Analysts Examine the Recent BSkyB OTT Announcement
BSkyB (Sky), a U.K. pay-TV operator as well as a major acquirer of satellite capacity, made a major announcement last week to bring a “satellite-free” OTT service to U.K. customers in the 2018 timeframe. In this intriguing announcement, the operator announced it will plan to bring this service to households that cannot access pay-TV services via satellite, and will enable Sky to compete better against the likes of Netflix and Amazon, which are now strong competitors in the pay-TV market.
The announcement is interesting on a number of levels as it brings into question how Sky will combine offering pay-TV via satellite and via terrestrial communications going forward. Analysts who cover Sky also seem a little split on the importance of the announcement. Sarah Simon, a satellite equity analyst at Berenberg, said in a research note that that the announcement of a dish-free service had “spooked the market.” However, she went on to say that she expects satellite to remain a key part of BSkyB’s overall broadcast infrastructure.
“Sky cannot afford to drop satellite: Sky spends [about] 70 million pounds ($87.81 million) annually on satellite infrastructure in the United Kingdom, or 2 percent of revenues. This cost is fixed, but its revenues vary with the number of customers. If Sky dropped its satellite costs, but lost more than 2 percent of its customer base, it would thus be financially worse off, even before the streaming costs that it will incur for each additional household taking a dish-less solution,” Simon added. “Meanwhile, we note that Sky’s U.K. contracts with SES run until mid 2022. Sky’s announcement may seem to herald a new departure but, in reality, households in urban areas have been streaming linear and on-demand TV for some time. Meanwhile, channel numbers continue to grow, and higher bandwidth standards gain share driving continued overall growth in SES’ global video segment.”
Eric Beaudet, a satellite equity analyst at Nataxis Securities, said in a research note that this announcement raises, once again, some fears that video through satellite (currently about 65 percent of SES’ and Eutelsat‘s sales) will become overtaken by fiber and terrestrial technologies. “We do agree that, as fiber expands, more and more people will watch TV through a terrestrial solution as it has an advantage compared to satellite: it offers a ‘return path’ which enables extra services (such as PPV, VOD, online voting). On the other hand, even with current ambitious coverage plans by European telcos, there will still remain [approximately] 30/40 percent of Europe will not have access to terrestrial solutions with enough bandwidth to view TV. Hence, even as satellite platforms might lose subscribers to terrestrial solutions, there will remain and important market for satellite well into the 2020s,” he added.
Matthew Walker, a satellite equity analyst at Credit Suisse said in a research note, that Sky’s OTT initiative could open a potential market of 2 million homes in the United Kingdom. “The implications of this in our view are the following: 1) ultimately this should put the company on a level playing field with [Subscription Video on Demand] SVOD services such as Netflix or Amazon (or better in Sky’s view) in terms of technology and ability to service customers from the cloud; 2) allow substantial long-term cost reduction due to subscriber acquisition cost savings and customer service savings. This could be up to 17 percent of average customer costs. This could free up resources for either greater profitability, or more likely, greater investment in content; and 3) satellite infrastructure companies could be negatively impacted,” he said.
In its most recent results, Sky announced that it had added 205,000 new customers the six months to the end of December 2016 in the United Kingdom. It said this was driven by a strong Christmas trading period, with a further 1.2 million products sold. This included 124,000 new TV products, taking its total TV customer base to over 11.4 million. In addition, it added 140,000 new broadband products meaning that it now has more than 6 million broadband households across the United Kingdom and Ireland.