With this in-depth study of Sky Global Network’s plans, drawn from analysts comments plus Sky Global’s June 20 filing with the US Securities and Exchange Commission, Interspace begins what will from now constitute a regular element of future issues

News Corporation will shortly offer the public an opportunity to buy into Sky Global Networks (SGN), Rupert Murdoch’s proposed all-embracing enterprise, which will hold News’, various satellite platforms, and related enterprises. What opportunities does this represent? What might this mean for satellite TV’s expansion and build-up? And perhaps most importantly, will SGN’s very existence make any real difference?

However, on the basis of the prospectus and early comment, the plan raises more questions than answers. For example, why ever are TV Guide’s modest earnings included in the offering? A business which SGN has only 21 per cent influence in, is hardly likely to be considered core. However, TV Guide is more than just a publisher, it has its own EPG-based portfolio of information and viewers can buy through its on-screen menus into certain pay-per-view (PPV) offerings. However, revenues are also slipping (for fiscal 1998 down 5 per cent to $617m), blamed on other listings titles and increased availability of EPGs. Additionally, even though the publisher is very much a household name in North America, it has yet to begin setting the rest of the world on fire, unless the unstated agenda to take the product global.

On a pro-forma basis the business would have revenues of $793 million in the financial year ending June 30 last year, and operating losses of $156 million. However, for the nine months to March 31, 2000 pro-forma revenues, on first blush, would have tumbled to just $295 million and losses of $75 million. The reason for the fall is News Corp’s disposal of more than 50 per cent of TV Guide last year, and the commensurate loss in revenue.

Most of the trading losses come from Star TV, News Corp’s wholly-owned Asian satellite outfit has lost $478 million over the past four trading years, according to the prospectus, although the report (not in the prospectus) suggests Star TV will see improved revenues this year of about $140 million with reduced losses of around $100 million. Nevertheless, this will be a continued drain on SGN’s prospects for some time to come. Putting these two key elements (TV Guide and Star TV) into the overall equation, SGN ends up with some $3.4 billion in total assets, although with indebtedness to News Corp of some $2.7 billion.

On the upside, Star is doing increasingly well in ad-revenue, up 32 per cent to $62 million against a 23 per cent rise in net subs revenue to $38 million for fiscal year 1999. However, expenses were up 14 per cent to $218 million. Also helping trim operational costs were savings made by switching from Asiasat 1 and 2, to the more powerful Asiasat 3, and the reduction in leased transponders from 16 to 10. Revenues from Star’s ISkyB operation were “nominal”, and the cost of closing ISkyB cost Star TV $22 million.

As to the overall intentions and aims of SGN these are suitably praiseworthy, although some might argue vague and leaving plenty of room for flexibility. They can be summarised as:

• offer customers the best programming content available;
• realise economies of scale to lower operating and investment costs;
• build on the Sky and Star brands;
• invest in the development of enabling technologies;
• offer interactive TV and Internet-based services to increase subs and revenues;
• provide unified decision-making and strategic direction;
• negotiate strategic alliances with technology and other new media companies;
• access capital markets and provide a public security for use future acquisitions;
• develop and acquire programming for use across SGN’s distribution platforms.

SGN, under the ‘risk factors’ heading also states its firm intention to invest in the development of interactive services, which it naturally cannot guarantee the success of. The warning paragraph which covers technology arm NDS is also telling, saying in part “Our NDS subsidiary is also subject to intense competition,” and also details the considerable risks from signal piracy.

NDS’ customers currently have 13 million subscribers globally as at June 30, 1999, up 41 per cent on the previous year, although NDS now states it expects to hit the 20 million subs number by the end of 2000.

News Corp, and thus SGN, is effectively controlled by one person thanks to the 10 votes per share clause of Class B News Corp shares held either by Rupert Murdoch, or Cruden Investments, his family trust, which combined represent some 30 per cent of News Corp stock. As if to rub salt in the potential investor’s wound, the SGN offering is unashamed, saying “We do not anticipate paying dividends.”

