01 April 2005

Any company that has ploughed the same successful course for a decade or more will obviously find it difficult to change tack when a new prevailing wind blows in. But European terrestrial broadcaster SBS Broadcasting has judged that the digital wind of change requires it to make a major change of course.

SBS operates free TV and radio channels across Europe. It recently broke into pay-TV leap by buyng CMore, the Nordic bouquet of channels for €270m, almost four times the amount that the former owners paid just 18 months previously to Vivendi Universal.

It's not that free TV is such a bad business: SBS had hitherto been happy making money from advertising. The digital world and pay-TV were pretty much unchartered waters, seemingly without much to offer. But one of the major reasons behind this purchase is the potential that digitisation in Europe is beginning to offer. SBS decided that it just couldn't afford to ignore digital any longer.

This digital wind looks set to become a gale that will blow holes in any business plan that doesn't take it into account. It's not a certainty that any digital plan will work - remember ITV's disaster with On Digital in the UK, where a relatively good idea fell victim to bad execution. However, the march of digitisation means that the way people get their TV is changing.

And this is especially true in the Nordic region. The Swedish and Finnish governments have already set their analogue TV switch-off dates at 2007 and 2008 respectively. That puts them among the European leaders in this development. Current research from Strategy Analytics forecasts that by 2010 there will be 131m digital homes in Europe (including satellite, cable and IPTV homes), up from 41m at the end of 2004. By 2008, 41% of European homes will subscribe to broadband with Sweden, Switzerland and Belgium in the lead with penetration rates of between 55-60%.

SBS thinks it will be sitting pretty in this digital environment. Harry Sloan, SBS founder and executive chairman, has realised his company's strength. "The bet we're not making is the big bet. We're not a telephone, satellite or cable company who are putting billions into building these digital distribution platforms. We don't do capex," he says. Sloan just wants to provide content.

CMore's previous owners had already installed new managers who revamped the packages, re-launched the brands, and focused on securing important pay-TV rights. SBS is taking all this to another level. It intends to use its free TV and radio stations in CMore's four Scandinavian markets to cross-promote and bump up the subscriber numbers from the current 770,000. Premium TV in this region is very under-penetrated with only 12% of homes subscribing to either CMore's channels or the rival TV1000. There are already betting services (launched last October), TV-to-mobile (January) and SVOD (February). CMore also plans to launch VOD and HDTV services later this year.

SBS believes the CMore channels have prime export potential, especially to countries where it already has some free TV and radio stations with Belgium and The Netherlands being the first prime candidates.

The target for SBS channels is generally younger viewers and listeners, so music is a key attraction and last year it decided to leverage a Danish radio brand, The Voice, into TV and websites and, in the future, music downloads. The Voice TV channel focuses on local music and concerts with great success. In Denmark, for example, The Voice boasts 60% of music TV viewing - almost double MTV's Danish figure, according to SBS. The Netherlands is the most important market for SBS in terms of TV revenue and number two for cash flow. It operates three free channels (SBS6, Net5 and Veronica) and has chosen the country to launch three new digital channels - the first is a DIY channel based on a very successful SBS6 Sunday afternoon show; the second utilises 'classic' 1960s-1980s TV series that are already part of SBS's terrestrial output deals; and the third, Veronica Vibes, provides 'what's-on' information that leverages the Veronica TV station and an eponymous listings magazine. With budgets of less than €6m each, this digital channel strategy is a hedge against fragmentation of audiences.

This year, one third of SBS's revenue is already expected to be from pay-TV subscriptions, downloads and other non-advertising forms of income. By 2010, the proportion of income from these sources is forecast to be closer to half of the total.

Sloan says that for SBS, it's not about being the biggest, but rather being the most profitable and catching a following wind - like the digital one - certainly looks a good way to achieve that.