groups of customers and
open up new areas of growth.
Second, we will use our strengths in cross-selling to bring more products to existing
customers everywhere. All the evidence is that customers have a strong appetite to
take more from Sky. And we see significant scope to go further, whether in TV,
communications or transactional services.
Third, we will continue to grow our adjacent businesses. In advertising, we’re
building on our reputation for innovation with our targeted service, Sky AdSmart. In
channel distribution, there are more potential partners who want high-quality
content on their networks and devices. And as our content business develops, we
are growing international programming sales on the back of our investments.
Fourth, as an enlarged group, we will raise our ambitions in content even further. We
are already Europe’s biggest investor in content with an annual spend of £4.6
billion. And we plan to scale this even further.
Finally, we are working across the enlarged group to accelerate innovation.
Combining our product development activity means we will be able to bring new
products to market faster, at greater scale and at reduced cost.
It’s the approach that we’re taking in these last two areas of opportunity – content
and innovation – that I want to focus on now.
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INVESTING IN CONTENT
Almost all the opportunities I’ve spoken about are underpinned by the range and
quality that we offer on screen. Our job is to bring customers the best content from
around the world, coupled with strong local content across multiple genres.
As we’ve grown from a start-up to the business of today, we’ve learnt that it’s the
breadth we offer that’s important. To serve a household successfully, you’ve got to
offer something for everyone in that household.
Equally, you’ve got to continually do new things in order to attract new customers.
Just carrying on offering the same kind of programmes isn’t going to give people a
reason to think again about joining Sky.
That’s why, for the last few years, we’ve been on a clear pathway to develop a broad
range of content right across our portfolio of channels. Today it’s the totality of our
channel offering that is cited by new customers as the key reason for joining Sky.
And our own channels take the top five places in existing customers’ ranking of
their ‘must-have’ pay channels. Both of these things tell us that we are on the right
track.
We are committed to growing our investment and creating content at greater scale.
Of course, a big part of this is building on and extending our traditional strengths in
areas such as sport, which remains a core part of our offering.
But, having talked a lot about sport in recent weeks, I want to focus particularly on
how we are building our entertainment offering. This means continuing to develop
our capability in original production and being the best partner for content owners
around the world.
So let me give you a few examples of how this is working in practice.
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FORTITUDE
Fortitude, our latest original crime drama, has been a big success for Sky Atlantic. It
epitomises what we are looking to do in production and serves as a pointer for the
future.
Creatively, it is the kind of big, complex story-telling that can be sustained over 12
episodes. It is perfect for pay TV, with the scale and ambition to cut through in a
crowded environment. And by bringing outstanding writing, directing and acting
talent to Sky, it builds our reputation both with viewers and the creative community.
Equally, Fortitude is a property that we can launch at scale. It was our first drama to
launch simultaneously across all of our markets and we were really able to get
behind it in our marketing, making it one of the most talked about shows on TV.
With sales to 100 territories including the US, Australia and France, Fortitude is also
the most successful show to date for our distribution business, Sky Vision. This will
be one of the ways in which we monetise our growing content investment in the
future.
And the response from customers has been exceptionally strong. With over two
million UK viewers watching the premiere episode, Fortitude attracted Sky Atlantic’s
biggest ever audience for an original drama.
There is much more to come. Across the group, we now have 160 hours of original
drama in production.
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GOMORRAH
It’s not just the UK by any means. The team in Italy is doing an excellent job in
developing a strong reputation for original content.
Their crime drama Gomorrah, described by some as the ‘real-life Sopranos’, was the
most watched series ever on Sky in Italy, as well as selling to more than 100 other
territories. The second season will run across all of our markets, as will the Italian
political drama 1992.
As we grow further in Europe, we believe this will lead to an even broader set of
ideas and pool of creative talent that we can tap into.
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PARTNERSHIP
Our slate of original productions is designed to stand shoulder to shoulder with the
best shows from around the world.
Across movies and TV series, we are the biggest partner for the major studios
outside the US. There is a shared interest between us in protecting and growing
the value of high-quality content. And we’ve shown that the way we package and
promote our channels makes Sky a good home for their shows and a good partner
to work with.
A really good example of this is our partnership with HBO. The output deal to make
Sky the UK home of HBO was the first of its kind and has since been followed by
many similar relationships around the world.
Now, this is a particularly exciting week for us because we are hosting the world
premiere of Game of Thrones, possibly the biggest TV show on the planet, here in
London tomorrow. It’s the first time that the season premiere has been held in
Europe and we are looking forward to welcoming our partners at HBO and the cast
of the show to the Tower of London. I can’t think of a more fitting venue.
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SKY ATLANTIC
All of this has fuelled the growth of Sky Atlantic.
Five years ago, we saw a gap in the market for a channel dedicated to the very best,
cinematic storytelling. Since its launch, Sky Atlantic has become established as one
of the main reasons cited by new customers for joining Sky. And existing customers
tell us it is one of their must-have channels.
