As Sky Growth Slows, Can Internet Defend It From Downturn And New Rivals?

BSkyB’s financials are still improving, but the company is now flaunting a range of new internet upgrades to try containing subscriber growth slow-down and potential threats from newcomers.

TV subscriber additions fell to 40,000 in Q2, from 140,000 the previous year. CEO Jeremy Darroch conceded to City analysts: “Some people are uneasy about making a long-term commitment right now.”

But half-year operating profit rose 16 percent to £601 million on six percent higher revenue of £3.36 billion and average annual customer revenue rose £8 to to £544. Total customer base grew 100,000 to 10.4 million.

“The company made a number of announcements which confirm that – beyond the near term slowdown – structural issues are looming,” Bernstein analyst Claudio Aspesi writes in a research note.

“While we believe the Pay TV business is inherently more defensive than advertising-funded ones, the depth and length of the downturn in the UK economy are still unknown: any significant changes to our forecasts for the UK TV ad market could be large enough to change the outlook for the stock.”

In the worsening consumer economy, Sky is trying to sweeten existing subscribers with new accessibility…

  • Device access for subscribers
  • : Sky Go, for watching Sky on non-satellite devices, got 1.5 million unique users in December and is launching on Android in February, with new channels Sky 1, Sky Living, Sky Arts 1 and Sky Sports F1 being added.
  • Public WiFi for subscribers: Sky is about to launch its public WiFi service based on its The Cloud acquisition, giving Sky Broadband Unlimited customers free access to over 10,000 public hotspots.
  • Fibre premium, wider footprint: Fibre broadband launching from April at up to 40Mbps for £20 per month. Meanwhile, Sky is extending its copper network to 88 percent of UK (an extra million homes) by June 2013.

And there are new threats…

  • Cheaper internet TV alternatives: Sky will de-couple its movie, sport and entertainment content from satellite by taking it to the coming wave of connected TV owners as post-satellite pay-as-you-go pay-TV – an attempt to head off internet TV apps from operators like Netflix (NSDQ: NFLX), Lovefilm and Blinkbox.
  • Premier League bidders: Al Jazeera Sports may bid up renewal prices in the next rights round. “We’ll have to see what noise there is in the market and who we think may be there,” Darroch told analysts. “It is a blind auction, it’s a sealed bid, but it goes through rounds. Not all packages are awarded in the first round.”

“The unbundling of pay-TV appears a direct response to the launch of Netflix, but also seems to suggest that additional growth through the old model of bundled pay-TV through satellite is coming to a natural end in its growth,” Bernstein’s Aspesi writes.

“The performance of BSkyB (NYSE: BSY) hinges on the continued availability of premium content in the face of possible new entrants determined to build competitive pay-TV businesses over different platforms.”