Streaming leads to Sky falling
CHANGE is coming for Sky Network Television and analysts are starting to question how prepared the company is to defend its position.
Sky TV is the monopoly payTV services provider in New Zealand, having a satellite distribution platform covering the whole of the country.
It has a stranglehold on key programming — especially sports. Its sizeable subscriber base had proved loyal until 2015, given limited alternatives.
All this is reflected in the company’s solid historical financial metrics and free cash generation.
Morningstar analyst Brian Han yesterday said longer term, Sky TV’s core content aggregation, bundledchannel distribution, and recurring subscription business model were likely to come under threat.
Internetfacilitated overthetop (OTT) technology was spawning new players offering subscription on demand streaming services.
‘‘The situation is likely to accelerate in the next few years, given the current rollout of fixedline broadband fibre in New Zealand.
‘‘It is a project likely to dramatically increase broadband penetration in New Zealand.’’
All of that was coming at a time when Sky TV’s core payTV business had reached full maturity and household penetration of its services was going backwards, he said.
Critically, emerging competition was likely to gradually affect Sky TV’s highmargin, highfreecashflow business model.
Competition for content from players such as telecommunications companies, Netflix, Amazon, Apple, Google, Quickflix, HBO and ESPN was likely to put pressure on programme costs and marketing expenses might also increase in response.
The company’s capital intensity might remain elevated as increasingly technologysavvy consumers shortened the settop box upgrade cycle from the current seventoeightyear timeframe.
Morningstar did not believe Sky TV had an economic moat, or competitive advantage, Mr Han said.
Until the 2014 financial year, the group enjoyed efficient scale as the monopoly payTV provider in New Zealand, installed in nearly 50% of households and boasting a customer base of 865,000 subscribing to its traditional satellitedelivered subscription TV services.
The enormous scale furnished Sky with several competitive advantages, he said.
On costs, the company had the capacity to bid more aggressively for popular content, given its large subscriber base and strong freecash generation.
For premium sports programming, its high household penetration and financial capacity to pay top dollar made Sky an attractive distribution partner for the relevant rights holders.
‘‘All this allowed the company to maintain its appeal to consumers.’’
However, three developments since then had dramatically changed the competitive landscape for Sky.
First, the rollout of the ultrafast broadband (UFB) had accelerated from 31% competition in 2014 to more than 70% at the end of 2017. About 35% of households had taken up the fibre service.
With advantages of speed and stability, UFB was increasingly becoming a mass market distribution channel for consumers’ entertainment needs.
Secondly, the 2015 launch of subscription videoondemand (SVOD) juggernaut Netflix in New Zealand was ‘‘perfectly timed’’ to take advantage of the UFB rollout and takeup, Mr Han said.
The fibre broadband had fed an insatiable appetite for SVOD content. The average fibreconnectedhome’s monthly data usage grew from less than 50GB in 2014 to 222GB in 2017, mostly watching streaming content from the likes of Netflix, Lightbox, Quickflix, Neon and YouTube.
Thirdly, in late 2016, Amazon launched its own SVOD service in New Zealand. As with its streaming initiative in other countries outside of the United States, the group had made no secret of its aggressive plans as a way to build its retail, membership and logistics economy system, he said.
Craigs Investment Partners broker Chris Timms said the other key takeout from the Sky financial result this week was the move to split the current basic tier into a Sky Starter product and Sky Entertainment product, and changing pricing from $NZ49.91 per month to $25 per product.
While the move had been speculated as happening, the key surprise was no associated lift in the sports package pricing.
The new pricing and basic tiers were effective for both new and existing subscribers from March 1 and would also flow through to wholesale partners as well on a retail minus basis, he said.
To access the sports and movies tiers, customers must take the Starter pack and, if they also took the entertainment pack, Sky would bundle the SoHo channel, previously $9.99 a month.
SoHo revenues were about $10 million a year and Mr Timms expected them to move closer to zero over two years under the new basic structure.
On an earnings call to brokers, Sky cited the Foxtel example where its experience of splitting the basic tier resulted in a less than 20% customer loss.
‘‘We think the magnitude of risk is higher for Sky given Netflix and Lightbox are now established in the New Zealand market. Sky still needs 12 months to execute its own technology refresh path and it has lower brand equity with consumers.’’
Average revenue per user (ARPU) was likely to fall in the next 12 months to 24 months. If the Foxtel precedent played out, the ARPU decline would be more limited to 4%, or $4 per sub to $80.
Craigs’ analysis of the new pricing structure suggested about $70 million of revenue could be at risk if 50% of the only and basic plus sport tiers elected to only take the starter pack, Mr Timms said.