SGN place considerable emphasis on the Open….-type ‘walled garden’ interactive services which they “anticipate….will be able to generate revenues from advertising, transactions and access fees charged to vendors selected by our platforms.” However, SGN goes one further promising what it calls a “comfort zone” for internet-enabled customers. In other words SGN is contemplating Internet access via satellite which will generate income from advertisers as well as “selected vendors”.

As to Kirch Pay-TV, which had 1.4 million digital and 700,000 analogue subscribers in Germany and Austria as at March 31, 2000. BSkyB’s 24 per cent stake entitles it to one third of the boardroom control. Kirch Pay-TV has a 30 per cent stake in Teleclub AG, the pay-TV service in Switzerland with 93,100 subs at April 30, 2000.

News’ holding in Italy’s Stream will be included. Currently it is a 42 per cent stake but this rises to 50 per cent “upon consummation of a pending acquisition anticipated to close in July 2000, subject to regulatory approval.” The 50 per cent balance is held by Telecom Italia. As of March 31, 2000, Stream had approximately 450,000 subscribers, comprising 400,000 DTH and 50,000 cable subscribers. The SGN prospectus adds “As Telecom Italia has decided not to proceed with any further cable build-out, any further growth in this market will likely come from increased DTH viewership.”

Star TV’s situation almost deserves a prospectus of its own, especially when taking into account its 38 per cent (post-IPO) stake in China’s Phoenix TV. SGN faces active competition from rival groups like Zee, TVB in Hong Kong, CCTV in China as well as facing distribution challenges in major cable markets like Taiwan. However, Star TV has emulated BSkyB in acquiring meaningful stakes in a range of new media companies.

In Japan, News’ currently owns 10 per cent of SkyPerfecTV with a portfolio of fellow investors including Sony, Softbank, Fuji TV, Itochu and Hughes Electronics. At March 31, 2000, SkyPerfecTV broadcast 167 digital TV channels and had approximately 1.8 million subscribers (not including DirecTV’s approximately 400,000 subscribers). DirecTV is said to expect to cease operations this October. Thereafter Sky anticipates competition from WoWow, NHK and the five major terrestrial networks, and the digital terrestrial systems expected on line during 2003.

SGN has a 36 per cent interest in Net Sat, operator of Sky Brazil, the leading DTH television service in Brazil. The remaining interests in Net Sat are held by Globopar (together with TV Globo Ltda, “Globo”) and LMI, which own 54 per cent and 10 per cent of Net Sat, respectively. Sky Brazil’s current subscriber base of 508,000 as of March 31, 2000 represents approximately 55 per cent of the current digital DTH market in Brazil.

The prospectus states “Net Sat believes that, due to the relatively recent introduction of pay-TV services in Brazil, Brazil represents one of the largest potential and least penetrated pay-TV markets in the world. As demand for pay-TV services continues to grow in Brazil, Ku-Band DTH systems offer the greatest opportunity for rapid expansion into households in areas not currently serviced by cable or MMDS operators. There are many rural areas of Brazil with little or no cable television availability, where the cost to install a cable system would be significant and, in many cases, economically unfeasible.”

SGN says there were approximately 17.1 million television households in the Mexican market as of December 31, 1999. Mexico had approximately 2.1 million cable subscribers (12.4 per cent), 592,000 DTH subscribers (3.5 per cent) and 616,000 MMDS subscribers (3.6 per cent) as of December 31, 1999. Sky Mexico believes that the low penetration of pay-TV services in Mexico is primarily due to the low level of accessibility of such services before the recent introduction of DTH satellite pay-TV services.

SGN will have a 30 per cent interest in Innova, the Mexican DTH platform, which operates as Sky Mexico. The remaining interests in Innova are held by Televisa and LMI, which own 60 per cent and 10 per cent of Innova, respectively.

There are also hundreds of pages of so-called “Small Print” of interest to accountants, lawyers and the like, although the complexities of the BSkyB-Kirch deal, like Star TV and its local challenges, are worth enthusiastic examination in their own right.

Interspace Complete Analysis will expand our already highly-popular single page features to at least two pages, looking at some of the major industry players. Comments and suggestions are, as always, welcomed from readers to [email protected]