The partnership will at first see Google provide its user-generated video, e-mail, search and targeted advertising tools to customers of BSkyB’s five-month-old broadband internet service – the first licensing of the video tools Google bought when it acquired YouTube for $1.65bn in October.
The companies plan to extend the partnership to BSkyB’s core television platform, however, by replacing traditional 30-second television adverts with targeted commercials stored on hard drives in BSkyB’s set-top boxes.
“This is a really, really big deal for us,” said Eric Schmidt, Google’s chairman and chief executive. “If it works, it will become our most lucrative deal from the get-go.”
Neither company would confirm the financial terms but BSkyB is thought to be in position to take the lion’s share of the revenues.
James Murdoch, BSkyB chief executive, said he was not changing the company’s earnings guidance to investors but Mr Schmidt said: “It should be net positive for Sky.” Mr Murdoch said the “multi-year” alliance was structured as a revenue share. BSkyB would contribute to the “substantial engineering resources” Google would commit to the alliance and towards the cost of the storage and capacity consumed by its customers’ activities.
Mr Schmidt said Google had chosen the UK as a “test bed” because of fast broadband speeds and high broadband penetration. “Britain is ahead. They have so much bandwidth it changes the definition of how people use Google.” The UK market, already 15 to 16 per cent of Google’s revenues, was “exploding”.
For BSkyB, the alliance should help distinguish its service from competitors in the UK’s broadband market and expand its small advertising revenues.
Mr Murdoch said BSkyB expected broadband to provide income from communications including internet phone calls; subscription revenues; and services including advertising.
The alliance comes as traditional broadcasters are looking for ways to regain younger audiences lost to social networking and user-generated content sites, and fits with BSkyB’s previous moves to differentiate itself from rivals such as NTL and BT Group in the fast-converging media and communications industry.
The fact that no figures have been disclosed may be significant. BSkyB has no doubt paid for the privilege of having Google handle the “back end” of email, search and video management, but the revenues may be small at first. BSkyB will feel it has struck a marketing coup, however.
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