From ‘Pay’ to ‘Pay Lite’ and now ‘Pay Premium’: Sky Q suggests finer segmentation of the pay customer base

Sky UK has unveiled its next-generation home entertainment system, called Sky Q, designed to satisfy the most demanding ‘want it now, want it anywhere’ customers. A key objective for Sky Q was to cater for an entire house full of the most demanding customers and this platform is focused on making Pay TV screen-agnostic. Highlights include the ability to watch DVR recordings on any screen and take recordings out of the home on a tablet, and the ability to watch different programmes on up to five screens at the same time while also recording four other channels. Sky says it is “opening up a whole new way of watching TV” and has introduced the term ‘Fluid Viewing’ to explain the new consumer freedoms. Sky Q will be available in the UK and Ireland in early 2016.

Sky Q is significant for a whole bunch of reasons. As much as anything, it represents a CPE-fest: the platform comes with a choice of media gateways (one supporting UHD and with more streaming options and storage), a client set-top box for use with additional televisions around the home, and a new broadband hub. These devices support Powerline and Wi-Fi, with the best connection made available automatically. The gateways and clients all act as Wi-Fi hotspots to ensure reliable and consistent whole-home coverage – a feature that could prove as popular as anything that Sky announced last week. 

A few years ago we were wondering if Pay TV operators would reduce their customer premise equipment and rely more on apps; some operators worldwide are still interested in an STB-less offer but here is an example of how the Pay TV operator expands rather than diminishes its physical presence in the home.
 
In some ways Sky Q represents the convergence of broadband and television in the home and points to how a Pay TV operator can exploit and cement a triple-play bundle. We have reported previously on how a service provider could differentiate itself by taking greater responsibility for the state of the home network and providing QoE guarantees. This is effectively what Sky is doing with its new device ecosystem. It has invested extra (in Powerline and advanced Wi-Fi capabilities in every set-top box) in order to ensure a great whole-home experience.

As Ted Hall, Research Director for Television at analyst firm IHS Technology points out: “Clearly this is a product with convergence at its core, combining the reliability of traditional satellite broadcast with the multi-device streaming flexibility of OTT and broadband.” 

Nigel Walley, Managing Director at Decipher, the media consulting and consumer research firm, agrees that the synergy between television and broadband is more obvious for a service like this. “While there is an element of the platform wanting to control the quality of video streaming into the house, the issue with Sky Q seems to be the importance of the router being able to direct stuff around the house. The Sky Q system has a very clever router that combines Powerline with WiFi to maximise quality distribution within the home.” 

You do not need Sky Broadband to use the new platform but Sky reckons you will get the best experience if you do have this service. The company declares: “Sky Q supercharges Sky Broadband by turning all your boxes into Wi-Fi hotspots for the strongest signal and best coverage through the home. With Sky Broadband, Sky Q can connect devices within the home through Wi-Fi and Powerline so you always get the best connection available. Neither of those features will be available with other broadband providers.”

Sky Q provides an early example of how Pay TV operators could handle UHD upgrades. With the option of the Sky Q box (non-UHD) or the Sky Q Silver (ready for UHD) customers will have to decide which route they want to go, especially as these devices will be available (early next year) before Sky UHD services are launched (later in the year). Sky will talk customers through this choice. 

Merrick Kingston, Principal Analyst, Connected Home at IHS, thinks the most important point about having a choice of gateway devices is that Sky has decoupled its next-generation UI/UX (user interface/user experience) platform from the issue of resolution. “In so doing, the new, premium UI/UX becomes the centre of value, and resolution – like UHD – is a mere incremental upsell.”

So if Sky is setting any kind of precedent, it has nothing to do with a two-box CPE strategy, Kingston argues. “Instead it has everything to do with UI/UX being positioned as the first line of defence, vis-à-vis OTT video, and as the key to new-subscriber acquisition. Comparing Sky Q to Sky+HD, I would argue that Sky’s new approach represents a strategic reversal, in that HD resolution was the new centre of value in its day.” 

The bottom line, for Kingston, is that Sky Q is a completely new user experience that just happens to be available with UHD when those services are launched. (As an aside, Sky has said its UHD services will be the most comprehensive in the UK and will cover a range of sports, movies and entertainment.)

Another key take-away from the Sky Q launch is that Sky is segmenting its customer base even more precisely. Sky Q is not a replacement product for Sky+HD, although obviously in the very long-term it will probably succeed it. New Sky customers will be able to sign-up for the Sky+HD service, a platform that will continue to be updated. Sky Q becomes the top of the range Sky experience, what some analysts would refer to as luxury Pay TV, a new segment being created for early adopters still willing to pay more for Pay TV (although it should be pointed out that Sky has not mentioned additional charges – the pricing for Sky Q will be announced later).