After starting in the UK, Sky Atlantic has gone on to launch in Italy and Germany.
While the channel is at an earlier stage of development there, we see the potential
for it to become an even more important part of our offering.
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ACCELERATING INNOVATION
Alongside content, the second area that I want to focus on is innovation. That’s
because it provides us with the tools to get the most value out of our content.
Innovation allows us to meet customers’ growing desire to consume content on
their own terms, both in and out of the home. That means making sure that they
can watch whatever they want, whenever they want, wherever they want.
And innovation allows us to get more value out of our investment. It means we can
distribute content more widely, unlock new pockets of demand and create entirely
new revenue opportunities.
A commitment to continuous improvement is part of the shared DNA that has
always connected the Sky businesses. But with the creation of the new Sky, we see
the opportunity to bring about a step-change in our approach.
As an enlarged group, we can accelerate innovation by sharing capabilities across
our markets. We will identify best practice - whether in Italy, Germany or the UK –
and apply it across the group. By bringing together our product development, we
will work collectively on a shared platform and roadmap across all our territories.
This means we will be able to bring new products to market with greater impact.
To illustrate the potential here, let me give you three areas where we are applying
innovation in practice.
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CONNECTED HOME
First, by putting Sky at the heart of the connected home, we are making it easier for
customers to access and consume all of our content.
Over the last couple of years, we have been connecting more of our customers’
boxes to broadband so they can enjoy the full benefits of our service. This now
makes us Europe’s biggest connected TV platform.
In the UK, around two thirds of customers are now connected and On Demand
users have become our best advocates. They are more loyal, more satisfied and
more likely to recommend Sky.
The impact on viewing behaviour is dramatic. On Demand downloads are up 40%
year-on-year and, in a reversal of linear viewing patterns, pay content outstrips
free-to-air by a ratio of around two to one.
Building on the experience in the UK, we will continue to develop our On Demand
proposition in our other markets. Almost a third of customers in Italy have already
connected their boxes while in Germany we’re at a much earlier stage with a similar
opportunity ahead.
One of the most popular features among our Italian customers is called ‘Restart’.
It’s a simple but very clever idea that allows customers to go back to the start of a
movie. We’ll bring it to the UK later this year – just one easy example of sharing best
practice across the group.
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SEGMENTING THE MARKET
Next, innovation is creating new services that reach an entirely new group of
customers.
We see a big opportunity to use over-the-top video to drive pay TV penetration in
way that’s complementary to our DTH business. In all our markets, we now have
streaming products that suit the needs and preferences of people who like our
content but want to consume it in a different way. By broadening choice, we’re
unlocking new headroom for customer growth.
In the UK, NOW TV is gaining real traction as part of our approach to segmenting
the market. It’s targeted at a very different kind of customer to Sky, with a
distinctive proposition and cost model. The acceleration in our customer growth
shows that the two brands are working well together, unlocking new and profitable
sources of demand.
Plans are well underway to push OTT further through all of our markets. Sky Online,
an equivalent product to NOW TV, has launched much more recently in Germany
and Italy. In each market, the plan is to make our own streaming box an important
part of the offering, building on the success of the NOW TV box in the UK.
We’re just getting going with these OTT services and we see a lot of potential in this
area.
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SKY STORE
The third application that I want to highlight is the way innovation is opening up
entirely new sources of revenue. Having built out our connected box platform and
grown it to scale, we are adding a range of services that get us into new parts of the
market.
To give you just one example, the launch of our Sky Store service allows us to
participate for the first time in the marketplace for movie rentals and purchases.
The transactional market is worth an estimated £1.6 billion a year in the UK, but
until recently we haven’t been able to access it.
With Sky Store, we can now offer customers an easy way to rent or purchase a wide
range of titles, including new releases like The Imitation Game.
Today Sky Store regularly ranks as the number one or two digital retailer for
blockbuster releases. Our Buy & Keep service, for example, was responsible for
around a third of all digital HD sales of X Men: Days of Future Past, one of the biggest
titles of 2014.
So Sky Store has got off to an excellent start. All of this is possible because of the
investment in our On Demand platform. With Sky Store revenues up by 90% yearon-year, we are starting to see the benefits flow through. And we are exploring the
potential to roll out in other markets.
More importantly it’s a great example of how we are using our skills in innovation to
position the business for an important and growing trend, reinventing our
distribution model for the future and entering a new market to build entirely new
revenues at scale.
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CONCLUSION
So in conclusion, we see a future that is full of opportunity.
Today the business is in good shape and performing well.
Building on this, we are creating Europe’s leading entertainment company.
Our vision is for an organisation geared around an appetite for change and a
commitment to continuous improvement.
With five clear areas of focus, we are well positioned for the expanded growth
opportunity that is opening up in our markets.
We’ll combine the benefits of an enlarged group with strong local identities.
And we’ll continue to win on the ground with customers by staying focused on
bringing them best content from around the world coupled with some of the best
innovation anywhere in the world.
Thank you.
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