Streaming box emerges as central to Sky TV’s turnaround plans

Sky TV reported a bump in net profit early today and forecast that FY2022 would see its first revenue increase since 2016 – but also a dip in earnings as it invested in new technology.

Speaking to the Herald soon after the result was released, chief executive Sophie Moloney said a new Sky box was central to the pay-TV broadcaster’s comeback plans.

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Investors and analysts were told that the new Sky box – which will be powered by Google’s Android software, deliver all of Sky’s channels over UFB fibre in up to 4K ultra-high definition and support third party streaming apps like Netflix, Amazon’s Prime Video and Disney+ – will be rolled out from mid-2022.

Moloney said the new box was the crux of a “one remote to rule them all” strategy, which is designed to position the company as a one-stop aggregator at a time when many are wearied by a shuffle through different gadgets and services to find all their desired content.

Sky can’t stop the rise of streaming services, but it does have the chance to keep them all within its tent, allowing it to showcase its own streaming wares to a new generation, and to potentially take a cut of the action from third-party service subscriptions.

Streaming has grown steadily with Neon, Sky Sport Now and Rugby Pass now accounting for just over 40 per cent of Sky’s total customer base – but only around 10 per cent of its revenue, because the average streamer pays $17 per month, and the average satellite customer $78.

Sky Broadband (provisioned behind the scenes by Orcon and Slingshot owner Vocus in a lower-risk but lower-profit setup) will help increase revenue per customer and reduce churn. But Moloney would not give any numbers for the new service at this early point. So a lot rests on the more internet-friendly new Sky box to pile on many more streaming customers to make up for streamers’ lower yield.

Some analysts see a 4K, streaming-friendly box as long overdue. But at the same time, mindful of pushback from some customers last time Sky had a major decoder upgrade, Moloney said “there will be no forced march” to the new Android box. Those who like the current decoder will be able to keep it.

Given that on-again, off-again plans for an Android box date back to the John Fellet era (the project was by his replacement as CEO Martin Stewart before being reanimated, and now pushed ahead by Moloney) can mid-2022 be regarded as a firm timeframe?

“I’m confident,” Moloney said. “I’m having a weekly check-in on the project because it’s just such an important part of our strategy moving forward.”

The CEO stressed that she wants the new Sky box to host as many third-party apps as possible, including Spark Sport.

However, Moloney conceded that with a focus on development at this point, there had yet to be any formal negotiations over whether Spark Sport could appear on Sky’s new box, let alone talks over whether Sky could clip the ticket on new Spark Sport subs generated via its platform.

Close industry watchers will note that Spark CEO Jolie Hodson said after her company’s full-year result last week that partnerships will feature in Spark Sport’s future as it looks to expand its content and reach in a commercially effective fashion.

While the new Sky box holds hope for the future, it also means some short-term pain for investors.

Interim CFO Andrew Hirst told an analyst conference call that Sky’s dividend would remain on hold while free cash flow would be prioritised to the Android box project.

He did not completely close the door on the return of the profit payout in FY2022, saying the board would assess options as Sky’s balance sheet strengthened.

But shareholders still reacted badly to the continued shelving of the dividend, or a forecast fall in ebitda and net profit.

In late afternoon trading, Sky’s shares were down 2.5 per cent to 15.8c.

Earlier, Sky reported a net profit of $47 million for the 12 months to June 30, 2021 – beating its guidance of $37.5m to $45m, which in turn was an increase on its initially anticipated $20m.

Last year, the pay-TV provider reported a net loss of $156m after write-downs, and an adjusted net profit of $41m.

The company this morning also announced a 10-to-1 consolidation of its long-depressed shares, which will take effect on September 16.

FY21 revenue was down 5 per cent to $711.2m as Sky continued to gain streaming subs at a rapid clip (Neon, Sky Sport Now and Rugby Pass subs were up a cumulative 57 per cent) but its much higher-paying satellite subscribers continued to fall, dipping from the year-ago 585,248 to 554,690.

Total customers fell from the year-ago 989,569 to 955,168 with the continuing fall in satellite customers, and streaming growing, but also losing a wodge of 154,000 customers who got Lightbox free under its previous owner Spark if they had a broadband or mobile account with the telco – an arrangement that continued until Sky rolled Lightbox into Neon in June.

Ebitda increased 14 per cent to $186.4m as expenses fell 8 per cent to $538.3m on tight cost controls, including a reduction in headcount (staff reductions saw $15m earmarked for redundancy payments), and lower production costs as domestic cricket rights went to Spark. Sky sold its outside broadcast unit to the multinational NEP in February. No price was put on the asset sale, but Sky said it would save $50m over five years by contracting back to NEP.

Sky faces the core issue that users of its streaming services pay only around a quarter as much per month as its traditional satellite subs – meaning revenue has continued to trend downwards.

However, this morning Sky gave revenue guidance for FY22 of $715m to $745m – which would represent its first growth in turnover since 2016 if it can deliver.

The company also forecast ebitda of $115m to $130m and net profit of $17.5m to $27.5m for FY2022.

For FY2021, Sky saw streaming revenue increase to $73m from FY2020’s $59m.

But because the cheaper, faster-growing Neon became a larger part of the pie, average revenue per user per month (arpu) dropped from $20 to $17 over the financial year.

Meanwhile, arpu from satellite subs continued its long-term trend downwards, dropping another dollar to $78 as total Sky box revenue fell from $271m in the second half of FY2020 to $261m in the second half of FY2021.

Moloney said the guidance was subject to change if the Delta outbreak persisted and caused major disruption to the sports calendar. On the upside, Moloney said Neon subscribers had spiked since the latest lockdown began.

Sky also faces the ongoing issue of Hollywood studios and TV content makers turning more and more to direct-to-consumer apps – a trend accelerated by the runaway success of Disney+, which is seeing Sky pay more for rights, losing rights (as with most Disney content) or settling for non-exclusive deals (as with its latest Discovery renewal, among others).

Earlier this week, as Chorus delivered its full-year result, its CEO JB Rousselot said his company had seen network traffic continuing growing – and that it anticipated direct-to-consumer apps from CBS and Discovery would launch soon in NZ, further boosting new media traffic.

Today, Moloney confirmed that Discovery’s launch of a standalone streaming deal was expected, in keeping with the terms of Sky’s new non-exclusive contract.

Lull in the sports fight

The pay-TV broadcast now at least faces a period of relative calm on one front – sport, where the settling of Rugby League rights (with the World Cup going to Spark but the NRL remaining with Sky until 2027) represented the last major tussle over a code for several years.

In May, Sky raised the price of Neon by 15 per cent to $15.99 a month.

The question now is whether Sky will have to raise the price of Sky Sport to accommodate its new five-year rugby rights contract, which kicked off this season and costs a reported$80m per year.

Moloney said Sky was currently assessing its pricing, which could lead to changes before the end of the year.

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