Optimistic glow for Sky Deutschland

In the past few days, Sky Deutschland (SD) has resolved a troubling legal dispute with former investors by settling $20 million on them, and also seen News Corp’s Rupert Murdoch say last week that his investment in the German pay-TV operator was “starting to pay off”. A week ago, SD raised €165 million via a convertible bond issued to a News Corp subsidiary.

In other words the broadcaster – and its main backer – seems confident in its own future, but is this optimism well-placed? A new note to investors from Morgan Stanley seems to endorse that optimism, suggesting that Sky Deutschland is “just getting going”. “SkyD would be EBITDA break-even at 3 million subscribers. Its problem is that it has been stuck at 2.5 million for four years,” states the bank, bluntly.

But there’s a strong upside. The past two quarter year’s trading have seen good operational results, with strong net additions (131,000 and 133,000) and well above market expectations. Churn is well down, to 11.8 per cent per annum, from 21.6 per cent this time last year – and now the lowest for 21 successive quarters. Moreover, ARPU is also positively up as old contracts are weeded out and the impact of extra HDTV revenues percolate through the system. Sky Germany’s CEO Brian Sullivan thinks the nation’s HDTV base can be pushed from today’s five per cent level to 30 to 50 per cent.

But that ambition is still some way off. Closer is the end-of-year results which will likely show a loss of about €258 million, says Morgan Stanley. Next year (2011) will see another loss, “significantly better” than 2010, but still a loss, but the light at the end of the tunnel will be in 2012 when SD should scrape by with a modest – but praiseworthy – €10 million profit.

However, the company will still not be entirely home clear. The bank’s report warns investors of the core “German problems” of under-penetration by pay-TV services, at just 11 per cent in Germany compared with 36 per cent in Italy, 42 per cent in France and 53 per cent in the UK. The second major question is whether HDTV can be a game-changer in Germany, and create the catalyst that will aid Sky Deutschland? “There are signs that HD is such a product. In Q3, 90k subscribers signed up to the HD service that costs an extra €10 per month. In Q4, HD additions were 133k, drawn broadly equally from new subscribers and upgrading existing customers. HD penetration of the SkyD base has risen from 10.9 per cent in Q4 2009 to 22.4 per cent in Q4 2011,” says the bank.

“Sky reports that satisfaction levels amongst existing customers has greatly improved in the last 18 months. The customer service experience is improving with 80 per cent of calls answered in 20 seconds. 90 per cent of Bundesliga customers and 75 per cent of movie customers express satisfaction with the service. Sky’s next challenge is to attract new customers. Historically 80 per cent of prospects don’t know the Sky proposition beyond Bundesliga and only eight per cent of Sky customers have bought through recommendation by an existing user versus 40 per cent at other pay operators. We see a substantial opportunity here for Sky and, with a recommendation rate of 90 per cent for HD, the first signs that this type of word of mouth recommendation is beginning to work to the benefit of the company.”

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