Sky TV earnings per viewer fall as programme costs rise 11.6%

The cost of maintaining the most compelling sports, television series and movies rose 11.6 percent to $331.1 million in the year to June 30, says pay-TV provider Sky Network Television [NZX: SKT], taking the cost of programming to 35.7 percent of total expenses, compared with 32 percent the year before.

That was a primary driver behind a year in which total operating costs rose 10.1 percent on the previous year, while average revenue per customer fell slightly to $78.63, from $79.54 the year before.

For the year to June 30, the broadcaster turned in net profit of $147.1 million, including $13 million in one-off due diligence ahead of its proposal to merge with Vodafone's New Zealand business, down from $171.8 million the year before, on total revenues that rose fractionally to $928.2 million.

The Vodafone merger is intended to place Sky on a footing to compete with lower-cost and proliferating alternative broadcasters using the internet rather than proprietary technology to deliver programming.

Operating earnings before interest and tax, depreciation and amortisation were their weakest since 2012, at $325.3 million, including the one-off merger-related costs. That compares with ebitda of $379.8 million in the 2015 financial year and $336 million in the year to June 2012. Total dividends have been maintained at 30 cents per share for the year, with a 15 cents final dividend due for payment on Sept. 16, with a record date of Sept. 9.

In a commentary to shareholders, chief executive John Fellet said the rising cost of premium content was "ironic", given the current global over-supply of TV content.

With a record 425 original scripted series in production in the English language this year and a deflationary overall economic environment, "one would expect the price of content to hit an all-time low," said Fellet. "Sadly, that has not been the case."

Instead, Sky had been in an "arms race" with a proliferation of new competitors offering streaming internet broadcasting services in direct competition to Sky's traditional model of delivery through satellite and set-top boxes.

That forced Sky to decide what programming it valued most and led it to "lock down" long-term rights to sports broadcasts controlled by the SANZAR international rugby competitions, cricket, the NRL rugby league championship, and Australasian netball. The largest is a five-year deal with SANZAR, with increased programming costs negotiated in the last three years flowing into both the last and the current financial year, he warned.

For entertainment programming, "gold standard" shows such as 'Game of Thrones' and 'True Detective' from the HBO studio were must-haves, while "the one studio you would not want to lose to a competitor during a difficult time would be Disney", Fellet said because it owns the Star Wars and Marvel franchises, and "great movies in general".

For day-to-day 'linear broadcasting', "we have protected Discovery, Viacom and Disney," he said.

Fellet questioned the commercial viability of both local and international broadcasters of Over-the-Top (OTT), or internet streaming services.

The largest OTT player, US-based Netflix, had declared a smaller profit than Sky's in its last financial year, at US$40.8 million on revenues of US$2.1 billion. In an apparent dig at Spark New Zealand's Lightbox OTT start-up, he said some of Sky's new competitors "get excited about creating new business models to deliver content and then they have to go out and buy content to test their model".

Internet-enabled pay-TV watchers were not as "shareholder friendly" as traditional Sky subscribers, said Fellet, noting they could switch between OTT providers at will. However, they provided their own connection infrastructure, saving costs of installation and customer service.

In the case of new OTT services launched by Sky itself, such as NEON and Fan Pass on-demand services, the company was finding only 3 percent of their users had been Sky customers in the past, allaying fears to date that the company might cannibalise its own customer base.

(BusinessDesk)

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