A focus on content and a growing acceptance of customer transition to Over-the-Top (OTT) delivery were at the fore as Sky released its results for the six months to the end of December 2016 (Sky's fiscal Q2) this morning. The devil was in the detail today, not for Sky's near-term outlook, but for its longer term growth strategy as it increasingly aligns for the rapidly changing TV marketplace. Despite a hit to operating profit from the timing of Premier League payments, Sky saw its overall subscription revenue grow 4% in the period with 503,000 customer additions across its footprint. Much of Sky's focus is now on content and original production, non-linear consumption and OTT distribution, bringing the synergies of a combination with 21st Century Fox into sharp focus. Among key content and distribution developments:

• Sky will launch Sky Q as a broadband-only product in the UK during second half of 2017 with launches in Italy and Germany to follow, showing that OTT is now seen as a viable means of reaching higher-value customers.
• Sky Store will be expanded to Germany and Austria from Summer 2017 as transactional revenues from UK Store reached £89m for full year.
• Sky highlighted its focus on becoming a major European production studio with a move into film production, joint-ventures with five Italian production companies and an increase in local production investment in Germany. Sky currently has 100 original series in production representing 1,000 hours of new content.
• Sky referenced the shifting viewing patterns of its customers on numerous occasions, highlighting its linear carriage dispute with Discovery; a record 2bn on-demand views; a statement that it would focus on channel brands that 'embrace on-demand'; and a note saying that 75% of all Sky Atlantic viewing is on-demand.
• It acknowledged that younger viewers were turning away from sport and seeking different types of content, although it said that Premier League viewing had picked up in January after a drop in the previous half. It also revealed a new deal with UEFA for England's UEFA Nations games.

While Sky continues to highlight the strength of its multi-product portfolio, including the communications services, content as core stood out. We believe that the deal with 21st Century Fox is likely to be approved this time around and that the real strength of that combination is not in the distribution access Fox will gain, but in the content flexibility the combined entity will. That nuance is central. With an increased focus on OTT distribution, the strength of the combination becomes crystal clear. No mention was made today of the international expansion using OTT that Sky has previously talked of, but clearly a direct tie with a major studio and additional channel business would smooth wider international roll-out of the subscription business. We believe that Sky will bring this back to the head of its agenda once the Fox deal completes. Sky said its own move into movie production was aimed at complementing Hollywood output, particularly in Italy and Germany where local movies remain key. But it also highlighted the windowing flexibility that full control of its own movie rights would bring.

Couple this sort of statement with the reality that Sky is removing one of the key differentiators between its satellite and OTT service by offering Sky Q functionality over IP, and you have a the perfect set-up for a focus on OTT subscription television for future growth. Sky revealed that it saves around £150 in subscriber acquisition cost by using OTT. Although no specific figures were revealed, its ARPU profile has shifted to a wider range in the last five years with a higher mid-point and longer high-value tail, despite the increasing mix of nominally lower value OTT customers. UK churn was up, however, and subscription growth in the UK and Italy is running at five per cent or less, meaning Sky must increasingly seek wider growth opportunities for the pay TV business.