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Anxieties over Sky’s numbers

Hot on the heels of one report that suggested that Rupert Murdoch might be about to bring the trio of Sky pay-TV broadcasters into his 21st Century Fox operation comes a highly negative report on Sky including its European businesses.

The report comes from equity analysts at Berenberg Bank. The bank has been negative on Sky’s prospects for some time, and this latest study doesn’t depart from that view and firmly advises investors to “SELL” their shares. The bank argues that Sky – at least in its UK and German markets – is already offering deep discounts during its first quarter of a new financial year (which started on July 1st) despite frequently saying that its strategy was to abandon such discounts.

Sky reports its Q4 and full-year numbers next week on October 13th.

Berenberg suggests that the rumours that Fox is looking to consolidate Sky are “flawed”.  “We believe Fox is more focused on content monetisation than on distribution, and we doubt US shareholders would favour Fox increasing its exposure to pay-TV.”  The bank admits that the Murdoch family, who control Fox, are not always known for listening to their shareholders, “we believe that a deal to take full ownership of Sky would be one step too far for Fox’s domestic investors. Pay-TV in the US is not looked upon kindly by investors, being at risk from the issue of cord-cutting, which has seen millions of households drop their high-priced pay-TV subscriptions in favour of lower-priced OTT services. This issue has affected both broadcasters, which rely on affiliate fees, and pay-tv operators.”

The bank is also concerned that Sky’s subscribers are “spinning down” to lower-priced tiers. “Sky’s ARPU clearly indicates that customers are spinning down to lower-priced services.  Given that the company does not split subscribers to its Now TV OTT service from “full-fat” satellite customers, we do not know how the mix has evolved. However, the fact that ARPU is not really growing, despite Sky selling more services per customer and also increasing prices, suggests that there must be spin-down. In the US, the pay-TV operators have been slower to launch their own OTT services, so the customer loss is clear to see (whereas Sky’s opaque reporting means we cannot easily prove the number of full-fat subscribers is declining) and this has been a considerable concern to investors in pay-TV businesses such as the cable operators.”

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