TV subscriber additions fell to 40,000 in Q2, from 140,000 the previous year. CEO Jeremy Darroch conceded to City analysts: “Some people are uneasy about making a long-term commitment right now.”

But half-year operating profit rose 16 percent to £601 million on six percent higher revenue of £3.36 billion and average annual customer revenue rose £8 to to £544. Total customer base grew 100,000 to 10.4 million.

“The company made a number of announcements which confirm that – beyond the near term slowdown – structural issues are looming,” Bernstein analyst Claudio Aspesi writes in a research note.

“While we believe the Pay TV business is inherently more defensive than advertising-funded ones, the depth and length of the downturn in the UK economy are still unknown: any significant changes to our forecasts for the UK TV ad market could be large enough to change the outlook for the stock.”

In the worsening consumer economy, Sky is trying to sweeten existing subscribers with new accessibility…

• Device access for subscribers: Sky Go, for watching Sky on non-satellite devices, got 1.5 million unique users in December and is launching on Android in February, with new channels Sky 1, Sky Living, Sky Arts 1 and Sky Sports F1 being added.
• Public WiFi for subscribers: Sky is about to launch its public WiFi service based on its The Cloud acquisition, giving Sky Broadband Unlimited customers free access to over 10,000 public hotspots.
• Fibre premium, wider footprint: Fibre broadband launching from April at up to 40Mbps for £20 per month. Meanwhile, Sky is extending its copper network to 88 percent of UK (an extra million homes) by June 2013.

And there are new threats…

• Cheaper internet TV alternatives: Sky will de-couple its movie, sport and entertainment content from satellite by taking it to the coming wave of connected TV owners as post-satellite pay-as-you-go pay-TV - an attempt to head off internet TV apps from operators like Netflix (NSDQ: NFLX), Lovefilm and Blinkbox.
• Premier League bidders: Al Jazeera Sports may bid up renewal prices in the next rights round. “We’ll have to see what noise there is in the market and who we think may be there,” Darroch told analysts. “It is a blind auction, it’s a sealed bid, but it goes through rounds. Not all packages are awarded in the first round.”

“The unbundling of pay-TV appears a direct response to the launch of Netflix, but also seems to suggest that additional growth through the old model of bundled pay-TV through satellite is coming to a natural end in its growth,” Bernstein’s Aspesi writes.

“The performance of BSkyB (NYSE: BSY) hinges on the continued availability of premium content in the face of possible new entrants determined to build competitive pay-TV businesses over different platforms.”

The as-yet-unnamed and unpriced service will offer Sky Movies, Sky Sports and entertainment over a swathe of devices including tablet, mobile, console and connected TV. There will be no minimum contract and “a wide variety of pricing options”.

It may not look like it today, but this may turn out to be one of the most significant developments in Sky’s history.

Sky has offered TV to internet devices since 2006 but, currently, all such efforts, including Sky Go and the Sky News iPad app, are geared at providing enhanced value for existing Sky satellite subscribers. Where Sky has allowed non-satellite subscriptions, they have been so prohibitively priced relative to satellite that the idea has, in essence, been to drive satellite subscriptions.

The risk for Sky was that the new wave of internet TV services - including from consoles, dedicated boxes, integrated connected TVs that ship with thousands of free on-demand services and the emergence of cheaper over-the-top operators like Netflix (NSDQ: NFLX) and Blinkbox - would tempt existing and new consumers away from the core Sky satellite option.

Already, Sky TV sign-ups are slowing - down to 40,000 in Q2, from 140,000 the previous year, Sky announced on Tuesday. “Some people are uneasy about making a long-term commitment right now,” CEO Jeremy Darroch conceded to City analysts.

So it is logical for Sky to turn that threat in to an opportunity - the opportunity to take its top-tier pay-TV content to a new generation of otherwise pay-TV refuseniks, minus the cost of satellite.

Consumers are expected to be able to subscribe to Sky on YouView; TVs from manufacturers like Samsung, Sony (NYSE: SNE) and LG; (SEO: 066570) Xbox; iPad and more.

Sky has been wedded to and defined by its satellite distribution system since launching it in 1990.  But, by allowing customers to subscribe to Sky Sports, Sky Movies and so on directly on the internet TV they buy in 2012 and beyond, Sky is de-coupling its content and its distribution platform in the future.

CEO Jeremy Darroch told analysts: “It will give another choice to the 13 million UK households that have chosen not to subscribe to pay-TV. It will be a new way to reach out to consumers who love great content but have no need for the full range of Sky services.” There will be “no infrastructure investment”.

“Beyond the near-term slowdown, structural issues are looming,” writes Bernstein analyst Claudio Aspesi in a research note. “The unbundling of pay-TV appears a direct response to the launch of Netflix, but also seems to suggest that additional growth through the old model of bundled pay-TV through satellite is coming to a natural end in its growth.”

Fascinating to watch Sky reinvent itself in OTT world. My prediction- number of subscribers to its core satellite service to halve by 2015.

