Update Sky Germany: discouraging results

On the one hand it is probably very fair to say that a company that has suffered the sort of problems that Premiere/Sky Deutschland has suffered over the past two years is doing well just to stay afloat. But the investment community likes to see progress, and a note from investment bankers Morgan Stanley doesn't make good reading.

The bank describes Sky Germany's latest numbers (low net additions of just 67,000) as "disappointing". The pay-TV broadcaster now anticipates the all-important EBITDA breakeven as happening around the 2.8m-3m subscriber mark. That's good news (the earlier guidance was for breakeven at about 3m-3.4m) but that it is going to take another year to get to that number, and that's bad news in the bank's opinion. In a market where pay-TV has such a low penetration, the bank says it finds a net growth of around 100,000 per quarter as "discouraging".

"The market will worry that (i) this indicates the German market will remain resistant to pay TV as in the past, (ii) churn has been higher than Sky expected and (iii) that slow progress may mean Sky will need further finance along the way. Our forecasts (which have Sky at EBITDA breakeven in 2012 rather than 2011) show Sky exceeding its current [banking] facilities during 2011.

The bank's report fairly reminds investors (and perhaps itself) that this ‘new look' Sky Germany is a very different beast from the corrupt Premiere. Morgan Stanley asks whether the new management team that has come from NewsCorp can replicate its success in Italy and persuade an historically sceptical German consumer to buy into premium pay TV.

The bank provides some of the answers, saying: (i) A new and experienced pay TV management team; (ii) the rebranding to Sky; (iii) the 2.4m starting sub base is ‘clean'; (iv) confident pricing of pay TV as a
premium product with no discounts or low end ‘Start' packages; (v) Bundesliga rights secured for the next four years; (vi) innovative timing of Bundesliga matches to offset the attractions of the free-to air highlights show on Saturdays; (vii) a much bigger presence in retail; (viii) the introduction of an installation service; (ix) Piracy has been overcome following the adoption of a new encryption system; (x) The backing of 40% shareholder NewsCorp.

The downside risks, in the bank's view, are: "(i) The German consumer is notably frugal and just doesn't go for premium pay TV (the historical experience); (ii) Sky is launching at a time of relative strain for the German consumer; (iii) Competition from DT with IPTV Bundesliga; (iv) execution issues. Sky is off to a slow start in Q3 09.