Sky Q should therefore be viewed in the context of what Sky has been doing at the lower end of the Pay TV market  with its standalone OTT (Pay TV Lite) offer, NOW TV. That now provides a paid television offer to homes that were previously not natural Pay TV customers. Sky refuses to differentiate between NOW TV and Sky TV subscribers anymore, a stance that suggests it could be time to rethink what constitutes a Pay TV customer today. In the wake of the Sky Q launch the company has provided a graphic of how it views its customer base now, covering ‘Pay TV Lite’ (NOW TV), ‘Pay’ (Sky+HD) and what it is calling ‘Pay Premium’ (Sky Q).

Ted Hall at IHS points out: “Sky has made it clear that Sky Q represents a new premium product tier that will be targeted at a certain segment of its customer base – though it has not been more specific in terms of the size of that segment. The implication is that customers will be asked to pay more, in the form of either one-off equipment charges or higher monthly fees or both in order to access the service.”

He believes there is a group of Sky customers who are willing to pay more than what they do today in order to enjoy Sky Q and that, in the long-term, this group will represent meaningful numbers. “Sky TV packages have never been cheap but that has not stopped Sky customers from upgrading – some quicker than others – to the operator’s top-tier products. Sky’s products are typically highly rated by its subscribers, being both user-friendly and reliable.”

Sky will not be over-aggressive in pushing Sky Q, Hall predicts. “The roll-out of its current-generation Sky+HD connected-TV boxes commenced in 2006 and these are still not in all Sky satellite homes nine and a half years later; they are in seven million of them,” he explains. “Take-up of Sky Q is likely to follow a similar timeline.”

He adds: “Sky Q appears to offer a genuine step up in QoS that Sky can monetize by appealing to a relatively small proportion of its early-adopting customer base at first, but a larger one over time as price drops, discounts and (or) promotional offers are used to hook more customers.”

Sky Q comes with a completely new TV guide and home page and makes greater use of cover art to help navigation. There is a touchpad remote control that allows users to scroll and swipe their way through the service. There are interactive sidebar apps for news and sport that are seamlessly integrated into the viewing experience, and search that brings together live, recorded and on-demand content (with voice search to follow later). 

Recommendations will get more contextual and are based on what has been watched according to device and, more precisely, the time of day on each device. This could have a dramatic effect on the relevance of recommendations without requiring any user log-ins (Sky wanted to avoid multiple people having to log-in and log-out again). 

This contextual approach to recommendations naturally takes account of whether a device is used for group viewing or individual viewing, and whether it is shared or not. Clearly the main television, if watched by various different people, will have a different recommendation profile to a tablet that is only ever used by one person. A shared tablet would reflect the different viewing tastes that it caters for. The main television will give the recommendations that might suit children after school, but at 10pm the recommendations will reflect what parents watch in the evening. This all applies to personalized ‘For You’ recommendations but there is also a curated ‘Top Picks’ section on the home page.

More web content is being integrated into the platform, partly thanks to YouTube and Vevo apps at launch (with more to follow later). Web content can be streamed to any television that is connected using the Sky Q media gateway or the Sky Q Mini client STBs. Other streaming partners include Condé Nast Entertainment (including GQ, Vanity Fair, Vogue and WIRED), plus Red Bull Media House. “More content creators will be added,” Sky says.

With the Sky Q whole-home system you will be able to watch different programmes on up to five screens, all at the same time. While you are doing that you can still record four other channels. The wireless Sky Q Mini box (client STB) connects the Sky Q gateways to television sets and a Sky Q app hooks tablets (initially) and smartphones (later) into this whole-home entertainment network. You can pause viewing on one TV screen and pick up where you left off in another room. 

All connected screens are treated equally, receiving live and on-demand content and personal recordings. This is the start of multiscreen DVR in Sky homes. When you leave home you can take those same personal recordings with you on the tablet and watch live or streamed on-demand content. Sky says the ability to take personal recordings with you ‘on the go’ has been the No.1 requested feature from its customers.

Jeremy Darroch, Sky’s Chief Executive, says the company wanted to re-imagine TV so that it is flexible and seamless across different screens and puts a huge choice of entertainment at your fingertips. “Sky Q is a brilliant new way for customers to experience TV on their terms,” he declares. 