— Wil Stephens (@wilstephens) January 31, 2012

Sky will lose a lot of its turnover but become immensely profitable as it strips out huge infrastructure costs associated with legacy biz.

— Wil Stephens (@wilstephens) January 31, 2012

After months of negotiating, which paidContent reported on in August, BBC iPlayer and ITV (LSE: ITV) Player will be added to the Sky+ box’s Anytime+ service later this year.

But Sky, which had wanted to syndicate the broadcasters’ shows and not their branded services, has softened on its determination to own the customer experience...

Both the BBC and ITV services will be explicitly branded “iPlayer” and “ITV Player”, will live in their own areas with distinct looks and feels, and editorial control for their front pages will rest with the broadcasters. They will look more like their equivalent web products than like Sky’s typical system of blue menus.

Previously, Sky customers had to actively record BBC and ITV shows using their Sky+ PVR. The Sky Anytime, pseudo-VOD service had also pushed a selection of shows to PVR overnight. Now customers will get access to most BBC and ITV shows from the last seven days, and often longer. Sky has also signed a deal for ITV archive shows.

Such services have fast become a baseline necessity for any modern TV service. Virgin Media’s rival pay-TV service had both iPlayer and ITV Player with its TiVo (NSDQ: TIVO) and previous boxes. Smart TVs are shipping with these services already integrated and interim internet TV boxes like Roku are all shooting for similar.

The risk was that customers would start to see greater VOD value in free-TV options like smart TVs than on pay-TV services like Sky.

It was important that, ahead of Tuesday’s Q4 earnings statement, Sky shows investment analysts it has a coherent VOD strategy.

Currently, Anytime+, which lets viewers watch shows by plugging a broadband Ethernet cable in to their PVR tuner box or by buying a WiFi dongle, includes on-demand shows from MTV, Discovery, FX, History, Disney (NYSE: DIS), UK TV and National Geographic Channel, as well as Sky’s own-brand channels.

Channel 4’s 4oD, Channel Five’s Demand Five and S4C’s S4/Clic VOD services are as yet absent from Anytime+.

Meanwhile, Sky is dropping its requirement that Anytime+ viewers must have a Sky broadband connection.

Anytime+ is now used by 1.2 million Sky customers, but Sky wants to hike that to five million.

The Competition Commission, which has been investigating the UK market for movies on pay-TV, in August provisionally ruled as anti-competitive Sky Movies’ exclusive deals to show the studios’ films in the first pay-TV window (for movies on a subscription basis, including VOD).

The commission proposed a number of remedies, including forcing BSkyB to open its satellite set top box platform to host competing services.

In responses published by the commission today, Disney (NYSE: DIS), 20th Century Fox (NSDQ: NWS), Paramount (NYSE: VIA), Sony (NYSE: SNE) Pictures Television, NBC (NSDQ: CMCSA) Universal and Warner unleash scathing criticism of the commission for failing to properly assess levels of competition in the market, as they see it. Notably, they say the commission has not accounted for the arrival of competing over-the-top services, as has been seen by this week’s Netflix launch.

However, two studios - Paramount and NBC Universal - favour the open-access remedy above others. This “has the best chance of being effective in resolving the competition problem”, according to Paramount. According to NBC Universal: “While this remedy might provide some short-term advantage to OTT providers, it would seem likely to become obsolete through technical and market developments such as those identified by the Commission (internet-enabled TVs and STBs).”

The studios are trying to protect their ability to retain exclusive deals with Sky Movies. Those deals would not be affected by Sky opening its box. That also means the proposal may not succeed in granting better studio deals to Sky’s rivals.

But, though it has started to offer its own on-demand programming to its set top box, BSkyB, at least for now, would rather walk over hot coals than open the box, which is the UK’s dominant pay-TV platform with over 10 million subscribers, as an over-the-top internet TV system.

In its submission, Sky argues “the effect is likely to be marginal” and “it is plain that (this) is not justified on the basis of the evidence and analysis put forward by the competition commission” because “Sky‟s Ethernet-enabled set top boxes do not meet the conditions required to be considered to comprise an essential facility to which access should be mandated”.

Sky recently began exploiting its movies rights as VOD through its Anytime+ service on TVs. Previously, it offered on-demand movies via Sky Player (now Sky Go) and via the Sky Anytime portfion of its set top box DVR.

Netflix CEO Reed Hastings this week told paidContent he could bid against Sky Movies for top-tier rights and he doesn’t need to depend on the Competition Commission to do it.

Studios’ Responses: Highlights:

Disney

“A number of conclusions that are simply incorrect.” “Impracticable”, “disproportionate”, “misguided”.

“The provisional findings are predicated on the CC’s view that technological developments will have little or no impact on competition in the pay-TV sector.”

20th Century Fox:

“The CC’s proposed remedies risk ossifying patterns of distribution in the UK at a time when the speed of technological change will produce market-driven
developments.”

