BoAML: Sky to launch wholesale fibre offering

Sky is expected to launch a wholesale fibre broadband offering in the next few months, according to Bank of America Merrill Lynch (BoAML).

While many customers are expected to be satisfied by the current trade off between speed and price, particularly given that Sky can overlay its DTH infrastructure to deliver high bandwidth services such as broadcast HD, top-end customers are likely to want the fastest speeds available and demand for bandwidth is likely to increase over time – driven by video on demand and content-rich services, BoAML said.

The group forecasts that 20% of Sky homes will take fibre services by 2016, rising to 40% by 2020. It also expects Sky broadband homes to rise 3% to 7.9 million by 2020,
including 1.2 million standalone subs, to reflect the improved offering and lower churn.

BoAML expects Sky to adopt similar pricing to TalkTalk, charging an extra £10 per month for its fibre offering, which (post VAT) fully offsets the additional wholesale fee (£7.40).

The group says Sky will continue to enjoy a price (and TV product) advantage vs BT (£9.25 a month cheaper for fibre vs £19.25 for DSL) and will increase its broadband price
advantage vs Virgin (for equivalent speeds) from £10.65 to £12.15.

However, while Sky can maintain its existing broadband gross margin on fibre, upgrade/SAC costs are significant (BT connection fee £80, with router and modem costing £35, and installation £40) and are only partially offset by an assumed activation fee of £30, resulting in an additional £485 million of costs by 2020 (or £1.2 billion if the entire broadband base was to migrate). In some cases Sky will have paid three connection fees to BT (partial to full to fibre).

As a result, BoAML have trimmed its 2013 earnings per share by 2% and by 3% in the longer term to reflect fibre upgrade costs.