BSkyB's digital rollout............................................................
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CITY PREDICTS BRIGHTER 1998 FOR SKY FORTUNES
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After a year that nearly saw the bottom fall out of BSkyB, some on the City are predicting a brighter 1998 for the U.K. satellite operator. Even U.K.-based investment banker Morgan Stanley, which has become known as the cable industry's biggest backer in the City, has come out with a report predicting the rosiest of futures for Sky.
Morgan Stanley upgraded Sky's rating to a "strong buy" and projected annualised Earnings Per Share growth of almost 40 per cent starting in 2000. The investment banker's reason was simple: Sky's programming. Morgan Stanley said Sky's package is unbeatable; but moreover, it is virtually the only game in town. It has its programming foot very squarely in the BDB digital terrestrial camp and Morgan Stanley expects BSkyB's upcoming digital satellite package to break even "three years after launch in April."
There are, of course, other programming players in town, none more important than Flextech, which has skillfully signed up the BBC to a mini-package of around eight channels marketed under the UKTV sub-brand. Allied to the Flextech flagpole is the powerful Discovery brand, again with a series of BBC joint-venture channels, the first of which (Animal Planet) already is transmitting to European cable headends.
But it is Morgan Stanley's numbers and subscriber forecasts that make the most interesting reading. In what some might see as a dramatic prediction, the bank suggests that by 2005 the total number of UK dishes will be a whopping 8.4 million. But nearly 5 million will be redundant or not contributing revenues to Sky, leaving a net total of 3.5 million plus a further 250,000 Irish subscribers. The important bit is that they will virtually all be digital. Morgan Stanley expects just 80,000 analogue homes to be still subscribing by 2005.
On this point one has to treat with doubt the suggestion that BSkyB will maintain expensive analogue uplinking and satellite transponder rentals right through to 2005. One suspects it would be far cheaper to even more dramatically subsidise digital set-top boxes (which should then have dropped dramatically in price) around 2003 to bring analogue transmissions to a prompt end.
Morgan Stanley is not keen to forecast BDB's digital terrestrial's prospects, especially with so much uncertainty surrounding the actual start date, lack of CEO, a licence only issued just before Christmas, with no firm order (yet) to a set-top supplier. Back in May last year when Morgan Stanley examined both BDB (which besides Carlton and Granada also at that time included BSkyB within the consortium) and the NTL/United News and Media DTN bid (prior to the ITC decision), it spoke of BDB achieving some 85,000 subs by Dec 1998 (assuming a mid-summer 1998 commencement), and placed DTN's total higher at 125,000. For the purpose of this report we have taken the BDB numbers, which have a lower start-up, but by 2005 matched DTN's totals.
Morgan Stanley is happy to suggest (as part of its October "BSkyB: Design of a Decade" report) BSkyB's share of BDB's fortunes. It will be apparent that even allowing for the second-half of each year - the pre-Christmas build-up - when far more than 50 per cent of subscribers come into the fold, Morgan Stanley has reduced its anticipated subscriber numbers for BDB, suggesting only some 220,000 subs by mid-year 1999, and worse, barely 500,000 by mid-year 2000.
This difference is further highlighted if one looks at Morgan Stanley's initial forecasts (May 1997) for NTL's DTN numbers. Where it can be seen that Morgan Stanley's current thinking is clearly to go a little more gently on expectations for digital terrestrial, at least in the period 1998-2001.
But back to Sky. Morgan Stanley was briefed by BSkyB on October 2, with a complete backgrounder as to Sky's upcoming digital launch. The key dates at that time were:
Pre-testing of System Dec-Jan 98 Launch of Astra 2A Feb 98 Brand Awareness Marketing From Feb 98 Full Testing of System Feb-Mar 98 Registration Marketing From Mar 98 Digital decoder availability April 1998 Full digital platform launch April-May 1998
Sky's "Special Interest" channels include Racing, Adult, ethnic and others available to viewers at additional cost. Sky's sporting offerings will expand to five channels, while the current premium movie channels will be multiplexed (time-staggered) with up to four versions of each channel. Additionally, Sky will devote 50 channels to PPV movies, with staggered start-times.
Two complete transponders will be held in reserve for the British Interactive Broadcasting contribution, coming on stream later in the year.
New Sky subscribers will be able to buy subsidised decoders at Pounds 199.99, while existing Sky subscribers will get a further digi-box discount (Morgan Stanley suggests a retail of around Pounds 100).
But there is a problem that neither Morgan Stanley nor Sky could have known about in October, namely the delayed launch of Astra 2A into a new orbital position at 28.2 degrees east.
In December, on-ground testing of the satellite was predicted to cause a delay in delivery until March. But the failed launch of the Asiasat 3 satellite on Christmas Day has had the knock-on effect that all launches from the contracted space centre are suspended during the failure investigation.
Sky promises the following:
Free to Air/Terrestrial channels 15
Basic tier channels 50
Premium (multiplexed) channels 15
Special Interest channels 30
PPV 50
Total Channels 160
The answer could come from the recently launched (Dec 3) Astra 1G, the seventh Astra satellite, which could be held in reserve for Sky's transmissions. Astra 1G has a long list of firm clients (4 transponders for Canal Plus, 1 for BetaTechnik, 3 for ARD/ZDF, 1 for ORF/SRG, 2 for Sogecable) and while SES has kept quite silent on the matter, it will clearly be keen to see whether or not BSkyB will be able to start the tests/services on time.
Finally, a cautionary note. We have concentrated on a series of bullish reports from Morgan Stanley. Banque Paribas, in a Dec 11 study, takes a different view. It says "Sell" BSkyB, citing management difficulties, regulatory problems and the threat from cable/DTT on the downside. Worse, it describes BSkyB as a "Weak" candidate for growth.
Merrill Lynch said in the same month that the interim trading profits, expected Feb 3, are likely to be flat, with pre-tax profits down four per cent to Pounds 128 million. It gave the broadcaster a neutral rating. |
