Sky High On 3D

Over the last two years, what may be the world’s largest effort to create three-dimensional TV programming has emerged in the United Kingdom, where pay TV giant British Sky Broadcasting has produced dozens of events in 3D. Last month (April 3), BSkyB became the first multichannel provider outside of Japan to launch a 3D channel, Sky 3D.

That channel, which now reaches more than 1,000 pubs and clubs in the United Kingdom with a potential audience of more than 100,000 for high-profile soccer matches, has made News Corp.- controlled Sky a crucial test case in the emergence of 3D technologies. Its efforts offer important lessons in both business models and emerging production techniques for 3D that a number of U.S. programmers and multichannel providers have been watching closely as they develop their own 3D offering, according to programmers and equipment vendors.

“We immediately saw that we had a viable business with 3D and could move quickly,” BSkyB’s director of product design and TV product development Brian Lenz said. “We’re uniquely positioned because we are vertically integrated, with both a satellite platform and high-profile sports and movie rights.”

Sky executives had assiduously followed the growing popularity of 3D in cinemas, but suddenly got serious about 3DTV at the National Association of Broadcasters show in 2008. There, officials saw a 3DTV demo produced by 3ality Digital Systems that beamed a live game show in 3D via satellite from Los Angeles to Las Vegas.

“Up until then, the presumption with 3D had always been that it was four or five years down the road and that we could only be able to broadcast it into the home if we invested in new set-top boxes and a brand new infrastructure. Such spending would have been difficult to justify after the direct-to-home satellite firm’s massive investments to upgrade to HD. All of a sudden, we realized that broadcasting 3D content would work. We could do it over satellite, as well as by using the existing HD infrastructure,” Lenz said.

So, Sky officials embarked on an intensive period of testing “with just about everybody in the world with 3D gear,” 3ality Digital CEO Steve Schklair said. The provider produced content ranging from boxing and soccer to rugby, ballet, tennis and concerts. “One of the greatest lessons that can be learned from Sky is that they’ve tested it and training and learned about 3D, not just technically but creatively until they felt they were ready to launch,” he said.

Sky has also worked closely with programmers. “We talk to them once a week at least,” ESPN vice president of emerging technology Anthony Bailey said. “They are far ahead on this, like us.”

Last fall, Sky commissioned a 3D truck from Telegenic that was built by Sony Professional Europe with 3ality camera rigs. During the last six months, the satellite firm has produced one and sometimes two 3D events per week in preparation for the launch of the all-3D service. Initially available only in pubs and clubs, Sky 3D will be launched to residential customers next fall.

“Sky has been a real catalyst” for the development of 3D technologies, said David Mercer, vice president and principal analyst, digital consumer practice at Strategy Analytics.

In many ways, Sky’s recent push into 3D is just the latest in a series of technical innovations that have helped the company dominate the U.K. pay TV market, with about 9.8 million customers. Its next biggest competitor, cable operator Virgin Media, has about 4 million total subscribers.

“Sky’s income trajectory over a very long period of time has always been driven by almost entirely by organic growth and innovation,” Claire Enders, founder of Enders Analysis, said. She listed Sky’s huge investments in premium sports rights, digital TV, DVRs, high-speed Internet, telephony and most recently high definition television as examples of how the company has consistently used new technologies to drive subscriber growth.

For example, Sky invested £130 million [$201 million] in HD during its 2008-09 fiscal year, mostly to subsidize HD set-top boxes. That helped Sky’s HD subscriber rolls swell from 422,000 at the end of 2007 to nearly 2,082,000 at the end of 2009, according to data collected by Enders.

“Sky does everything for the very long term and will work patiently to develop its offering. They’ll see 3D as very successful if they get 5% or 10% of their subscriber base in the next two to five years, and we expect them to do better than that,” Enders said.

Continuing this innovation with 3D will also strengthen Sky’s brand as an innovator. But the company’s approach to 3D is designed to have a more immediate payback by boosting revenues per subscriber and convincing existing customers to buy higher-priced tiers, an approach that offers some key lessons to multichannel providers.

“Decision to initially launch in pubs and clubs is a brilliant move,” said 3ality Digital’s Schklair, “because it provides a venue for 3D broadcasts at a time when there aren’t many sets in homes, it allows Sky to start marketing the technology for the launch of their residential channel and it lets Sky immediately start getting some revenues from the owners of those venues.”

BSkyB’s Lenz noted that finding revenues from such venues as cinemas or pubs could yield pay TV operators a new business model for 3DTV. “It builds awareness and provides a pretty compelling approach to help the investment pay for itself a lot earlier,” he said.

The fee structure is also designed to encourage first pubs and then consumers to upgrade to the most expensive tiers. Currently, Sky currently offers the 3D channel for free to any pub or commercial venue that already takes its highest movies and sports package. It plans to use the same approach when it launches a residential channel this fall. That means the residential subscribers to the Sky World and HD services who currently pay £58.50 [$90.40] a month will get 3D for free. Sky has not announced 3D pricing other subscribers.

