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Nervous times at Sky Deutschland

January 23, 2014

By Chris Forrester

Shares at Sky Deutschland are down dramatically over the past month, and there was a further sudden drop on January 22nd (from €7.18 to €6.91) adding to shareholder anxieties and which have seen Sky Deutschland’s price tumble from $8.14 just before the Christmas holiday by €1.25.   The news prompted Patrick Wellington and his media team at bankers Morgan Stanley to put out a client note.

There are four reasons cited by the bank, not least that one significant shareholder has reduced its holdings below 10 per cent of the company. The bank also mentions anxieties over “lackluster” Q4 subscriber growth. Sky Deutschland ‘s actual numbers come out on February 6th and Morgan Stanley suggests that net subscriber additions will be about 135,000 (which is a bit less than the earlier expectations of 150,000). This 135,000 would mean that Sky Deutschland, during the 12 months to December 31st, would have added an overall net 301,000 net new subs, compared with the 351,000 added in 2012. Morgan Stanley expects Churn to be about 12.2 per cent, and ARPU of some €34.50.

“The market fears that the last two quarters’ lacklustre growth may be symptomatic of a lower German appetite for pay TV . This would have serious implications for longer term growth expectations and the back end loaded DCF valuations of Sky Deutschland,” notes the bank.

Then there’s Sky Deutschland’s new ‘SNAP’ OTT service. “Sky Deutschland launched its OTT service Snap at the end 2013. It offers an on-demand film/TV library of circa 4,000 titles with Sky customers paying €4.90 per month and non Sky customers €9.90 per month. There are two issues related to Snap. The first is that Snap is expected to be loss-making in 2014, probably to the tune of €25 million – €30 million as Sky has bought extra content for the service and will incur marketing and start up costs.

The bank says: “The market’s greater concern may be that the launch of Snap could imply that Sky Deutschland management feels that the OTT market is more buoyant than it has previously allowed and that its development may impinge on the growth of the ‘full fat’ pay TV subscription market where Sky is the dominant player. Allied with the relatively weak subscriber growth in the last two quarters, the market may be sensing that the traditional pay TV market growth is not as strong as it thought hitherto.”

Those are the downside elements. On the upside the bank reminds clients that Sky Deutschland appears very confident that its net new subscriber growth will improve in 2014 and be above 400,000 and tells clients that it sees 415,000 net new subs this year. It also suggests that Churn should reduce as the year unfolds.

“Sky Deutschland appears confident it will get past 4 million subscribers in 2014. CEO Brian Sullivan observed at our Barcelona Conference in November that he sees a strong year ahead and is “very excited about it”. He observed that he is starting to get comfortable with forecasts of customer additions in excess of 400,000 in 2014. Importantly Sky Deutschland is minded to let subscriber growth come through in 2014 whereas 2013 was characterised by an emphasis on ARPU and customer quality,” states the bank.

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