Our take...
Focusing on sports content is a logical move; Sky's pay TV business has been built on premium live sports, specifically the EPL, and this content is likely to have strong appeal for many Xbox owners. The introduction of live sports content– for which consumers have a proven willingness to pay, not only via the TV but also online – is a first for the Xbox in any territory. The US iteration of XBL Video Marketplace includes some sports video but this is limited to content such as season previews and recaps for Major League Baseball.

For Sky the delivery of content to the Xbox will enhance the value of Sky Player to existing subscribers to Sky's Pay TV and Broadband Max packages. Unlike the PC and Mac versions of Sky Player the Xbox service will deliver Sky's content directly to the television set. While Sky's pay TV customers can already view channels through the primary screen, the ability to watch on-demand catch-up through the Xbox will provide additional flexibility around the linear schedule. The addition of Sky Player to Xbox marks the first time that on-demand catch-up has been available to Sky's Pay TV subscribers through the television. The idea of using the Xbox to deliver a value-add service is nothing new – in the US Netflix's DVD subscribers can access on-demand movies and TV shows through Microsoft's console.

But unlike Netflix (which provides free online streaming as a means of attracting and retaining its core DVD rental subscribers) Sky is also looking to monetise online video delivery as a revenue stream in its own right. Although the cost of a Sky Player subscription package on Xbox has not yet been released Sky's standalone PC-based service costs from £15/month for simulcasts of the basic channels – only £1.50 less than a basic Sky TV package. Consequently a new PC-based online-only subscriber will generate similar revenues to a pay TV customer. However the costs associated with online delivery (such as the cost of video stream delivery) must be weighed against the costs associated with the traditional business (e.g. subsidizing set-top boxes).

Although the Xbox will continue to be seen first and foremost as a gaming platform the availability of Sky content (in addition to videos through Microsoft's own online store) will strengthen the console's appeal as a general entertainment platform. It is possible that Microsoft will look to generate revenue from Sky Player directly by limiting access to the service to XBL Gold subscribers. The company has used this strategy in the US where, in order to access Netflix's movie streaming service through the Xbox, users have to have an XBL Gold membership, at a cost of $49.99 per year, in addition to subscribing to Netflix.

The one potential conflict of interest between Sky and Microsoft is on the VOD side, as both Sky Player and the Video Marketplace offer content on a PPV basis. At present the XBL offering in the UK and Ireland is limited to a small selection of movies but will expand later in the year as Microsoft rolls out its Zune initiative. New release VoD movies distributed through the Xbox Live Video Marketplace fall into the same window as titles on Sky's pay per view Box Office service. But it is likely that, as with the PC-based Sky Player, Box Office content will only be accessible to subscribers to Sky's service and not to all Xbox users. In this case cannibalization of Microsoft's own content sales would be kept to a minimum.

If Sky Player is restricted the Xbox Live Gold users the revenue gained from converting a basic tier subscriber to a gold package would likely outweigh the per-user revenue generated from individual content sales through the Video Marketplace. With Studios typically receiving 60 per cent of the consumer price of an online movie rental a a consumer would need to rent around 13 movies per year to generate the same revenue for Microsoft as a single £39.99 Xbox Live Gold annual subscription. Given that online movie rentals represent a small revenue stream the benefits of a collaboration with Sky are likely to outweigh any cannibalization effect on Microsoft's own online movie transactions.

The multiplatform approach that Sky is taking is part of a wider trend among major cable and satellite operators keen to preserve their role as gatekeepers of premium content. Screen Digest expects Sky to seek more device partners in an effort to extend the strategy. One obvious possibility is an equivalent deal with Sony for its PlayStation 3 console as the two companies are already working together on Go! View, an online video joint venture for Sony's PlayStation Portable (PSP) device.