BoAML on BSkyB: “it could be a lot worse than you think”
Bank of America Merrill Lynch (BoAML) has said that BSkyB’s performance “could be a lot worse than you think” in a new financial forecast, rating the business as “under-performing” as BT and TalkTalk offer cheaper and more competitive TV offerings.
The bank has cut its TV forecasts to 620p and it says the market’s reaction to BT sports has focused on broadband market share, with recognition that “stickier BT subscriptions” will make it harder for Sky to attract its own and that some existing Sky broadband subscribers may even switch back to BT to benefit from the newly announced free football offering.
In the bank’s view, many people will now take TV from BT largely because the business offers sport, fibre-optic broadband, a PVR, a choice of catch up, extra channels and programme scrollback at a lower price. A similar view is held for TalkTalk.
“While BT’s sports offering lacks the depth and breadth of that of Sky, Sky Sports customers have the opportunity to save at least £370 a year,” said BoAML analyst Daniel Kerven. “This is unlikely to appeal to core sports fans but could be of interest to more marginal sports customers.”
The bank currently estimates that around 40% of Sky’s customers are on basic packages, paying between £21.50 – £26.50 for PVR functionality and additional choice. BT and TalkTalk can now offer something similar at a fraction of the cost, creating a high element of risk.
Currently BT offers PVR functionality, scroll-back – which is unique to Youview – catch-up TV, 18
extra channels, BT Sports and ESPN for just £7 per month. The extra channels are currently only available to Vision boxes but should be available to YouView boxes by the summer.
BT offers most of the leading channel brands with the exception of the Sky basic channels and some of the children’s brands, including Disney and Nicklodeon.
This compares with Sky’s cheapest TV offer of £21.50. Sky also offers PVR functionality and catch up, and this package does include the Sky basic channels. However, it does not include National Geographic, Discovery, Animal Planet and Eurosport which are included within BT’s package, and most importantly it does not include any premium sport.
As such the bank views BT’s TV offer as being comparable, and certainly better value for money, than Sky’s cheapest entertainment pack.
The result means the bank estimates Sky has to find over 1.3 million gross additions each year just to offset churn and maintain its exiting customer base.
“Given that Sky and Virgin broadband customers are very heavily skewed to pay TV households, and that there should be a significant overlap between ‘pay TV refusniks’ and homes that do not take broadband, a simple process of elimination would suggest that the pool of non-pay TV homes that Sky must draw on to replenish its subscriber base is largely made up of BT and Talk Talk homes,” says Kerven.
“With TalkTalk and BT offering attractive TV services at cheaper prices we believe that it will become increasingly difficult for Sky to offset churn.”
The bank’s churn and gross additions imply that Sky will lose around 300,000 satellite customers each year. This is largely a result of BT and TalkTalk taking a share of TV gross additions for the first time rather than a dramatic uplift in churn which Sky can mitigate through retention offers.
“Sky could seek to maintain its share of gross additions but this would require in vestment in pricing, SAC, marketing or content differentiation.
“Sky is now the incumbent in TV. New entrants are offering customers new choices at lower price points with Sky constrained by legacy revenues. Sky faces these challenges without owning most of its content and a largely fixed cost base with the last 20% of its customers representing the majority of its profits.”