Published:
28-Jan-10
HDTV continued to drive Sky's customer growth in the quarter to end 2009, helped by its seasonal 'Christmas in HD' marketing campaign, but the company faces a number of challenges during 2010 which we believe will see a levelling of growth. Sky added 172,000 new customers in the quarter, an almost identical performance to the previous Christmas. HD grew strongly with 482,000 new HD customers in the quarter, the company's best ever HD performance. Forty per cent of new customers now take HD from day one.
In an effort to maintain momentum, Sky said that all new and upgrading customers would now receive an HD box, making the hardware standard and kick-starting a migration to a single box strategy. The standard definition box and Sky+ will be phased out, although Sky made clear it had no intention of executing a HD box swap-out. Sky will continue to bring box manufacture in-house. Sixty per cent of boxes are now manufactured by Sky's Amstrad subsidiary, with the operator expected to edge towards 100 per cent in-house production over the next few years. Sky said the push behind HD boxes would allow the company to 'accelerate the pace of innovation', a reference to a slate of new services that will launch on the HD platform that include targeted advertising, a progressive download VOD service and 3D TV channel. Sky confirmed that its 3D channel would launch for commercial premises customers in April and for consumers in the second half of 2010. The channel will be free for top-tier subscribers and carry one Premier League soccer match a week. The new VOD service, delivered via the HD box's ethernet port, will also launch this year.
Sky saw solid if unspectacular performance of its telephony and broadband offers. It added 101,000 new broadband customers and 130,000 new telephony customers, in-line with our forecasts and largely flat against the previous quarter. Eighteen per cent of customers now take triple-play services. Churn was down at 9.6 per cent quarterly annualised and ARPU grew strongly to £492 against £444 a year earlier, driven by the £10 additional fee for HDTV and telecom service growth. Sky confirmed it had no intention of dropping its fee for HDTV.
Our take...
Despite the on-going strong performance, Sky faces a number of uncertainties that are stacking up for 2010. We believe that HD subscriber growth will remain strong during the coming year but begin to show signs of levelling off. The launch of 3D TV will not be a strong driver and certainly will not replicate the super-charged boost that HDTV has given the platform. The next phase of the Ofcom pay TV review is also looming large. We believe that Ofcom will continue to push for regulated wholesale prices for the Sky channels and that this is likely to include Sky's HDTV channels. Sky was unclear on whether appeal against the decision due March 2010 would hold-up the implementation of any ruling. We have stated in previous analysis that the actual impact on Sky of the pay TV review should a wholesale cap be imposed will be limited. While we do not believe it will be positive for Sky in terms of wholesale revenue, the positive converse is that neither do we think there will be strong uptake of Sky channels on other platforms and migration away from, or negative impact on, Sky's core television subscription product.
The main challenge for Sky over the next three years will be maintaining the spectacular growth in subscribers that it has managed over the past 18 months, as the drivers of that growth begin to level off but are not replaced by new services of equal impact. The same does not apply to ARPU and revenue which should continue a strong growth trend thanks to steady additions of HD and telecoms services among existing subscribers. The up-sell, so long the domain of cable operators, will be key to the company's financial performance in future. While the digital switch-over process in the UK represents some opportunity, we expect it to become increasingly difficult for pay TV platforms to seize disproportionate growth in switch-over regions. Sky said that it remained concerned about the economic environment, although we don't believe the environment will be any tougher than 2009. Overall we believe that, while Sky will continue to far outpace the competition during the coming year, the bar its own performance during 2009 has set will not be matched due to a combination of internal and external factors. We now forecast 10.15m TV subscribers for the group by 2010, slightly up on our previous forecast. HDTV subscriber numbers should comfortably exceed 3m by end of year.
UK,
