BSKYB “AT A COMPETITIVE DISADVANTAGE”

Investment bankers Morgan Stanley Dean Witter (MSDW) published a report on May 21 examining a portfolio of operators including BSkyB, Sogecable,UPC, NTL and Telewest. In it they suggested that Europe’s DTH satellite operators are at a competitive disadvantage compared with cable.

The report also warns that BSkyB is “likely to have to invest in a second-generation set-top box, with an estimated cost to BSkyB of GBP1.6 billion (E2.7 billion) in order to compete effectively with new interactive services” offered by cable and generally becoming available to satellite. It in addition states that Canalsatellite (France), Canalsatellite (Spain), Via Digital (Spain) and Telepiu (Italy) have all announced next-generation box roll outs. In its view, “if Sky does decide to roll out new boxes and subsidise them, this should put further pressure on analysts’ [profit] forecasts”. As an aside, it adds that SES Astra is not vulnerable in this regard, given MSDW’s understanding that it will concentrate its broadband Internet services via SMEs rather than direct to consumer.

MSDW explain the difficulties they have in comparing companies (generally cable operators) that capitalise their investments in set-top boxes. Whereas in such instances a client churn will result in the box falling back into the operator’s hands, outfits such as BSkyB expense their set-top subsidy on the basis that the customer owns the unit. Consequently, MSDW say they favour companies that have a fully financed business plan, thereby ruling out NTL, for example, and citing Telewest as having much less financial risk.

In terms of DTH players they favour Spain’s Sogecable (‘strong buy’), saying the market trades its stock at a discount compared with BSkyB and US-based comparables. Furthermore, the company has an advertising-income exposure of just 4 per cent (compared to Sky’s 13 per cent), and this should benefit Sogecable in the event of an advertising downturn this year.

Sogecable also dominates Spain’s market, with a 65 per cent market share (compared to Via Digital’s 21 per cent and Quiero’s 3 per cent). BSkyB, on the other hand, is rated ‘neutral’ by MSDW, not helped by concerns over the company’s upcoming FTSE re-weighting of its stock and an Office of Fair Trading’s decision due this month on wholesale pricing strategy. These pose risks to Sky’s wholesale agreement with NTL, along with the possibility that its minimum guarantee expectations might be forbidden or modified.

MSDW is also concerned with Kirch’s Premiere World operation, which is a quarter held by BSkyB. The report states that while Sky has an exit option, it also has the option to increase its holding in Premiere World “[and] we believe the German pay-TV market will continue to be difficult, especially if set-top box subsidies are introduced, requiring additional funding”.

According to reports, Vivendi may sell its GBP3 billion stake in BSkyB to institutional investors. The company had previously been expected to swap the asset, currently representing 23 per cent of BSkyB, with another minority stake – possibly John Malone’s USA Networks. Vivendi’s CEO John-Marie Messier has promised the EU he would exit BSkyB within tow years in order to aid Vivendi’s take over of Seagram/Universal.