So what is the likely impact of Sky Q and, in particular, will it result in Sky customers watching more Sky content, including in homes where customers also subscribe to Netflix? David Mercer, VP, Principal Analyst for the Digital Consumer Practice at Strategy Analytics (the analyst firm) comments: “If Sky are improving the service as much as they say, in terms of making content accessible from different devices, I would assume that it will increase consumption of Sky content. That is a reasonable assertion to make.”

He thinks it is also a reasonable assumption that the improved access to content on mobile devices, especially, will result in Generation Z consumers (the oldest of whom are turning 18 this year) watching more Sky content in Sky homes. That is all good news. “We cannot infer that any of this will impact Netflix or other SVOD services because people may simply end up consuming more content overall,” he adds.

Ted Hall at IHS says it is fair to suggest that the functionality Sky Q provides will encourage younger viewers in Sky households to consume more content. “Sky Q removes a lot of the barriers that the ‘Netflix generation’ are less tolerant of – limitations on how, where and when content can be accessed, and the number of people that can do so at the same time. Addressing these limitations is likely to engage younger users in the service and foster an expectation that they will be able to use Sky Q to access the content they want on their terms,” he says.
 
Hall predicts that in a Sky TV home that also subscribes to Netflix, consumption of Sky content will rise where Sky Q is installed. “Sky Q will provide a flexible means through which to access on-demand films and TV boxsets,” he reasons. 

Nigel Walley at Decipher agrees. “If you give them [millennials and Gen Z consumers] MTV [the music channel] or other linear channels that appeal to them in their bedrooms, where they did not have them before, some of them will inevitably watch that content.” He thinks consumption of Sky delivered content will rise in homes where there is also a Netflix account, too. “It is about dramatically increasing the number of screens that the core subscription is easily accessible from.”

Hall is impressed by Sky Q but does not think it will have a significant impact on the Pay TV or multi-play market dynamic in the UK. “The opportunity to attract new customers – either younger consumers becoming bill payers for the first time, or customers of rivals Virgin Media, BT and TalkTalk – is limited in what is a saturated market for higher-end traditional Pay TV,” he argues. “Growth in UK Pay TV is coming at the lower end of the market, a segment in which NOW TV is Sky’s customer-growth driver.”

But this product will serve two main purposes, he reckons. “It will re-establish Sky as a best-in-class TV provider and increase ARPU and revenue over what will be a lengthy roll-out period.” He emphasizes: “One of the most important functions of this product is to re-establish the dominant UK Pay TV operator as an innovation leader.” He thinks the new app partnerships, along with the integration of user photos and music into the entertainment platform, is a clear attempt to position Sky Q as more of a one-stop shop for consumer needs.

Hall says the challenge for Sky will be recouping the investment it has made in this new innovation cycle. But the verdict is positive. “Sky opted to play the long game in judging when to pull the trigger with its latest flagship service iteration and, from a pure user-experience point of view, Sky Q appears to be worth the wait.” 

Sky Q customer premise equipment specifications

Sky Q box (non-UHD gateway) has a 1TB Hard Disk Drive, over 700GB of which is for customer use. It supports up to 150 hours of HD recordings. Sky Q Silver (UHD ready gateway) has a 2TB Hard Disk Drive with 1.7TB of this storage available for customer use. It supports up to 350 hours of HD recordings.

Sky Q box can record three channels while watching a fourth. Sky Q Silver will record four channels while watching a fifth.

Sky Q box will support viewing on one tablet using the Sky Q app and Sky Q Silver can support simultaneous viewing on two tablets using the Sky Q app. 

Sky Q box supports viewing on one Sky Q Mini box (client STB) and Sky Q Silver supports simultaneous viewing on two Sky Q Mini boxes.

The Sky Q Silver, Sky Q box and Sky Q Mini client STB have the following technical specifications.

• 2x USB (1x USB for Mini client)
• 2x HDMI (1x HDMI for Sky Q Mini)
• 1x 10/100 Mb/s Ethernet RJ45 port
• Dual band Wi-Fi on 2.4GHz and 5GHz concurrently
• 2.4GHz 801.11n is 2×2 MIMO, backwards compatible with 802.11 b/g
• 5GHz 801.11ac is 3×3 MIMO, backwards compatible with 802.11n
• Powerline AV1.1 (only compatible with other Sky devices)
• Bluetooth 4.0 LE support
• Video resolution supported: 1080p, 1080i, 720p, 576p (2160p will be added in a future update on the Sky Q Silver)

Sky Q Hub (the new broadband router) shares the same communications specifications and has IPv6 support.