BSkyB could reach the magic seven million subscriber by the middle of the year, some six months ahead of schedule. The operator added 244,000 subscribers in the quarter ending Dec. 31, 2002, reaching 6,562,000 subscribers by the end of last year.

This is an impressive performance and takes BSkyB to within 450,000 subscribers of the seven million figure. The performance is impressive but the quarterly subscriber growth stood at 3.862 per cent, its worst pre-Christmas performance since launch. At the same time, if BSkyB were to have quarterly subscriber growth of 3.5 per cent over the next two quarters it would reach seven million.

BSkyB also announced that operating profit before goodwill for the six months to Dec. 31, 2002, increased to GBP158 million ($251.8 million), a 126 per cent increase compared with the same period to Dec. 31, 2001.

BSkyB has benefited from problems with the cable players as well as the demise of ITV Digital, so it remains to be seen if it can keep quarterly growth well above 3.5 per cent. The successful launch of Freeview is likely to have an impact.

Sarah Simon, a media equity analyst at Morgan Stanley, believes the threat from Freeview cannot be underestimated: “Though Sky management downplayed the threat of Freeview, claiming that it actually complemented Sky from a demographic perspective and allowed its channels to reach a wider audience, we are not so sure. Sky channels, namely its news channel, have lower ratings on Freeview than it does on the Sky platform. Its sports channel has higher ratings, but one would expect such a result as the only sports channel on the Freeview line-up.

She continued, “We believe Freeview’s long-term effect on Sky could be more severe in that it could encourage current Sky subscribers to migrate away from the platform. Indeed, higher basic competition (and a general maturity of the market) could encourage current subscribers to churn down to basic levels of service at lower ARPUs [average revenue per unit] and margins, especially during difficult economic periods.”

The universe of pay-TV subscribers has to get smaller, although it appears BSkyB still has some way to go and a goal of 10 million subscribers at some point in the future is not unrealistic. According to Interspace’s estimates, if BSkyB could maintain an average of three per cent quarterly subscriber growth, it could reach 10 million subscribers in the middle of 2006, assuming BSkyB hits the seven million by the middle of this year. That is a big task, but then many people thought seven million subscribers in 2003 was also. It looks like that is going to happen sooner rather than later.

Raising ARPUs

While BSkyB is an undoubted success story in the European pay-TV sector, there are still many challenges ahead. Raising ARPUs is still a key. In the quarter ending Dec. 31, 2002, it had an ARPU of GBP351 ($558.4) per subscriber, an increase of GBP20 ($31.8) from the same quarter in 2001. The GBP351 represents an approximately 6 per cent increase from the figure in 2001. If it were to grow the ARPU a similar way in 2003, it is likely to reach around GBP372 ($591.8) by Dec. 31, 2003. If it were to carry growing at this rate, it would not reach GBP400 ($636.4) until the first quarter of 2005. The deployment of PVRs (personal video recorders) has also yet to take off. Sky+ subscriptions have reached 65,000, but this is still less than one per cent of Sky’s overall subscriber base.

BSkyB also reported that 55 per cent of its subscriber base was taking the top Sky World package, dispelling concerns that customers were scaling down their packages from Sky (See Interspace issue 762).

Football Rights

One of the major issues for BSkyB will be the renewal of the Premier League football contract, which is one of the keys to BSkyB’s content. The current deal, which runs for three seasons until the summer 2004, is worth GBP1.1 billion ($1.75 billion), and is soon up for renewal. This deal was struck at a time when the cable operators and ITV all had ambitions of gaining the rights. Now, with the cable players handicapped by balance sheet issues and ITV unlikely to be aggressive in this area, the stage is set for BSkyB to pick up the rights for less than the deal struck in 2001. It looks like the only bidder for the premium rights on paper, thus giving it strong leverage in negotiations.

The European Commission’s desire to increase the availability of football rights could in theory see BSkyB lose some of the rights, but it would still retain the best games, with terrestrial broadcasters possibly able to pick up some less appealing games. This is not all bad news as if this factor came into play, costs would inevitably come down as BSkyB would no longer have total exclusivity of Premier League live coverage, and thus would not pay the premium for doing so.

Nick Bertolotti, a media equity analyst at JP Morgan, said in a research note, “The Office of Fair Trading (OFT) estimated the league rights could be worth GBP317 million ($504.3 million) per annum to BSkyB. This could imply that BSkyB could bid GBP317 million, a 17 per cent discount on the current price without provoking any regulatory interference. The OFT also concluded that free-TV broadcasters could not afford to bid as much as BSkyB for live Premier League Football because they could not achieve sufficiently high viewing figures.”

–Mark Holmes