BSkyB: ‘Accelerating away’

Chris Forrester

Last week BSkyB unveiled its Q3 results, and the market was impressed with over-performing numbers. Now investment bank Morgan Stanley has issued a detailed 7-page note on the pay-TV operator. The news is good, despite CEO Jeremy Darroch’s candid admission that trading conditions will “remain challenging”.

‘How so?’ implies the Morgan Stanley note. “The strong operational performance might suggest that BSkyB is not finding the conditions so challenging. Jeremy Darroch, when asked on the conference call to expand on the remark, cited three areas where BSkyB feels it is feeling the effect of present economic conditions: (i) the company feels that it is harder to attract new customers. Sky has responded both with the new HD campaign and an increase in the levels of advertising. (ii) Darroch reiterated that BSkyB is seeing a greater number of customers coming onto the Sky system at the lower tier packages. (iii) Darroch’s impression is that customers are having to be persuaded harder before they will upgrade packages. Nevertheless, it is clear that BSkyB is performing well in this environment with Darroch’s conclusion being simply, ‘we’re working pretty hard for what we get.’”

The bank says: “After nine months, underlying revenue is up 6.9%, led by retail and wholesale subscription revenue. Retail subscription revenue rose by 9% to £3060m. This reflects 2% y-o-y increase in customers and 6.6% ARPU growth together with strong take up of incremental ‘paid for’ products such as telephony line rental and HD. The 10% jump in wholesale revenue reflected the benefit of the return of the Virgin channels in November 2008. The third notable area of revenue growth is ‘Other’, largely reflecting the growth in Easynet Enterprise revenues up 16% y-o-y to £151m. There are three weaker areas of revenue progression although none of these represents a change in trend from the half year. Advertising revenue is now down 5.6% (H1 -1%) but continues to outperform the overall TV market (Q3 was -15% against a TV market down around 20%). Installation and Hardware revenue fell 22% in the quarter and is now down 9.4% for the year (H1 -4%) reflecting the substantial y-o-y change in the subsidy on the HD boxes in the period. SkyBet revenues are flat y-o-y,” adds the note.

But will further investment by Sky’s arch-rival Virgin Media force Sky to itself invest in broadband? “Our last note,” says the bank, “highlighted the possibility that advances in broadband speeds offered by Virgin and BT may induce BSkyB to follow with a substantial investment in fibre to the curb in the next 3-4 years. BSkyB’s response to this remains consistent, essentially highlighting
• that Sky customers are happy with the current range and services and price points - ‘reliable broadband at an affordable price.’
• and highlighting the flexibility of the mixed satellite and ADSL delivery methods used by BSkyB - ‘our approach is to use the elements of the network for what they are good at’.
• And that BSkyB , while keeping abreast of the trials into FTTC being conducted by BT believes its current network assets ‘look very strong for any kind of foreseeable future’.