No Bloodbath on Sky's lawn

When a company plans to invest £500m of cash over the next couple of years in addition to the net £110m (£200m for the purchase of Easynet with £90m of realizable tax losses) already invested in a fibre network entering a new adjacent market with new technology, it is a pretty frightening moment for the incumbents.

ntl/Telewest/Virgin

Ntl’s share price only went down by 4.87% today, probably because the market has already discounted the world of pain it is entering. However with a market capitalization of US$1.89bn it still has a long way to fall and it has £5.9bn of debt to finance.

In the UK Conference Call little was discussed about the cable company impact, but in the US Analysts Call either because of the ntl NASDAQ listing or the history of cable in the States, it featured heavily.

Sky confirmed that customers would be allowed to churn from ntl onto the Sky double or triple play offering – they must take the TV element. The acquisition cost for Sky would obviously be higher as the customer would have to return to the BT Openreach Copper Network and Sky have worked out a process with BT to manage these switchers. Although, it didn’t feature heavily in the presentation, this suggests to me Sky will be after ntl’s base and I don’t suspect they will do it quietly.

The biggest problem for ntl is that they are a broadband incumbent with 2.8m customers and a drop in ARPU by only £1/month on broadband costs them £34m pa and that is a big figure for someone who is making a loss and charges £35/month for a 10Mb connection compared to £10/month for a 16Mb connection for Sky customers.

If that wasn’t problematic enough for ntl the fact that Sky is underrepresented in its’ LLU areas compared to ntl, added to this is the fact that Sky have now finally got solutions for multi-dwelling units ie flats and the only conclusion is a few sleepless nights for the new ntl CEO, Steve Burch.

AOL Negotiations

James Murdoch protested too much about AOL. It was clear to me that he was negotiating the price downwards and signaling to other participants in the auction that live will not be easy for them if they buy AOL UK. Again in the US Conference Call, it was revealed that 50% of AOL’s Broadband Base is also Sky customers. The only purpose in revealing this statistic is reducing the price.

Telephony

SkyTalk has already 200k CPS customers. I was quite surprised at this figure especially seeing that Sky hardly promotes the service. I felt that Sky was downplaying the telephony element of the launch, but they still forecast 1.5m customers by 2010 with monthly ARPU of £18.72 (net of VAT) which equates to a £337m annual business.

Partial Unbundling

I was really surprised that Sky were going for partial unbundling rather than the full unbundling that Carphone Warehouse are going for. Sky are quite open about they will not be getting the full economic benefits from unbundling initially, but they feel that it is too risky to go for LLU of voice and BT is not ready for the volume yet. If they are correct, Carphone Warehouse will have a huge problem coming up. Sky forecast that early 2007 they will start to move customers to full LLU unbundling.

Sky seem to have really thought out the customer service requirements not only by taking on an extra 1,500 call centre agents (which they emphasized were recruited in Britain and not South Africa or India) and 600 Home Service engineers. The fact they Sky will send an engineer out for installation and also bundle a wireless router is impressive.

Other Services

I feel Sky is being supa-aggressive with its’ estimates of £5/customer/month for advertising revenue from the portal either through banners or search and content distribution. This equates to a portal with £180m pa turnover. I don’t know how many sites in the UK currently actually earn that much. They claim that they currently are Europe’s biggest legal video download service.

What is not included is the Video on Demand revenues, which I suspect will be slow to grow as Sky will need to roll-out Sky+ (PVR) devices with Ethernet interfaces to their home router. Once the rollout reaches critical mass, I can see Sky causing a lot of problem to the Blockbuster business model. It will also be interesting to see if they beat the distribution costs of a DVD postal service. I expect they can thrash the costs with a real example of telco yield management by pushing out the bits during the night.

Also, Sky seem to have big hopes for its’ interactive services, such as Sky Bet, which will get a huge shot in the arm will a higher bandwidth always on return channel.

Churn

Although churn or customer loyalty is not factored in the standalone economics it is blatantly obvious that it will play a big part in the equation. The CFO revealed that a 1% reduction in annual churn (or about 80k customers) is worth easily North of £100m over a 4-year period.

Conclusion

This is an extremely well thought out offer with a very specific target audience – I like it a lot. Personally, I think Sky is being very conservative with the forecast customer numbers and the upside for the Sky PayTV business.