Sky spreads its risks

Sky spreads its risks

By Raymond Snoddy,
Wednesday, 11th February 2015
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The merger of three European satellite broadcasters is a defensive move, explains Raymond Snoddy

When Rupert Murdoch tried in 2010 to acquire the 61% of satellite operator BSkyB that he did not own, pandemonium broke out. There were inquiries, protests and threats to a number of powerful reputations.

Eventually, the deal was fatally undermined by the News of the World phone-hacking scandal and revelations that murdered teenager Milly Dowler’s phone had been hacked.

Yet, recently, the satellite broadcaster was able to complete a quiet coup by taking control of both Sky Deutschland and Sky Italia from Murdoch’s 21st Century Fox in a £7bn deal. There was little sign of opposition.

Murdoch already had effective control of Sky in the UK. He retains the same degree of control, flowing from his continuing 39.1% stake in the enlarged European company – now called Sky, rather than BSkyB. The transactions netted Murdoch £5bn.

The new Sky has 20 million subscribers across five countries – the UK, Ireland, Germany, Austria and Italy.

As a result, it boasts of being the leading entertainment company in Europe and is seen by many as an expanding European pay-TV powerhouse.

Sky CEO Jeremy Darroch, who will run the entire company as Group Chief Executive, promised: “The new Sky will be a world-class, multinational pay-TV business headquartered in the UK, anchored in Europe.”

The few complaints raised about the deal concerned price, not power, and it was virtually nodded through by the EU. It ruled that the transactions would not hamper competition: the three companies were based in different countries, operated in local languages and focused on different audiences.

Michael Gambon in new Sky thriller Fortitude

In fact, all the signs are that Sky’s big European adventure is more defensive than aggressive. It reflects the relative maturity of the UK pay-TV market and the rise of other big beasts in the European communications landscape.

These include Liberty Global, with, following its acquisition of Virgin Media, 27 million subscribers. And that is before considering the increasingly expansionist mobile operators and companies such as Netflix, Amazon and Google.

Alex DeGroote, Media Analyst at stockbroker Peel Hunt, notes that the UK may be an attractive market, but it is also an increasingly competitive one.

“To some extent, Sky was running out of road in the UK in terms of further scope to grow. Germany and Italy are large countries, but relatively immature in pay-TV terms. There is lots of scope to grow if it gets it right,” DeGroote believes.

Germany and Italy each offer different opportunities for Sky. In Germany, Sky Deutschland, run by Brian Sullivan, is progressing well, albeit from a relatively low base.

Until recently, German consumers have been used to relatively cheap packages of channels from either phone companies or cable operators.

Germany has 40 million households. Sky’s subscriber base was 3.9 million in September 2014, having grown by 379,000 over the previous year. Churn (the rate of subscriber loss) had fallen to 9% from close to 20% in the recent past.

But revenue per subscriber has been either flat or declining thanks to discounted, two-year subscription deals.

There have also been cheap packages to attract subscribers from Deutsche Telekom after Sky outbid the phone company for live TV football rights to the Bundesliga until June 2017.

On present trends, Sky Deutschland will only move into underlying profit six months before the Bundesliga deal expires. This will coincide with a new, and probably more expensive, bidding round.

In Italy, the main problem is a national economy mired in a triple-dip recession.Read more television magazine

Sky Italia, which will continue to be run by Andrea Zappia, is profitable. This is despite the number of subscribers falling from a peak of 5 million in 2012 to around 4.7 million now. Churn, however, is down from 13% to less than 10%.

Future strategy involves targeting the most attractive 9 million out of the 21 million Italian homes that do not have Sky. The bait is high-definition TV and multi-screen technology, combined with live coverage of all Serie A football games.

Apart from the potential for subscriber growth, to what extent can Sky become more than the sum of its parts?

“There are a lot of synergies, but not necessarily the ones you would first look to,” says Toby Syfret, a television specialist at consultancy Enders Analysis. You can forget about general sports deals with organisations such as Formula 1, but there could be savings from “backroom” areas, such as transmission, back-up facilities, set-top box development and, possibly, programme acquisition, suggests Syfret.

There are a lot of synergies, but not necessarily the ones you would first look to

The fact that Fortitude, the new crime thriller filmed in Iceland, will be shown across the new Sky empire gives a hint of things to come.

Joint management roles are also possible. In January, Sky asked Sky Deutschland executive, and a Sky founder, Gary Davey, to take on a new expanded task. He was promoted to Head of Content for Germany, the UK and Ireland. Davey will divide his time between London and Munich.

Overall, the acquisitions give Sky the advantages of scale, says Syfret: “Bulking up gives Sky a sense of being less dependent on any one thing. If anything goes wrong, it now has a larger core that is not doing so badly.”

The obvious thing that could have gone wrong would have been the loss of most of the Premiership TV rights to BT in the auction that concluded on 10 February.

Sky still holds rights to five of seven Premiership packages. The nightmare for Sky would have been for that score line to be reversed by BT, which has pushed into televised sport, primarily to defend its vital broadband business.

At £18bn, BT revenues dwarf those of Sky, even before the likely impact of BT’s planned £12.5bn acquisition of EE, the UK’s largest mobile operator.

In a foretaste of what still might come, BT outbid Sky for Europa League and Champions League football rights.

The existing Premier League deal is worth £1bn a year. The Sky-BT battle has just pushed Sky’s annual bill up to more than £1.3bn; it paid £4.18 billion for 126 games.

Apart from BT’s financial muscle, DeGroote points to BT’s advantage of having former Sky Chief Executive Tony Ball on its board.

“That’s invaluable experience to have,” says the analyst, who adds that the Sky share price, which has been treading water between 850p and 930p in recent months, has been held back by fear of losing the Premiership – or of winning at too high a price.

It would have been a huge symbolic blow to Sky to lose the majority of Premiership rights packages in an auction it has dominated from the outset – but not terminal, as it might once have been.

Sky, as a business, has broadened out far from football, and even television rights, and now has Germany and Italy to fall back on. This may have been a large part of the broadcaster’s strategy in buying the German and Italian businesses.

But does it all amount to a cunning step-by-step plan by Murdoch to own all of Sky outright in the end?

Probably not. If Murdoch were to try again, you can be sure that political pandemonium would break out once more in the UK.

Besides, by then, Murdoch will have moved on and may have much bigger fish to fry in the US.