Market Insight

Sky delivers revenue and customer growth, but hits to profits and wholesale signal significant challenges

July 27, 2017

Tim Westcott Tim Westcott Director, Research and Analysis, Programming

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Pan-European pay TV operator Sky reported growth across a range of key metrics in its full-year 2016-17 financial results, along with some notable declines.

By the end of June 2017, Sky served a total of 22.5 million retail customers across its five markets (UK, Ireland, Germany, Austria and Italy), having added 686,000 over the preceding 12 months. On the wholesale front, however, Sky lost 431,000 customers subscribing to its channels via alternative providers in the UK and Ireland (having lost 105,000 the previous year), and a further 15,000 in Germany.

Total products taken within Sky’s customer base increased by 2.66 million over the year to 59.7 million. Customers in the UK and Ireland, where Sky provides broadband, telephony and mobile alongside TV services, take an average of 3.3 products each, including add-on services Sky Plus HD, Multiscreen, Sky Go Extra, Ultra HD and the Sky Kids app. Advanced pay TV platforms Sky Q (UK and Ireland) and Sky Plus Pro (Germany) are in 1.3 million and 460,000 homes respectively.

Revenue for Sky’s 2016-17 financial year totalled £12.9 billion ($17 billion), up 10% on the previous year (at a constant exchange rate). Less positive, though, was a decline in operating profit of 14%, or £212 million, in the UK and Ireland. Thanks to increases in Sky’s other markets, this was reduced to a decline of 6%, or £97 million, at group level. Premier League rights costs of £629 million were the cause of the decline, with the increased spend necessitating cost-cutting measures – Sky reduced its operating costs by £209 million (5%) in the year.

Sky has sought to position itself for future growth with several key strategic moves, including the recently executed revamp of its Sky Sports offering in the UK and Ireland, and the confirmation of a planned expansion into Spain via a Now TV-like service.

Our analysis

While Sky’s latest results provide evidence of growth in most of the KPIs against which its business is evaluated, they do not tell the full story of the nature of this growth, obfuscating the extent to which the operator’s core DTH service is struggling in the fast-changing TV landscape. Premium TV, Sky’s specialty and historical strength, is facing strong competition from a plethora of increasingly popular free and low-cost offerings. These include Sky’s own pay TV lite services Now TV and Sky Ticket, the more flexible and lower-ARPU alternatives to Sky TV that are driving growth in the operator’s mature pay TV markets – and perhaps replacing lost satellite subscribers.

In the UK and Ireland, there is evidence of lower-spending customers offsetting price rises at the higher end, with annualised monthly ARPU (average revenue per user) stagnating at £47, having increased by just £1 in the last four years. Sky is also experiencing higher-than-ever customer attrition in these markets, with churn increasing to 11.5% in FY17.

Perhaps most alarming is the sudden drop in wholesale customers, which provides evidence that Sky channels are becoming less of a staple in UK pay TV homes, for subscribers of alternative providers Virgin Media, BT and TalkTalk. The drop cannot be attributed – solely, at least – to pay TV subscriber declines for these platforms. While TalkTalk did lose TV customers over this period (it reported a net decline of around 100,000 in the 12 months to end-March 2017), as did Virgin Media in Ireland (losing 25,400 in the nine months to end-March), these do not come close to accounting for the 431,000 wholesale customers lost by Sky. The main cause of the drop was in fact, according to Sky, a shift in the makeup of its wholesale partners’ basic offerings, with fewer customers of these operators taking packages that include Sky’s entertainment channels. This trend adds weight to the notion that the likes of Netflix and YouTube are reducing viewers’ reliance on Sky content.

Investment in content – both acquired and original – will continue to be a top priority for Sky, though, with streaming rivals Netflix and Amazon becoming increasingly aggressive in commissioning and acquiring their own exclusive series. Highlighting its most recent content achievements, Sky pointed to the success of programming supplied though its output deals with HBO (Game of Thrones) and Showtime (Ray Donovan, The Affair), as well as strong audiences for its original productions. The company said it would increase investment in Sky Originals by 25%, with upcoming productions including new drama Chernobyl co-produced with HBO, Babylon Berlin, its first German original drama production, and a third season of its Italian drama series Gomorrah.

Sky Sports, as ever, remains a core part of Sky’s proposition. A new deal for the Bundesliga is due to start in August in Germany and Austria, and Sky showed its determination to keep hold of another key sports contracts when, in the face of opposition from BT, it renewed the rights to English cricket from 2020 to 2024 last month.

In a bid to broaden the appeal of Sky Sports in the UK and Ireland, Sky rebranded these channels earlier this month, launching 10 services with new names, including Sky Sports Main Event, Sky Sports Premier League, and other services dedicated to football, cricket and golf. As part of the change, subscribers no longer have to take the full package of sports channels. Each channel costs from an additional £18 ($23.70) a month, added to a basic channel package. By overhauling its packaging of Sky Sports, Sky hopes to sell at least some part of this offering to the four million sports fans it has identified in its customer base that do not take a sports package. In the context of Sky’s broader strategy, the move is notable – the operator has already embraced an unbundling of its key content via Now TV and Sky Ticket, and now appears to moving in a similar a-la-carte direction with its core, traditional pay TV packages.

On the pay TV lite front, Sky’s confirmation of its long-rumoured expansion into Spain, due to take place by the end of 2017, does not come as a surprise. The level of success it can achieve here could be limited, though, in a market where piracy is rampant and consumers have a low propensity to pay for content, as evidenced by low pay TV penetration of 32% at the end of 2016, according to IHS Markit data. Likely with this in mind, Sky has safeguarded itself against any significant losses by making what it describes as a ‘modest’ investment in a Sky España service that will be simple and affordable, run by a small team and use Sky’s existing online-video technology.

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