“The CC has failed to recognise the significance of one of the most important new forms of content distribution that is likely to affect the UK market: internet distribution.”

“It is striking that when one of the major international players in this area, Netflix, was asked about its intention in the UK it replied that “it had no comment to make” and the CC did not pursue this further.”

Paramount:

“None of the proposed remedies will be effective.”

“The CC must now recognise that the provisional findings as they stand do not provide a robust basis for analysing possible remedies.”

Sony Pictures Television:

“The CC should abandon its provisional view… The CC has not demonstrated ... and has failed to take into account quantifiable and foreseeable market developments that
will stimulate competition.”

“The clear implication of investment (from rivals like Lovefilm, Netflix) is that they believe they can compete successfully (without the need for regulatory intervention).

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Challenging BSkyB

“Sky Movies and Sky Atlantic are the big competitors,” Hastings told me, playing down the threat from Amazon’s incumbent UK movie and TV service Lovefilm.

UK anti-trust authorities may be about to grant Sky’s rivals an opportunity by breaking up its exclusive first-run pay TV rights with six Hollywood studios. “It could make it easier for us to bid,” Hastings said. “But we could also just bid against them. We are not dependent on whatever the Competition Commission does.”

Out-bidding Sky could be cash-intensive. “Yes, but that’s why the studios like us,” Hastings added, hinting that Netflix can dig deep for licenses.

UK opportunity

Hastings explained the UK opportunity: “Over-the-top is established. When we launched Canada a year and a half ago, people were like ‘Stream-what?’ But, here, because of iPlayer being so successful, the whole notion of click-and-watch internet video is very popular already.”

Still, Netflix won’t employ any local staff for its overseas countries. “We’re doing this all out of California,” Hastings told me. “It’s just like Skype can serve the world from Luxembourg - it’s amazing what you can do on the internet now.” Even so, the service is spending “tens of millions” on today’s UK and Ireland launch, much of it on marketing the unfamiliar brand and on content licenses.

International losses

Now in 45 countries after Canada and Latin America, global expansion is set to push Netflix in to the black throughout 2012, and Hastings is not committing to a return to profit in 2013, nor a first UK profit by year three. “We’ll see how it goes,” he said. “We’re not really focused on the short-term profits, we’re focused on the long-term market opportunity.”

Q4 non-U.S. losses were projected to reach $60 to $70 million. “That’ll grow”, Hastings said, explaining why Netflix raised $400 million in private finance recently: “You never want your suppliers to be nervous about payment. So it’s better to raise a bunch of money. It didn’t cost us that much. Then the suppliers are not nervous at all. We don’t expect to ever need it. But that’s when you want to raise it.”

Content line-up

For its UK and Ireland launch, Netflix has movies rights in the first-run subscription window from Lionsgate (NYSE: LGF), MGM and Momentum; further deals with Miramax, Paramount (NYSE: VIA), Sony (NYSE: SNE) Pictures Entertainment and Twentieth Century Fox; (NSDQ: NWS) plus archive TV from BBC Worldwide, ITV (LSE: ITV), Channel 4, All3Media, CBS (NYSE: CBS) and Viacom.

“Sky Movies and Sky Atlantic have been so strong, it’s been very difficult to compete with them,” Hastings conceded. “But now, with over-the-top, it creates an opportunity for someone to come in. It’s not that we’re going to beat them - but at least we can provide them some good competition.”

Netflix vs Lovefilm

“Love,” as Hastings calls Amazon’s Lovefilm, “has two million DVD-by-post subscribers and they just launched streaming-only this week, so essentially we’re starting in the same place, we’re talking about no streaming subscribers, it’s a great opportunity for us both to grow.” In fact, Lovefilm today claimed “hundreds of thousands” of customers for its online-only new Lovefilm Instant tier, despite not making it public until today.

“We overlap on some content. On the BBC series Top Gear, they license three series, and we license 13. We have a bunch of American TV like Breaking Bad; they have hardly any. We both have a set of movies and they’re all exclusive. So it may be that people subscribe to both - their £4.99 and our £5.99 service - and use them both together.”

Just as Hulu controls networks’ new catch-up TV in the U.S., UK broadcasters prefer to offer latest on-demand via their own-brand services. Though the remaining content is archive fare, Hastings touts “complete-season” access for many shows as a selling point. But Netflix will not yet consider funding original UK programming as it now does in the States, he says.

“Sky has all the big studios so you might say it’s impossible to launch a service. But, with the Moneyball strategy, we’re able to get lots of other content - it’s so much now in pieces that we can have a winning service.”

The future of TV

The long-term opportunity Hastings is shooting for, beyond all the short-term losses, is era-defining.

“There’s a complete change coming from broadcast video, which has been dominant for 60 years, to become on-demand, click-and-watch, over-the-top,” he said. “The smart TV revloution is just beginning.”

