BoAML: ECJ ruling is “no risk to Sky”
The European Union’s ruling that it is not illegal for individuals to buy set-top box decoder cards from foreign broadcasters is “no risk to Sky”, which will maintain its ‘buy’ rating, according to Bank of America Merrill Lynch (BoAML).
Earlier this week, the ECJ said attempting to prohibit the “import, sale or use of foreign decoder cards is contrary to the freedom to provide services and cannot be justified either in light of the objective of protecting intellectual property rights or by the objective of encouraging the public to attend football stadiums”.
However, the court ruled against a bid by Karen Murphy to be allowed to use the Greek decoder to show live football matches in her pub without permission from the FA Premier League.
Sky, which makes around £200 million a year in revenue from selling commercial subscriptions, saw its share price fall by by just over 3% to 635.50p on Tuesday, as the city reacted to the European ruling.
The ECJ’s judgment has now been passed to the UK high court for interpretation, which could take four to five months.
“Given similar retail pricing across Europe, the loss of other content, triple play packages, HD and other functionality, we believe Sky’s residential subs have no incentive to churn, while Sky’s commercial revenues are protected by copyright law,” BoAML said. “We have a Buy rating on Sky, given ongoing sub growth, product penetration of the base and its underleveraged balance sheet.”
Commercial revenues protected by copyright laws
The ECJ has determined that the PL anthem and graphics are copyright protected, and that pubs are not able re-broadcast these works without the PL’s permission. Commercial sales account for c3% of Sky’s revenues and, given copyright infringement, BoAML see no risk to this segment.
Premiership via Greece?
Copyright protection does not apply to residential customers. This means that EU citizens will be able to legally subscribe to pay-TV operators outside their country of residence to watch the PL. However, with a Greek sports subscription costing more than Sky Sports (€52.5/m v £40/m for Sky), Greek commentary, the loss of Sky’s other sports, movies and basic channel content, HD channels, triple play services, Sky Go and Sky Anytime+, means the churn will be minimal for Sky, according to BoAML.
“Indeed, we believe Sky could benefit from legally marketing its products to British expats across the EU for the first time.”
Moving to Pan European rights
Following the ECJ judgment, the PL may change the way it sells its rights or choose to forego some of the more marginal international markets. In this event, BoAML believe that Sky (the European pay-TV retailer with the greatest number of PL subs and the strongest balance sheet) would be the best placed to acquire the rights, most likely at limited incremental cost for the international rights, and resell the rights to SkyD, Sky Italia, Canal+, etc.
BSkyB
BoAML prices Sky at 806p ($51.10) – based on a macro scenario analysis around a base case that assumes flat GDP growth in 2012 and 2013, a WACC of 8.7% and terminal growth of 2%.
“The most important determinants of our valuation are pay penetration, price inflation, product penetration and the longer-term margin. Risks to our PO would be if the weak consumer environment reduces demand for pay-TV, or competitive risks from YouView are greater than anticipated”.