Sky will be entering the Spanish market with an OTT streaming service within the calendar year, according to a statement from CEO Jeremy Darroch. Speaking to analysts at the company's quarterly earnings call, Darroch said that the Sky service would be branded Sky España, and would be a "simple and affordable" OTT offering.

The planned service appears similar to the Now TV standalone streaming service in the UK, targeted at people who do not subscribe to Sky's satellite TV service. This year Now TV has expanded to other Sky TV markets Ireland and Italy, and into Germany, where it is branded Sky Ticket.

Reports had appeared last year about Sky's plans to launch in Spain as a first step to expanding the reach of its streaming service across Europe. One of the drivers for launching is Spain according to the company is that it has the largest "free-to-air headroom" in Europe, outside of its existing footprint. Those are the homes the service is targeted at, and at least initially, Sky plans a relatively modest local investment in both content and resources.

But the operator plans to grow its investment in original programming by 25% to keep up with streaming rivals Amazon and Netflix. It will also be launching a co-production with Home Box Office Inc. (HBO) next year about the Chernobyl disaster.

Sky's entry into Spain does raise questions about its relationship with HBO, which has been an important content partner for the operator. So far, Sky has offered its OTT service only in countries where it has a satellite pay-TV service, while HBO has partnered with Sky for distribution of its content both via linear and OTT channels in Sky markets. But last year HBO launched its own streaming service in Spain, HBO España, so the Sky service would be a direct competitor. It suggests that the two have decided to go their separate -- and competing -- ways.

One of the advantages of an OTT service is that set-up costs and operations are much cheaper, with more functions potentially centralized than with a pay-TV operation. So it makes perfect sense for an operator/broadcaster like Sky to leverage both its content libraries and the technology stack it has already developed for existing markets to now reach out to new markets. But that's equally true for HBO -- meaning that Sky will have to do without HBO content such as Game of Thrones and Westworld in those regions, and have to cope with one more well-funded competitor with high-value content.

Sky's strategy to supplement free-to-air broadcast homes with a low-cost premium streaming service makes a lot of sense, but it also needs to be aware that pay-TV is picking up in Spain. Recent results from both Spanish incumbent Telefónica and Orange Spain suggest that subscribers are finding more value in pay-TV, particularly within a bundled proposition.

Telefónica grew pay-TV subscriber numbers in the second quarter for the first time in a year, largely driven by the addition of 51,000 subscribers in Spain. According to the company, this was driven by new net adds and upgrading lower paying subscribers to the Fusión+ Ocio bundle in recent months, which grew to 151,000 customers by the end of June 2017. The operator is also launching a new entry-level bundled offer that includes TV, which it expects will further accelerate pay-TV penetration.

Orange has also grown its TV subscriber base on the back of strong growth in Spain. It grew its Spanish pay-TV subscriber base by 42.2% year-on-year to 541,000.

Pay-TV appears to be gaining subscribers in Spain, which at least in theory could shrink Sky's target market. Fortunately for the UK operator, there's still a long way to go -- Spain's national telecommunications observatory (ONTSI) estimates that more than 60% of households in Spain were still getting their TV service over-the-air at the end of June 2017.

Sky's results were mixed, with a 5% increase in revenues to £12.9 billion ($16.9 billion) but a 3% decline in EBITA and 6% decline in operating profits due to the increased cost of Premier League soccer rights. Sky is also waiting to hear on its proposed acquisition by Fox from regulators which is now expected to happen next year. The delay could affect the operator's investment plans.

— Aditya Kishore, Practice Leader, Video Transformation, Telco Transformation