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“This is 100 percent new funding,” CEO Ernesto Schmitt tells paidContent. “It’s a major deal. Sky consider social TV to be the biggest opportunity for innovation since Sky+ (PVR). Now we are launching in the U.S., Europe and Australia.”

Co-founder Anthony Rose tells paidContent: “The Sky deal is a significant new deal in addition to our previous $7 million funding, which this new deal dramatically exceeds.”

“As part of the deal, BSkyB’s advertising-sales house, Sky Media, will sell sponsorship and product placement opportunities around Zeebox’s ‘Zeetags’, accompanying text that highlights actors, characters and topics being shown on screen,” reports FT, which broke the news.

“The deal secures exclusive rights in the UK to integrate Zeebox’s technology into (BSkyB’s) own array of 20 mobile apps, while providing the London-based start-up with capital to expand internationally. Zeebox will first appear in the Sky+ app.”

Founded by former EMI executive Schmitt and former BBC online product leader Rose, Zeebox, which paidContent exclusively previewed in August and which launched in October, is a collection of technologies, currently available as iPad app, which let TV viewers watch and chat together, gives them contextual information about on-air material and, as a possible eventual business model, may let them buy products mentioned on screen.

Early in 2011, the project had been codenamed Tbone, but was renamed after raising nearly $7 million early in the summer. Albeit with a small audience, Zeebox has won admirers in a short space of time.

“Zeebox has attracted 250,000 users in eight weeks in the UK through word of mouth only,” Schmitt added. The space also includes social TV app peers like GetGlue and Miso but Zeebox eschews their “check-in” paradigm.

The company is currently pitching the technology at the Consumer Electronics Show in Las Vegas.

Arguably, Zeebox technology could gain a wider audience inside Sky’s own apps.

Other major Zeebox shareholders are not clear.

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Sky’s newest edition of the app, still free to pay TV subscribers, now includes a £4.99 monthly fee for those who are not—another example of how broadcasters are looking to use their apps not just as complements to their core TV services, but as revenue generators in their own right.

The new app, currently only available in the UK (sorry, overseas British sports fans), offers a significantly expanded list of services on top of those from the earlier version.  Users can now get a live feed of the channel (before there were on-demand clips from the live feed as well as a link to Sky Sports News Radio, which are still available, too).

David Gibbs, director of mobile for Sky, also notes that they have added in some new features that were in response to requests from existing users. One of these is a more extensive graphic interfaces with up-to-the-minute match data as it happens. Match data, he says, probably the most-used part of its existing sports news app.

The app is a signal of how broadcasters are looking to apps as a way of growing revenues beyond those that they are getting from pay-TV services and advertising. Those who subscribe to Sky’s sports bundle via satellite TV, which includes Sky Sports channels as well as Sky Sports News, will continue to get the app for free, which works as a kind of perk for those who are paying for the TV content.

Those who do not get Sky Sports by satellite—and that includes those who might pay for Sky Sports but via cable or IPTV services—can now pay £4.99 ($7.80) per month to get the app. That payment goes through Apple’s in-app payment system, meaning that Apple (NSDQ: AAPL) will get a 30 percent cut on the fee.

“If you look at comScore/GSMA data, we have four of our apps in the top 20, and two of them are sports apps, Football Centre and Sky Sports News,” Gibbs noted.

As before, the app will also offer a selection of content to users that integrates text posts from the channel’s web site (still free), as well as video from the TV channel. While the app still gives users full lists of the day’s games, it still does not offer direct links to Sky’s video coverage of those games—but it does have links to Sky Go, the company’s separate video app that lets users watch that content. Down the line, it sounds like that move from fixture info to actual game will be more seamless in later iterations of the app.

As cool as all this sounds, it looks like the full whack of bells and whistles will be something for iPad eyes only for now. An Android version is “coming soon,” says Gibbs. “It’s easier to build for iOS but we are pushing ahead.” Ditto a web-based app: “Video at the moment is always built in the native application environment,” he explains. “It’s the ony way we can really protect our premium video content.”

Al Jazeera Sports has picked up international La Ligue rights (€90 million per year), most Champions League rights in France (€60 million per year) and has reportedly trumped a joint TF1-M6 bid for French rights to Euro 2012 with a €130 million offer.

“We would expect (Sky Sports) to spend +15-25% more than in the previous round of negotiation in 2009,” says investment analysis firm Bernstein. “We envision a scenario in which BSkyB (NYSE: BSY) retains all but one packages for the next 3-year block but faces competition (for all six packages available) by at least two other entities, ESPN (NYSE: DIS) and Al Jazeera.”

That could raise Sky’s payment to up to £675 million per season. A 25 percent price hike is consistent with increases Sky Sports has made in the last two bidding rounds, however.

Any entrance by Al Jazeera Sports to the UK could hurt ESPN, which currently holds a minority of Premiership rights beside Sky Sports’ majority, more than Sky Sports, in Bernstein’s scenario.

