Freeview Success Should Not Hurt Sky, Says Merrill Lynch

Freeview currently attracts a significantly older customer profile than Sky, with almost three quarters of Freeview buyers aged 35 or over; 40% are over 55. By contrast, Sky brings in a much younger demographic profile, peaking in the 18-34 category. As a result, Freeview’s success should not cannibalise Sky’s customer base, at least for the time being.

In addition to the demographic difference, Freeview purchases appear to be largely independent of other TV platform options, with 83% of Freeview buyers saying that they were not considering subscribing to any other service. Merrill Lynch analysts believe that this may be good news for Sky, as some customers may decide to ‘trade up’ to a more comprehensive service once they have had a taster of multichannel television.

Looking ahead Whilst Freeview currently represents little threat to Sky’s market, a widening of the platform’s channel capacity could start to impact at Sky’s lower end – that is, on the cheaper, smaller channel packages.

A key attraction of the Freeview service is that it does not come with any monthly subscription charges; after the one-off cost of the box itself (around £100), there is nothing else to pay. If Freeview’s channel selection does widen, consumers looking at the cheaper end of Sky’s portfolio may be tempted by Freeview’s non-subscription offering.

However, widening of Freeview is not technically feasible until the analogue signal is turned off, due to the limited broadcast bandwidth. Given that the switch-off seems unlikely to take place any time before around 2010, Freeview will probably not move into the lower end of Sky’s market for some time (if at all).

TV market forecasts The proportion of TV homes receiving analogue broadcast signals is forecast by Merrill to have dwindled from 55.7% last year to just 22.4% by 2008. However this still leaves a further 17.4% of homes to convert to digital in order to hit the Government’s analogue switch-over target of 95% DTV penetration.

UK Television Market Forecasts, Homes (000s)
	2002A	2003	2004	2005	2006	2007	2008
BSkyB	6,250	6,809	7,085	7,286	7,447	7,583	7,701
% of pay TV homes	65.0	66.5	66.3	63.1	60.0	57.4	55.3
% of TV homes	25.4	27.4	28.4	29.0	29.5	29.9	30.2
Cable	3,351	3,418	3,529	3,820	4,195	4,567	4,921
% of pay TV homes	34.9	33.4	33.0	33.1	33.8	34.6	35.4
% of TV homes	13.6	13.8	14.1	15.2	16.6	18.0	19.3
XDSL	12	15	75	439	766	1,052	1,296
% of pay TV homes	0.1	0.1	0.7	3.8	6.2	8.0	9.3
% of TV homes	0.0	0.1	0.3	1.8	3.0	4.2	5.1
TOTAL PAY-TV	9,613	10,241	10,689	11,545	12,409	13,203	13,918
% TV HOMES	39.0	41.2	42.8	46.0	49.2	52.1	54.7
Freeview viewers	1,300	2,200	2,950	3,700	4,450	5,150	5,850
Net additions		900	750	750	750	700	700
% TV homes	5.3	8.9	11.8	14.8	17.7	20.3	23.0
Analogue terrestrial	13,735	12,392	11,319	9,837	8,349	6,981	5,692
% of TV homes	55.7	49.9	45.5	39.2	33.1	27.6	22.4
Number of UK TV homes	24,648	24,833	24,957	25,082	25,208	25,334	25,460
Source: Merrill Lynch, June 2003

Freeview is expected to surpass cable in 2006, with a predicted 4.5 million homes by the year-end, compared to cable’s 4.2 million. Merrill reckons that BSkyB will have 7.7 million subs by 2008, despite Sky’s more optimistic targets.