Sky to start DVD service

By PETER GRIFFIN

Pay TV operator Sky has a $15-million-a-year business opportunity in its sights with plans to launch an internet-based DVD rental service that will compete with its own movie channels.

The venture, disclosed with the company's $35.3 million profit last week, is being set up to muscle in on the market occupied by rental chains such as Video Ezy, which are able to release movie titles before Sky gains access to them.

Sky's chief executive, John Fellet, said the service would allow Sky subscribers to pay a flat fee each month for which they would be sent a number of DVDs that they would return in a pre-paid envelope.

But a number of small companies have a head start on Sky. Auckland-based www.fatso.co.nz is already operating on the model Sky is pursuing.

Fatso's Robert Berman said there was a "definite window" of opportunity to reach the movie audience before Sky and it was only a matter of time before the pay TV operator moved in.

"I'm not surprised, there are other companies looking at this space as well," he said. Fatso offers an all-you-can-eat monthly DVD subscription for $40 and is starting an advertising campaign to attract subscribers.

Berman said Fatso would compete on quality of service.

Fellet said the economics of the movie industry meant the pay TV operators were unlikely to get to screen movies at the same time as the rental chains any time soon.

"The studios make so much money off the DVD segment that they don't want to destroy that market."

Sky made the bulk of its $441 million in revenue for the year to June 30 from pay TV subscriptions, but has been trying to open new revenue streams. It has dabbled in interactive TV services and introduced pay-on-demand movies, which contribute about $15 million a year revenue.

Fellet said the DVD rental business had the potential to deliver a similar amount. "It's less than 5 per cent of our revenue but that's not to say it isn't a nice healthy piece of business."

Fellet said: "Similar to pay-per-view, it will cannibalise our movie channel and it will cannibalise our pay-per-view a bit. But, at the end of the day, we think we have an advantage in that we know a great deal of people that like movies."

Macquarie analyst Stephen Freundlich said Sky was moving to counter the major disadvantage of playing second fiddle to the cinemas and rental chains in receiving content. "By the time they get it, they're third cab off the rank. Maybe they're trying to take one step back in that chain and catch some of that revenue a bit earlier."

Sky's move mirrors that of major media players who are attacking the market share of large rental chains such as BlockBuster.

"It's terribly ironic to me that with today's technology it's economically more feasible to mail you two DVDs than it is to download the movies," Fellet said. "It's like we're going backwards technology-wise but that's the way the economic model works right now."

Infrastructure players such as Telecom, a partner of Sky's, have talked about delivering movies over phone lines on a "video-on-demand" model. Fellet said the DVD mail-out service was a stop-gap until the market tipped in the favour of instant-access technologies such as video on demand.