Sky urged to be more aggressive

Sky Network TV needs to be significantly more aggressive in expanding beyond the traditional pay television set-top box and become a platform-agnostic content distributor, analysts say.

Morningstar analyst Brian Han says the key lies in leveraging Sky’s comprehensive video-on-demand (Svod) products and marketing them more actively to streaming-hungry New Zealand customers.

Although placing additional pressure on the satellite-distributed business, self-cannibalisation was still preferable to losing those customers altogether to the likes of Netflix and Lightbox.

"Given Sky’s brand awareness and the incumbent position in pay TV, its 800,000 customer base is pitiful compared with 400,000 for Netflix and 260,000 for Lightbox."

Mr Han noted Disney’s decision to include the 39% shareholding in Sky PLC (a pan-European equivalent to Sky TV, with 23million subscribers) as part of the recent $US52billion ($NZ72.6billion) deal to acquire certain assets of Fox.

The deal recognised the value in having a direct relationship with consumers, even if mostly through satellites.

Unfortunately, that could be cold comfort to shareholders in Sky Network if it continued to lose traditional pay-TV subscribers in New Zealand at the rate of the past three years — down 15%, or 128,000, to 737,000 at the end of the 2017 financial year. It could be worse if Sky did not recapture many of those customers through its own streaming product, he said.

Subscriber retention through a more aggressive digital streaming strategy will come at a cost. Compared with a traditional pay-TV subscriber assessing Sky’s content through a set-top box, an Svod subscriber accessing through broadband paid only $20 for Neon, but higher for Fan Pass, depending on options. Customer churn came more frequently, all reflective of the competition forces brought on by Netflix and Lightbox, Mr Han said.

At the same time, cost of programming to populate those products was unlikely to fall.

Morningstar expected Sky’s operating earnings margin to fall to 28.6% in five years’ time, a significant step down from the eight-year historical average of 38.9%.

On the other hand, digital streaming was still growing in New Zealand, he said.

The estimated 800,000 Svod subscribers equated to a 46% penetration of households, although the real penetration was probably more like 30% to 35% if households who subscribed to multiple offers from different providers were counted.

With a robust fibre broadband infrastructure being rolled out, there was no reason why New Zealand could not follow the US experience and see non-duplicated Svod penetration reach 50% within five years. That would imply an additional 315,000 potential new households for the existing Svod players. Morningstar’s predicted 176,000 Svod subscribers for Sky in five years’ time would represent a market share of about 20%, Mr Han said.

"It is imperative Sky actively plays in this space as a subscriber retention move, as traditional satellite-delivered pay-TV services are structurally destined to be challenged."

Only by keeping a firm hold of its subscribers could Sky maintain its intrinsic value and perhaps appeal to a potential acquirer — whether it be a telecom player, such as Vodafone trying again, or a consolidator — Foxtel after it listed on the Australian exchange this year, he said.

In the meantime, Sky was expected to adopt a conservative stance on its balance sheet. The dividend per share was expected to be 20c for the next two years before edging down to 18c from 2020. Such a payout would soak up about $70million to $80million of Sky’s expected $90million-$100million annual free cashflow, allowing the group to maintain a "still solid" net debt/operating earnings margin, Mr Han said.