Bernstein also reckons Al Jazeera Sports could bid up to €730 million for Eurosport. But the firm is also persisting with a strange forecast it has been making lately...

“As European regulators are turning increasingly hostile to exclusive contracts, it may prove impossible for pay TV companies to keep key premium content away from Apple.”

Few people currently consider Apple (NSDQ: AAPL) has ambitions to own premium content, even though it has proved masterful as a distributor and retailer of content owned by other entities.

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“The movies market has never been more competitive,” Griffith told UBS’ Annual Media and Communications Conference in New York.

“Sky has never traded on exclusivity. Every movie that’s ever been on Sky Movies has had a theatrical release and has been in Asda or Tesco well before it has been on Sky.

“The average consumer only has to spend 15 minutes on the internet to realise just how competitive the landscape is, including companies like Netflix.”

The Competition Commission provisionally ruled Sky Movies’ exclusive pay-TV 1 window deals with six Hollywood studios anti-restrictive. It has proposed breaking up those rights or forcing Sky to offer rivals like Netflix (NSDQ: NFLX), Lovefilm and Blinkbox to its own satellite customers.

Griffith was also asked if BSkyB could offer bouquets like Sky Sports to platforms like YouView, so that consumers would not require its satellite boxes.

“YouView doesn’t have a lot of linear capacity, and sport is the hardest to reproduce on an on-demand basis.

“If there’s demand out there from people who don’t want a dish and a box and just want to be able to subscribe to Sky Sports on-demand, there’s no reason at all why we won’t be in the marketplace giving them that service.

“We are today. The reality is that market right now is not very large. Anecdotally, it’s students in their dorm room using a laptop.”

Griffith also gave a gloomy UK economic indicator - he expected Q4 advertising sales to be “flat to down”, with December the weakest month of the quarter. That is disappointing since December is chock-full of Christmas ads. But advertising is only five percent of Sky revenue.

Sky will buy back up to £750 million in its stock to return to investors, Griffith said, following the shelving of News Corp.‘s bid to buy out the remaining piece of the company.

That is one of two new remedies proposed by the commission, which this summer provisionally ruled that Sky’s exclusive deals with six Hollywood studios is anti-competitive.

In an additional new consultation, the commission is asking…

• “whether access to Sky’s Ethernet-enabled STBs would enable qualifying OTT movie service providers to compete more effectively with Sky’s movies services”
• or “whether, in the foreseeable future, this remedy will be rendered superfluous through technical and market developments, in particular the adoption by consumers of Internet-enabled TVs and STBs, including YouView”.

Sky has only recently enabled its own on-board on-demand service, Anytime+, which includes movies, on its boxes. It is also increasingly making its own content available on other devices and platforms including YouView, for which it is a content partner, when it launches next year.

A compulsion to host rival services on its own box would be a massive boon to rival services like Netflix, Lovefilm and Blinkbox because Sky is in around 10.5 million UK homes.

But the notion is likely be contested vigorously by Sky. In any case, the technical challenge could be considerable since Sky’s current Sky+ box was not built to host over-the-top services.

Research carried out by Screen Digest for the commission has found the most common scenario across leading markets is for pay-TV rights with the six Hollywood majors to be split between different operators.

Previous remedies proposed by the commission had been…

• Restricting the number of major studios from which Sky may license exclusive FSPTW (first subscription pay-TV window) rights
• Restricting the range of exclusive rights which Sky may license from the major studios
• ‘Must retail’ measures requiring Sky to acquire on a wholesale basis and market to its retail customers products incorporating FSPTW movie content created by other parties

The commission has ruled out these remedies…

• Wholesale must-offer
• Divesting Sky of its rights acquisition, content aggregation and wholesaling functions
• Divesting a proportion of Sky’s retail customers
• Changing the duration of the FSPT
• A price control
• Coterminous studio contract

It has also proposed “requiring Sky to publish the expiry dates of its contracts relating to FSPTW rights with the six major studios, so as to increase the ability
for rival bidders to engage in timely negotiations”.

—Capgemini: The consulting firm is adding Dee Burger as its telecom, media and entertainment lead and Jean-Marc Steffann as deputy lead and VP.

—Kinetic: The ad buyer is adding former Sky.com portal head and ex AOL (NYSE: AOL) MD Andy Jonesco as its EMEA CEO.

—RBI: The business publisher is making its editorial development manager Adam Tinworth, its former head of blogs, redundant, Tinworth writes.

—O2: Vodafone (NYSE: VOD) R&D’s strategist and evangelist Dan Appelquist is joining rival O2’s BlueVia development initiative as product management lead. Via BlueVia.

News Corp controls 35 percent of the company.

James Murdoch was also re-elected to News Corp in October when a protest vote garnered 35 percent.

