/* ----------------------------------------------- Comment out annoying Snap... ----------------------------------------------- */

Wednesday, July 11, 2007

BSkyB Trading Update: Mild Disappointment

The Broadband adds were boringly in line: Sky unbundled 205k which was 40% of total uk unbundled lines of 514k for the quarter. Personally, I was hoping for an improvement on last quarters effort of 207k and taking the total over 50% of uk unbundling. The fact that the numbers are extremely similar implies to me that Sky is up against some sort of unbundling processing limit of around 3k/working day. Having said that, Sky now accounts for 24% of total uk unbundled lines, 580k out of 2,424k, which is a pretty impressive achievement in a year.

The Sky offnet base is standing at 136k or 19% of the total broadband base and demand is also pretty consistent with 54k added in the quarter. I’m not sure whether this reflects the power of the bundle or the power of the Sky brand, because Sky is actually relatively expensive for offnet broadband.

In terms of voice, it looks as if Sky has performed well in a declining market. The recent OTA2 figures showed a decline to 6.13m from 6.21m CPS customers a quarter before, whereas Sky added 171k to go 526k. Sky has plenty of options with this product to cut costs further, especially as scale is realised and network effects start to kick-in.

The scary factoid for the competition was that it was made crystal clear that churning people off the other broadband networks was the target. There was no talk of growing the market as with payTV, the raw message was basically:
“We have built it, we are better than the rest and they will come”
The 90k expansion in payTV was made up of 77k in the UK and 13k in Ireland which is more than I expected. The interesting fact was that it was mentioned that 33% of broadband customers were new to Sky – in other words 86k. On face value, it looks as if the See, Surf and Speak triple play campaign is starting to pay dividends in customer acquisition.

Also it is heartening to see the annualised churn reducing to 12.1% from 13.7% the quarter previously. In the short term, I think a reduction in churn is the justification for the investment in broadband. In fact most of the presentation was spent highlighting how big a competitive advantage Sky believe their customer service is. Only time will prove this advantage, but Sky makes a pretty compelling case.

The most disappointing part of the presentation was the lack of new product announcements – no news on MPF, no news on linking the Sky+ box with the broadband modem and no new internet content or application deals. As an aside, it was mentioned that a WLR product was to be launched, but given that it will be basically zero margin and just serves to cut the umbilical chord to BT, it is hardly groundbreaking. I think the marketing guy slipped up when he said he had the product at home and it worked. WLR is just a billing product and doesn’t affect the physical line. I suspect he must have been speaking about a MPF product and been a little dazed and confused.

The lack of launching a MPF product could be because:
  • the Sky back-office systems and voice platform isn’t ready for the mainstream;
  • Sky can just think the Openreach process is too error prone; or more likely
  • Sky could be keeping its powder dry for later when more value is needed to be introduced on the entry level triple play product if and when the SMPF demand dries up.
What is certain is that with only 8.3% of the Sky base signed up for Broadband and 6.1% signed up for Telephony, there is a lot of upselling opportunities remaining even before the general increase in penetration of payTV. Sky has a really bright future and from the share price movement today more and more people are starting to buy into the story.