BSkyB: Ready for a “Noisy summer”

Now that the dust has settled down on BSkyB’s Q3 results, perhaps it is time to reflect on the overall state of play in UK pay-TV. First, and provided you ignore the deliberate fudge over actual DTH net new subscriptions, which for Q3 were probably – at best – about 5,000, but if you just look at BSkyB in pure financials, then the pay-TV broadcaster is on a roll.

BSkyB enjoyed impressive product growth, not in pure DTH numbers but in total products additions of 715,000, with retail subs revenues rising 7.6 per cent (up from H1 results of 5.2 per cent) and further new revenue streams developing very nicely (NOW TV, On Demand movies up 37 per cent, Sky Go Extra at 44,000).

Indeed, investment banker Morgan Stanley says simply: “Sky continues to pump out good numbers. However, the market has concerned itself with slowing traditional TV subscriber growth and perceived threats to the business model, particularly the risk of content cost inflation due to the entry of BT in the sports market and the possibility of greater churn as OTT delivered TV offers basic subscribers potentially lower-cost ways to access some premium movie and sports content.”

“Sky has good product growth, up 9% in total yoy to 30.2m. Although traditional pay TV has slowed it is seeing continued growth in products like HD (108k adds in Q3) and broadband (152k). Sky, moreover, continues to develop a number of new fast-growth revenue streams. Sky added (i) 44k SkyGo Xtra customers at £5pm in this quarter (ii) It saw strong growth in SkyBet revenues, which drove other revenues up 24% in Q3 (iii) It saw a 37% yoy increase in movie rentals following the sharp increase in internet-connected Sky+HD boxes. In addition it has added c50k Now TV subscribers at c£15 pm in the last two quarters. Nine-month sales growth of 6%, albeit including the benefit of a c2% price increase in the last couple of quarters, is good in the context of a challenging consumer environment.”

But that environment is about to become more challenging. As well as a change of ownership at Virgin Media, the deep pockets of BT are about to re-enter the market with a BT Sport offering complete with a slice of the English Premier League, making – in Sky CEO Jeremy Darroch’s words – for “a noisy summer”.

Morgan Stanley says: “As the Premier League season draws to a close, the market is beginning to anticipate the details of the impending BT Sport launch. BT Sport intends to host an event on May 9 at its Olympic Park facility, and BT has its result/investor day on May 10. BT Sport appears to be dropping into the ESPN role in the sports market, with a decent but less appealing sports line-up likely to act as a low-cost supplement rather than replacement for Sky Sports. The competitive impact is limited by BT restricting its content spend to c£300-350m pa (BSkyB spends £2.2bn) and by a focus on upselling existing customers and acquiring customers from the Freeview/ YouView base. Nevertheless BT will clearly look to make an impact; there is likely to be a series of attractively priced package deals and marketing of BT Sport has already begun.”

The bank’s report admits that Sky might well be vulnerable in terms of increased churn, especially from its lower-priced subscribers who might be in any case be tempted by the free-to-view offerings of Freeview or Freesat. However the other way of turning this risk to one’s advantage is to create a product (aka as NOW TV) and earn potential revenues from the 10 million of existing Freeview users.

Moreover, Sky’s customers continue to show strong loyalty at the upper tier levels, and “continues to demonstrate the resilience of demand for its premium TV products,” says the bank. It continues to add HDTV customers, and its other ‘triple play’ core products are doing extremely well.

And the market seems to agree. Last Friday BSkyB’s share price hit 860p a share, up 9p (€0.106) per cent) on the day.

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