Quick math: Just over 40% of non-NewsCorp shares either withheld or against James Murdoch as Chairman of #BSkyB
3 months ago

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@tom_watson "w/ revelations of computer hacking under James' watch out this week. How can we trust Sky's Internet initiatives?" #bskybagm
3 months ago

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Avaaz.org

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Ferguson: We have seen nothing that makes us doubt the integrity of James Murdoch #bskybagm
3 months ago

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The satellite broadcaster intends to appoint Gilbert and Pigasse, who is currently vice-chairman of Lazard Europe, following what is expected to be a fiery annual general meeting on 29 November.

BSkyB chairman James Murdoch, who is set to feel the wrath of shareholders who question whether he should lead the company after his handling of the phone-hacking scandal at News International, said that the appointment would inject “wide-ranging expertise” to the board.

“With backgrounds encompassing significant experience in UK public companies and the European media sector, they will complement and add to the existing skills of our board,” he added.

The composition of BSkyB’s board has been criticised by some investors who argued during News Corporation’s bid to take full control of the company earlier this year that the largest shareholder wielded too much influence and that a significant number of members should be changed.

News Corp ultimately abandoned its bid to acquire the 60.9% of Sky it did not already own in July at the height of the phone-hacking scandal.

The pair will replace Allan Leighton – the former Post Office chairman who has served for 11 years, two more than is recommended by good corporate governance – and David Evans, who is one of eight independent non-executive directors despite having previously worked for News Corp.

BSkyB reiterated its position that the appointments are part of programme to replace board members as they retire, not a response to criticism from investors and observers.

“The board has begun an orderly programme to replace existing Directors as they retire over the coming years,” said Lord Wilson of Dinton, chairman of BSkyB’s corporate governance and nominations committee. “After a comprehensive search supported by external consultants, we are pleased to have identified two strong, independent directors who will contribute to the company’s continued progress.”

Related

• BSkyB Board's Letter Defending James Murdoch – The Full Text

I thought it would be helpful if I set out the reasoning behind the Independent Directors’ unanimous decision that James Murdoch should continue as Chairman. We are quite clear that it is an important issue and we have handled it as such. The Independent Directors have always acted in the interest of all the shareholders and we will continue to do so.

We start with the basic judgement on the key roles of the Chairman. In essence, these are responsibilities for leading an effective board, as set out in the UK Corporate Governance Code; and providing strategic advice and facilitating a constructive relationship with the senior management team.

On both of these, we agreed that James Murdoch has done a first class job. In terms of the Board, he is visibly a good Chairman, with good well-structured and open meetings, and sound procedures. He has also put in place robust governance, as you saw from the bid process, on which shareholders have universally complimented the Board.

The relationship with the CEO is key in any chairmanship. On this, he gets very high marks. He is respected and trusted by the CEO and other senior management; and he has excellent strategic insights.

We then considered carefully other factors which could affect his position. The first was his available time, given his executive role at News Corp. (NSDQ: NWS) James has assured the Board of his availability; and Jeremy Darroch confirms that since the end of the bid, James has been fully available as required.

The next was the question of integrity. Clearly there has been a great deal of speculation on this, but your Independent Directors will always deal with substance. We have known James for some eight years, and during that time he has always acted with integrity in the eyes of both the Board and the senior management. If this was to change, clearly the independent directors would re-evaluate the position.

A few shareholders have raised with us their concern of having a Chairman who comes from News Corp, when they expect a further bid. News Corp have made clear that they are not contemplating a bid, and the focus of the entire Board is on helping the company to run well. If there was another bid, we have shown that we have clear governance procedures to deal with it.

I would note that a year ago, five months after the bid was announced, 98% of the shareholders voted for James Murdoch to be re-elected. Finally, the independent directors believe that from time to time there is an advantage in having a News Corp Chairman to facilitate agreement on key actions, such as the recent buy-back announcement, and the progressive dividend policy, which the company has adopted.

We’ve also considered whether there would be any negative reputational effect on the company, as a result of the News of the World issues. We have seen no effect on sales, customers or suppliers over the last five months. The recent results substantiate that. We have seen no effect on the share price, which has materially outperformed the peer group and the FTSE since the bid ended. Finally, we have seen no negative effect internally.

Clearly, before coming to our decision, we also took soundings from shareholders, both directly and through the brokers, most of whom were either in favour of continuation or wished to leave the decision to the Board. We will continue to listen to shareholders at all times.

After considering all of these issues, the Independent Directors reached the unanimous conclusion that James should continue as Chairman.

Nick Ferguson,
BSkyB deputy chairman

Netflix says the deal is a multiyear licensing agreement and will cover most of the first-runs for feature films from MGM and its distribution partners in the region. Financial terms of the deal were not disclosed.

The news comes as Sky Movies is widening access to its service: it’s just launched a new app for iOS devices—although for now this works more as a program guide for the channel’s TV service, rather than as a content service of its own.

The content, as with other films and TV programs that are streamed by Netflix, will be viewable by paying subscribers on connected TVs, tablets, game consoles, computers and mobile phones.

Netflix has not given a specific launch date for its UK and Ireland service except to say that it will launch in early 2012.

