BoAML downgrades BSkyB

Over the top offers TV viewers a better user experience and operators lower upfront costs, and erodes barriers to entry, facilitating the entry of new, global and well-funded players, according to Bank of America Merrill Lynch (BoAML). This will drive competition for subscribers and content – and will reduces Sky’s pricing power.

BoAML says the impact of OTT hinges on to what extent YouView / OTT is a substitute for
Sky – and what proportion of OTT growth Sky can capture without cannibalising its
own higher value satellite customers.

A GfK survey, commissioned by BoAML, suggests traditional pay TV is ex-growth, that Sky will have to work hard (discount) to avoid subscriber losses, and that OTT will grow the market, albeit with a less attractive customer mix.

As such, BoAML has cut its longer term earnings forecast for Sky by c20%, given a less favourable subscriber mix and gross margin erosion more than offset the benefit of the lower broadband wholesale fees recently announced by Ofcom.

The bank said it is confident that Sky’s management team with adopt the right strategy to maximise Sky’s valuation in any given scenario. However, it concludes that new technology and lower barriers to entry will result in a less favourable set of outcomes than was previously the case.

The launch of YouView will force the market to recognise that the world has changed, and with Sky trading on a similar multiple to peers but offering a fraction of the growth given rights inflation and wholesale margin leakage, BoAML has cut its price objective to 640p and rating to Underperform*.

*stocks are the least attractive stocks in a coverage cluster