Customer management key in Sky's war with Virgin

By Stuart Lauchlan, news and analysis editor

The battle royal between Richard Branson and Rupert Murdoch is bad news for viewers deprived of their weekly fix of '24' and 'Lost'. But it’s also an interesting exercise in customer management as the two media tycoons mount a PR battle to keep consumers on side.

Screens of Virgin Media – formerly NTL – customers went blank last week following a bitter public row between the companies. Virgin customers have lost access to BSkyB's basic channels such as Sky One and Sky News because the companies could not agree on what Virgin should pay for them.

"The fallout from the dispute between Virgin Media and BSkyB is bad news for consumers," says Philip Cullum, the National Consumer Council's deputy chief executive. "Over three million Virgin Media customers have been left high and dry. They have lost some of the most popular channels, they aren't getting a discount, and they've had little notice."

But the ramifications for customer management in a multi-channel, digital age go further than the row between BSkyB and Virgin. "Our concern is that this dispute may expose a more fundamental flaw in the digital television market, and the extent to which it is competitive for consumers," adds the NCC’s Cullum.

The NCC is now looking into upgrading the crisis to the status of ‘supercomplaint’ with the Office of Fair Trading or Competition Commission. "If necessary, we will refer this market to the regulator using our power to bring a 'supercomplaint'," he says. "In the meantime, we urge the two companies to put consumers first, by reaching a speedy solution and being crystal clear about customers' rights."

Virgin issued a statement accepting that the situation was symptomatic of possible future problems throughout the industry. “We agree that this dispute is one example of deep-rooted structural flaws in the way the UK's pay-TV market operates,” it said. “We would welcome a thorough investigation of the causes of this and possible solution by the relevant regulatory authorities and would cooperate fully with any such enquiry.”

BSkyB for its part has been trying to pitch an appeal to customers directly. “We believe absolutely in the quality of our channels and their strong appeal to customers, but we've offered a simple alternative if Virgin really doesn't think they're worth 3p per customer per day,” explains a spokesman. “At no cost or risk to Virgin, we'll retail our basic channels directly to cable customers on the Virgin Media network to ensure that no one misses out on the TV they enjoy."

Hidden agenda?

But Virgin Media CEO Steve Burch accused BSkyB of having a hidden agenda. “It's a bold-faced attempt to take our network from us,” he says. “It's a ludicrous proposal and they know it's ludicrous. We are not going to let them steal our network; they're far more dominant than they should be. It's a ridiculous request. It's classic Sky to hijack our network, to continue to have not only their dominance on their network but to take our network as well. It's very misleading, an attempt to distract and confuse people."

The stakes are high. Media analysts estimate that in order to cover the £60 million a year in lost revenue from carriage fees and ad sales, BSkyB will need to sign up 150,000 extra subscribers. Virgin meanwhile cannot afford to see mass defections of NTL and Telewest customers to Sky.

Virgin Media has more than 3.3 million TV customers affected by the move, while BSkyB has said it will take a hit of up to £20 million in operating profits for the remainder of the year to end June. Jeremy Darroch, Sky's finance director, admits: " In the short-term there is a financial cost and we'll have to bear the consequences of that.”

So the battle is now on to keep customers on side or to win them over. "There are a percentage of customers that are unhappy that Sky's channels are no longer on the air, but we are saving at least 95 percent of them at the moment with retention offers,” said Burch. “The vast majority of our customers see Sky as the bully in all this."

Market research seems to support his claim. A poll of visitors to www.webuser.co.uk found that 59 percent of respondents blame BSkyB for the dispute, with only 27 percent blaming Virgin Media.

But BSkyB hit back claiming that Virgin was playing the 'victim' to win public sympathy. "I think their PR offensive was always part of the plan. They wanted to have a big dispute," said CEO James Murdoch. "They want to try and turn Virgin Media from what is a pretty big business in residential telephony and the biggest business - or it was until the last quarter - in residential broadband into a victim to try and get public support."

Customer-friendly pitch

Winning and hanging on to the support of customers is now crucial. Virgin Media claimed an early victory at the weekend, claiming that just 100 customers a day have cancelled subscriptions since Sky One was withdrawn.

"We haven't lost very many yet," suggested Virgin CEO Richard Branson. "Sky obviously took a gamble. They started the popular programme "24" the week before knowing we were likely to get to this stage, gave our people their fix of the first episode and then we couldn't reach agreement so it was a dangerous move from our end. But, most of the viewers seem to be staying loyal and I think we won't lose very many.”

So stand by for a customer retention war. BSkyB, which broadcasts to 8 million households, is advertising a £15 'rescue package' to Virgin Media's 3.3m customers. A poster campaign featuring the slogans "Don't Lose Lost" and "Get Jack Back" - a reference to the lead character in 24 - is running to encourage Virgin subscribers to follow their favourite shows.

For its part, Virgin Media has made its own ‘customer-friendly’ pitch by saying that customers unhappy at losing 24, Lost and The Simpsons will be allowed to cancel their contracts without penalty payments. Customers who receive just the TV service will be given a once-only opportunity to cancel their deals before the end of March. Normally, Virgin Media customers who sign up with a one-year contract would be expected to pay out the rest of the deal if they wanted to cancel the service.

It has also announced a major movie promotion in a bid to placate customers who are angry about the loss of channels such as Sky One. "Among both our customers and the public as a whole, we believe there is a significant groundswell of support for our decision to stand up to BSkyB: we are determined to ensure it is the customer that benefits from our determination to do so," Burch says.

But can any customer really win? Or are the various ‘interests’ simply too vested? "This dates back from an old battle on NTL's attempt to swallow ITV and then BSkyB's bite of 17.9 percent stake in ITV. Back then, we said it's a chess game in 'stalemate position', and we said this saga will continue! And indeed, it has but in a more profound and strategic way that will have an impact on the quad-play competition and digital content offerings across all platforms in the UK market,” argues Aleksandra Bosnjak, analyst with research firm Ovum.

“Two months on from the BSkyB-NTL battle over ITV, we face what could be described as a zero-sum situation where our contenders for the title of UK 'digital content king' will gain or loose exactly by the subscribers' loss or gain of the other! Neither BSkyB nor Virgin can win as the two parties embark on a mutually destructive PR campaign. It still remains to be seen how the regulator will react to this self-destructive PR behaviour.”

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