Before even opening for business the UK and Ireland, those operations have already taken a toll on the company’s balance sheet. In its earnings reported last month, Netflix said that the costs of taking the service to the two countries would push the company into global unprofitability, and that it would pause further expansion until got back into black.

The exclusive element of the deal announced today will cover MGM films streamed “within one year of their theatrical release,” the company said in a statement. Titles will include blockbusters the two Hobbit movies from Peter Jackson, Zookeeper, Hansel & Gretel: Witch Hunters, and the film version of 21 Jump Street.

The deal will also extend to a selection of titles from MGM’s back catalog: films such as Capote, Fargo, The Usual Suspects and West Side Story. It appears that these will not be exclusive to Netflix.

Netflix already has a deal with MGM covering its home market: in 2010, Netflix signed a $1 billion agreement with Epix to include movies from the studio (among others) in its streaming service.

It is still unclear what this deal will mean to Lovefilm, which had an existing deal with MGM covering its back catalog and new releases. We are reaching out to Lovefilm and will update this post as we learn more.

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Total revenues at the company were $7.96 billion for the quarter, which News Corp. said was driven by strong growth in the company’s cable and TV business—bringing in a mixture of subscription as well as advertising reveue—as well as its film division. The revenue figure exceeded the high end of analysts’ estimates, as polled by Yahoo.

Net income was down by nearly five percent to $738 million, with the most notable charges coming from News Corp.‘s European business. Pre-tax charges at SKY Deutschland were $130 million; the company had to pay a fee because of the withdrawal of its bid for BSkyB in the UK; and it also took a restructuring charge related to News International, specifically around the closure of the News of the World, which had been one of the biggest and oldest newspapers in the country, in the wake of the phone-hacking scandal.

Among the items included in the charge were severance payments to employees, Chase Carey, president, COO and deputy chairman of News Corp. said in answer to a question during the earnings call (more on the call below).

And we may not have seen the last of the after-effects from the scandal. The company declined to comment on whether there has been money set aside (and if yes, how much) for legal actions related to the phone-hacking scandal: several high-profile celebrities, politicians and other public figures were impacted, and those cases will be making their way through the courts now.

Additionally, James Murdoch, chairman and chief executive of News Corp.‘s Asian and European business division, is due to return next week to the House of Commons select committee to give further evidence in the ongoing inquiry.

The impact of the scandal came through in the balance sheet in other ways, too: In contrast to the strength of the company’s TV and film assets, the segment that performed the worst was the company’s publishing division, which had operating income of $110 million compared to $178 million in the same quarter a year ago.

The sale of most of MySpace (News Corp. remains a shareholder), the company noted, has proven to be a boost to the “Other” segment in its balance sheet. The division is still loss-making, reporting a loss of $99 million in the quarter, but News Corp noted that the MySpace offload contributed to a $57 million lift in the category.

From the call:

Rupert Murdoch was not on the call, which was led instead by Chase Carey and David DeVoe, its CFO. Carey kicked off his comments with an acknowledgment of the ongoing situation in the UK and its impact on the business, but immediately set the pace to look elsewhere:

“With so much focused on News of the World, now is a good time to refocus on operational issues,” he said. “We are cooperating fully with the [UK] authorities and do what is necessary to make things right.” Focusing on those operations, a lot of the positive activity and growth at News Corp. in the last quarter seemed to have been focused on the U.S., where the film and TV businesses are based.

Digital deals: Digital continues to figure strongly in the company’s strategy, largely as an integrated part of the company’s overall content business rather than as a standalone piece: the company is increasingly getting digital and mobile rights as a standard part of their content deals. Some notable audiences for some of the company’s VOD services: VOD viewership for the Fox series Terra Nova has exceeded five million, he said.

On Hulu: Carey’s description of why Hulu was taken off the table was simple. He says News Corp. decided, “It is better to own [Hulu] than to sell.

“Partnerships can be complicated,” he continued, but it seems that its a fair enough price to pay to be a part of a leading premium video operation. He didn’t refer to it, Google’s ambition to offer more premium TV could well have compelled them to hold on to the asset, too.

“Hulu is working for us,” he said.

On the board and votes from shareholders to change management including the removal of some of the Murdochs from the board: “We are taking votes seriously and value feedback,” Carey said. But despite that, he also reiterated support for James Murdoch—saying the board had “great confidence” in James with no plans for changes. How that sits with shareholders’ votes longer term was not addressed.

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Sky Go, launched in July for free to Sky subscribers, is partly the Sky Player service which already existed. Android and other platforms are coming in the next few months. BSkyB is likely to link it in with The Cloud WiFi hotspot service it recently acquired.

The service shows Sky is increasingly keen to be viewed on platforms other than its historical satellite boxes. For now, customers require a Sky satellite subscription, but they can use Sky Go on up to two other registered devices. One Nomura analyst told Darroch there is anecdotal evidence to suggest primary customers are sharing those accounts so their friends need not become Sky subscribers.

