More on BSkyB
BSkyB Q1 results
We have a number of concerns about investing in Sky. Although Sky remains dominant and there is no pay TV platform in the UK that is yet a major competitor to Sky, alternative channels are emerging and we are beginning to see the emergence of real competition for the first time in many years. At the same time Sky’s churn has risen in the last quarter. In addition the increase in News Corporation’s stake in Sky must make other shareholders concerned about the further strengthening of New Corporation and Murdoch family control over BSkyB.
The last of these concerns has been in the news recently. News Corporation’s stake gives it a high degree influence, a little short of outright control, of BSkyB. In addition the CEO of BSkyB is James Murdoch, son of Rupert Murdoch.However the change in News Corporation’s stake is fairly small. It results from a share buy-back and will result in a less than 2 percentage point increase in the size of the stake, however it has concentrated investors mind’s on the issue.
BSkyB has been extremely successful in beating its competitors. IN the eighties it first out-competed and then bought British Satellite Broadcasting. The cable companies have never been able to gain enough market share to be a serious threat to Sky. Freeview does not offer as many channels as BSkyB but is cheap and does have quite strong content. BSkyB’s free satellite service (a response to Freeview) may also cannibalise some of its subscriber base.
The most uncertain threat is the internet. BSkyB is taking this seriously and plans to offer TV over broadband internet (and it has purchased an internet service provider as part of this). However if TV over broadband does take off, it will have far lower costs of entry than other methods of distributing TV and video. The major media companies (including Sky) stand to lose very heavily from the greatly increased competition it will bring.
The increase in churn is a considerable concern. If, as BSkyB claims, it is partly the result of price rises, it is even more of a concern. If customers are price sensitive enough to cancel subscriptions because of a price increase of between £1.50 and £3.00 a month to have a significant effect so quickly, they are likely to be also price sensitive enough to consider the free to air alternatives.
Subscriber growth remains little changed and subscriber numbers are up 6% on last year. However the higher churn and fall in the numbers of subscribers added suggest that future growth will be slower.
At 493p BSkyB is trading on a PE of around 16× 2006 earnings. This is cheap given its market dominance and continuing subscriber growth. Beyond that there is a great deal of uncertainty around 2007 earnings - in particular competition may force BSkyB to subsidise some equipment. 2007 EPS may show strong growth but there is a significant threat of a decline. In the longer term competitive threats are likely to strengthen.
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