YouView is finally on sale: 7 reasons why it may fail

YouView consortium members' bosses

Boxes for YouView – the UK IPTV JV comprising the BBC, ITV, Channel 4, Channel 5, BT, Talk Talk and Arqiva – have finally gone on sale, four years after conception.

When YouView chairman Lord Sugar presented them recently, he said: “The audience, to me, is Mrs Smith on the seventeenth floor of a tower block in Newham.”

Sugar’s brand of plain talking has made him a national icon. On this occasion, however, it is not so helpful. Most observers believe YouView, which consists of an Ethernet-enabled Freeview DVR with broadcasters’ catch-up apps, will struggle in its current form. Here are seven concrete reasons why:

1. Failure To Understand its Addressable Market

  • YouView’s stated target audience of mass-market consumers appears to have been defined more as last resort than through careful design. Perhaps long delays ruled out other, more lucrative avenues – people who will pay subscription for lots of TV are already Sky or Virgin Media subscribers.
  • Most Freeview TV viewers appreciate extra choice, but not enough to pay a regular subscription. Additionally, viewers who already refuse to buy a Freeview+ DVR are unlikely to pay £300 for YouView’s similar delights.
  • Perhaps BT and TalkTalk will offer new broadband subscribers a free YouView box. Will that lure Mrs Smith on the 17th floor? Is she really tempted enough both to take broadband and to consider YouView more appealing than other TV-broadband bundles available, like satellite?

2. Failure To Devise A Sufficiently Compelling Consumer Proposition

  • YouView never presented a clearly articulated service or strategy until Lord Sugar came on board last year. The external public mission statement was that YouView is the natural, internet-connected long-term upgrade to digital terrestrial’s Freeview standard – but its internal hopes were pinned more on YouView’s use by its ISP stakeholders to prevent short-term broadband customer churn.
  • Both make sense. But a glaring problem remains: how will YouView and the existing Freeview+ DVR brand compare in Mrs Smith’s eyes? YouView is not a bargain at £300.
  • Pretty soon, both YouView and Freeview+ boxes will be competing to win new customers. How can Arqiva, Channel 4, ITV and the BBC be shareholders in both when they seem so similar? And is that a good use of investor and license fee money?

3. Failure in Estimating Reliable Sources of Value and Revenue

  • Any pricing strategy requires your customers to pay you for something, at some stage. But profits are problematic when YouView will have to compete on price, given how fiercely competitive the already crowded UK broadband and TV markets are.
  • When it does try to compete on price, how can it match its rivals who have much more structural headroom to do so? Unless there is a thoughtfully considered and well executed profitable pathway to paid content, does YouView even have a real business?
  • Advertising would be a limited source of potential value because broadcasters will not share their linear-channel revenue. So are the investments from ITV, C4 and C5 recoupable through its own increased advertising CPM? If so, would that necessitate first replacing Freeview?

4. Failure To Recognise The Formidable Competition

  • There does seem to have been an underestimation (or wilful blindness) to what’s already out there, and what’s coming.
  • Can YouView compete for Mrs Smith’s attention against Sky, Virgin, Freeview, BT Vision, Amazon, Apple and Google’s content libraries, proven service capabilities and marketing budgets?

5. Failure To Build A Pathway Toward Network Effects

  • Success (or survival) for YouView requires critical mass to encourage network effects that would persuade Mrs Smith to make the switch. But it’s difficult to see what type of ecosystem can develop around YouView.
  • Third parties need incentives to spend their own resources and forgo other opportunities to build products and services for YouView.
  • But, despite earlier talk of on-board “apps”, opportunities for developers to even consider building them for YouView are absent. The box is closed and there are no developer tools or info discussed or cited anywhere.

6. Failure In Capital Budgeting

  • YouView faces significant customer acquisition costs in order to educate its target segment of price-sensitive late adopters and subsidise box distribution. But, with retail planned through high street stores alone, it has little pricing power of its own and is aiming at a low-spending segment. It is, therefore, highly unlikely YouView will ever recoup its backers’ investment.
  • Given this, there does seem to have been curiously optimistic capital budgeting analysis.  As ever, outlay minus income equals: are there better uses of everyone’s time and money?
  • One report in 2008 suggested the BBC Trust estimated a cost of £115 million over four years to run YouView, which might be much higher now.  Assuming we consider break-even will require revenue that is largely met by a la carte content, the precise math would require knowing the as yet unreleased pricing.
  • Recall that iTunes is not profitable in itself – it helps pay Apple’s operational costs so it can sell high-margin devices. YouView, however, is not making money on boxes but subsidizing them.

7. Failure To Reject Confirmation Bias

  • Managers are naturally worried for their jobs and reputations – as such, they are prone to confirmation bias. However, outside directors representing shareholders are failing in their duties if they fail to counterbalance this tendency.
  • Of course, broadcasters, broadband operators and technology providers each have different perceptions and ways to calculate return on investment.  Some might say: “Now that we are here, why not proceed?”  Sure, but how and why did we get to this point? Lord Sugar came on board to kill or cure. Instead, is he going to simply confuse Mrs Smith by “taking on Freeview”? Why spend £115 million to compete against yourself? Or, are they now doing it so they can convince someone another company to buy and give YouView a good home?
  • The question they need to answer may not be: “How best to plan for marketing YouView for the all-important Q4 2012?” but rather: “If this is not a viable business, is it already worth more in liquidation than as a going concern?”
  • And the follow-on question: “Who else could make better use of the technology assets and IP of its current TV backers?”

Nayeem Syed is a digital media legal consultant who has worked for Google, Warner Music, Warner Bros Pictures, Hutchison, Accenture and others.

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