“I dropped my son off at university the other day and noticed that one or two people had (their parents’) Sky Go subscriptions,” Darroch replied. “It’s something which we will keep a close eye on. if we felt that was something which was getting in the way of TV, we’d come back to that.”

BSkyB Q3 operating profit rose 16 percent to £295 ($463.62) million on nine percent higher revenue of £1.65 ($2.6) billion. It is now ringing an extra £25 ($39.29) per year from customers for an average ARPU of a whopping £535. ($840.8) And the customer base grew by 392,000 to 10.37 million.

Webcast | Release | Slides

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The European court of justice ruled that the FA Premier League cannot stop individuals from seeking better deals for TV sports subscriptions than that offered by BSkyB (NYSE: BSY) – which paid more than £1bn for the UK broadcast rights for Premier League matches – from foreign broadcasters.

The ECJ said attempting to prohibit the “import, sale or use of foreign decoder cards is contrary to the freedom to provide services and cannot be justified either in light of the objective of protecting intellectual property rights or by the objective of encouraging the public to attend football stadiums”.

However, the court ruled against the bid by Karen Murphy, the landlady of the Red, White and Blue pub in Portsmouth, to be allowed to use a Greek decoder card to show live Premier League matches to pub goers at much cheaper rates than BSkyB charges commercial premises in the UK on copyright grounds.

The ECJ said the transmission in a pub is a “communication to the public”, which means that without the permission of the FA Premier League Murphy is in breach of the copyright directive. This directive would not stop individuals buying foreign decoder cards for domestic use.

The FA Premier League, which sells TV rights exclusively to broadcasters across Europe on a territory-by-territory basis, has been clamping down on British pubs buying in live coverage from foreign broadcasters.

The ECJ ruling could potentially have a huge impact on the way BSkyB and other UK and European broadcasters buy rights to sport, films and foreign TV shows. Sky’s share price was down by just over 3% to 635.50p at about 9.20am on Tuesday, as the City reacted to the European ruling.

Murdoch’s youngest son is the company’s deputy chief operating officer, the third most powerful executive at the company overseeing News Corp’s European and Asian businesses including News International and BSkyB (NYSE: BSY), and has been earmarked by his father as his successor.

Pirc, which advises shareholders on corporate governance issues, said: “In light of his close association with the phone-hacking scandal we are advising shareholders to oppose James Murdoch’s election.”

Pirc said in written advice on Tuesday:

“We question James Murdoch’s suitability as a senior executive and potential successor to Rupert Murdoch. As a senior executive at News International it is unclear why he did not initiate in-depth inquiries at an earlier stage and why former colleagues now directly and publicly contradict his stated position that he was unaware that hacking extended beyond [Clive] Goodman [the News of the World’s former royal editor].”

Murdoch insists he was not told about an email which indicated that phone hacking at the paper was being carried out by more than one “rogue reporter”, Goodman.

The News of the World’s former editor Colin Myler and its head of legal Tom Crone have disputed this. Murdoch has been recalled to appear before MPs on the Commons culture, media and sport committee later this year to explain the discrepancy.

“Up until the closure of the News of the World, News International’s response to the unfolding events had not been decisive and featured a number of arrests and resignations rather than dismissals,” Pirc added.

Pirc has consistently opposed the re-election of News Corp directors with close links to Rupert Murdoch, the company’s chairman and chief executive, including James Murdoch.

“Pirc’s key governance concerns focus on the position of James Murdoch as a member of the News Corp board and the implications for minority investors of continuing dominance of the company by the Murdoch family,” the group added.

Family trusts controlled by Murdoch own 12% of News Corp but control around 40% of shares with voting rights, effectively giving them the power to veto any takeover bid.

paidContent adds: Pirc in July said BSkyB should replace James Murdoch with a new independent chairperson.

Alice Macandrew, Murdoch’s spokesperson, handed in her notice in July at the height of the hacking crisis – but news of her departure has only just become public after News Corp tried and failed to make her change her mind.

She becomes one of the first senior executives to quit News Corp voluntarily over disagreements with the company’s approach, which saw the publisher contest phone-hacking lawsuits brought by celebrities and other public figures in 2010 and early 2011 and close the News of the World in July.

Macandrew was personally appointed by Murdoch as his chief press spokesperson in 2009, and was a key adviser on the company’s media strategy from the moment the first stories about phone hacking were written by the Guardian. She reported to Matthew Anderson, group director for strategy and corporate affairs.

In July, it emerged that News of the World had hacked into the phone of murdered schoolgirl Milly Dowler, prompting a three-week crisis at the company. News Corp initially responded by closing the News of the World, but in the week after the company was forced to abandon its £8bn bid for full control of BSkyB (NYSE: BSY) and the News International chief executive, Rebekah Brooks, was forced to resign.

It is understood that Macandrew will leave the company at the end of the year, having served out her notice period. Both News Corporation and Macandrew declined to comment.

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