Bank: “Sky in sweet spot, but squeeze is coming”

Mike Williams, telecoms analyst at investment bank Exane BNP-Paribas, says the battle for eyeballs – and subscribers – is escalating among pay-TV players and as OTT content quality and quantity continues to improve. The bank’s report says: “We expect them to increasingly try to compete as substitutes (rather than complements). Additionally, as OTT players, most notably Netflix, increase their content budgets, we see further pressure on their content budgets, particularly for TV series and movies.”

Williams praises Sky, suggesting that the market should be in the “sweet spot” as far as Sky’s investment cycle is concerned but also issues a caution. “Accelerating product growth (helped by the repositioned Now TV), transactional revenue from the investment in connected boxes and improved retention driving the top line; limited content inflation, cost control and strong operational leverage translating the above into a sharp improvement in profit and cash over the next 12 months. Our enthusiasm for this near term story is tempered however by: the ever present spectre of content cost inflation (notably the EPL from 2016/17); the increasingly intense UK promotional environment (softening the link between product growth and ARPU); value dilution from quad-play and FX headwinds. The near term risk reward is finely balanced in our view.”

He warns that the linear broadcast v OTT debate is only going to intensify. “More platforms mean more competition driving up content cost – which Sky passes on to the consumer through price increases. At the same time the viewing public gets more choice on how to consume TV/video – price increases on linear ultimately enhance the opportunity for new entrants. So far Sky has managed the twin challenges of 1) embracing OTT (Now TV) without cannibalising subscription and 2) defending against new entrants (BT, Netflix et al). This challenge can only intensify from here necessitating increased investment in own commissions, product breadth and below the line retention. Navigating this structural challenge will provide [Sky] management with its sternest test to date.”

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