“It provides a commercial thrust to provide upsell to the top tier,” noted Enders analyst Toby Syfret, something Sky has done consistently well in recent years. TV ARPU hit £434 [$671] per year at the end of 2009, up from £398 [$615] at the end of 2007, according to estimates from Enders Analysis.

That won’t happen, though, unless consumers embrace the technology. Early set sales have been brisk and a March 2010 study from Insight Media predicted that some 3.3 million 3D sets will be sold worldwide this year, with those numbers growing to nearly 50 million by 2015.

Impressive projections for 3D set sales may not translate into a 3D boom, analysts cautioned. “We’re in a dangerous zone right how at the peak of industry interest, when everyone is jumping on the bandwagon,” Strategy Analytics’ Mercer said. “There are still many questions about 3D in terms of consumer acceptance of displays and glasses. Our view is majority of programming will be 2D for quite a long time to come.”

Media Insight analyst and editor Dale Maunu also cautioned that “so far the push to move 3D into the home is more of a push by television makers than a pull by consumers” — in part because of a lack of content.

To overcome that problem, Sky hopes to leverage its rights to popular sports events and theatrical films. “We own sports channels and the movies channels and we have a platform to put on the channels. So the difficult issues in the U.S. of channels and platforms having to fight to get content didn’t apply to us. We’ve got the content and we can move quickly,” Lenz said.

Even so, Sky executives quickly realized they would have a problem getting 3D sets to potential customers. New consumer-electronics devices tend to be launched first in Asia and the U.S.; the first 3D sets only went on sale in the U.K. during the week of April 19, nearly three weeks after Sky 3D launched in pubs. To overcome the lack of 3D sets, BSkyB worked with consumer electronics manufacturer LG and a local reseller to supply the pubs with reasonably priced sets. The LG TVs also use inexpensive passive 3D glasses that cost around $1, so pub owners won’t be on the hook for the shutter glasses used by many other 3DTVs, which can cost as much as $150 a piece.

While the promotion strategy has gotten off to a good start, analysts said, the company still faces a number of additional longer-term problems, including the cost of 3D production. BSkyB has been using separate crews to produce two-dimensional and 3D versions of its live sporting events, a practice Lenz expects it to continue for a while, given the different camera angles and editing techniques required.

But the launch of 3D has not required a massive upgrade or major capital investment in Sky’s overall infrastructure. About 90% of the production infrastructure is the same as HD and 3D cameras are the largest incremental expense. Even better, Sky 3D’s signal can be delivered into the home just like a normal HD channel, where it can be viewed by anyone who owns a 3D set and has one of the Sky Plus HD set-top boxes. “We haven’t had to do anything different from what we would do to launch an HD channel on an HD transponder,” Lenz said.

That will also allow Sky to market the service to a large base of existing customers. There were 2.5 million Sky Plus HD subscribers at the end of the first quarter of 2010. Sky’s costs will drop as they learn to share crew members for the 2D and 3D production.

The competitive lessons from Sky’s experience are more murky, though. Sky’s aggressive push into 3D will give it another leg up on cable MSO Virgin Media, which has expressed interest in 3D but doesn’t own the kind of premium sports and movies as does Sky. Other satellite operators are hoping for similar gains. In addition to BS 11 in Japan, which launched the world’s first 3D services in December of 2007, satellite providers DirecTV in the U.S., Canal Plus in France, Canal Plus Spain and SkyLife in Korea have all announced plans to launch 3D services this year.

“There has been a regular stream of 3D announcements,” Mercer of Strategic Analytics said. “Pay TV providers are the ones likely to lead this because they have the right to the sort of content that people want to watch in 3D.”


3D Won’t Fix Bad Programming
“The first thing we’ve learned is that 3D doesn’t make something less boring. Moreover, productions that overuse eye-popping 3D effects can tire the eyes. My No. 1 concern is what happens when people try to jump on the 3D bandwagon and going out there without understanding what they are doing because that is what will kill 3D,” BSkyB director of product design and TV product development Brian Lenz said.

Sports and Movies Will Drive Viewing
BSkyB launched Sky 3D towards the end of the English Premiere League soccer season. Its first match involved two top teams, Manchester United against Chelsea, all but ensuring fans would flock to pubs to see the game.

Market It First, Then Sell It
Sky has worked to partner with outside venues to build awareness. Only later, sometime in the early fall, will it launch the service into homes. “If you go back to the early says of pay TV, a lot of the biggest early events were big PPV events on closed-circuit TV that made people aware of the benefit of a pay service,” Lenz said. Sky also plans to offer free 3D service to its best subscribers.

By George Winslow, Multichannel