British Sky Broadcasting (LON:BSY) stands at the center of a storm sweeping the film and television industry. Consumers are using the internet to access content directly threatening the role of middlemen like BSkyB. The speed of this transition is only limited by the capacity of the UK broadband network. Although I am sure people do not read for my thoughts on industry trends I will try to briefly outline what I think as it is an important part of my view.

First, it is not worthwhile for the potential BSkyB investor to debate the business model of the so-called "over-the-top" (OTT) providers like Netflix or Lovefilm. These businesses work and will fundamentally change the industry. Distributing content over internet is effective, cheap, and hands a great deal of power to the consumer granting choices about what they have access to and when. Moreover, as these business add subscribers they will be able to pay up for more, higher-quality content. Or so the thinking would go. In reality, the trend towards internet distribution has handed more power to producers and set off a fierce competition for content.

The films and TV shows that a Netflix or Lovefilm offer OTT are not new and in the case of Channel 4 content, for one, rights are not necessarily exclusive. The sheer fact is that they do not have access a lot of content, especially the new stuff. Pay-as-you-go services like Apple and Sky have the latest films locked up. Rental services, like Lovefiilm, are also competitive here but they do not have fast access to content. Of course, we are leaving out sport. Sports leagues in the US are ahead of the trending offering OTT services in markets where the rights for certain fixtures have not been sold locally (for example, in the UK one can subscribe to NBA.tv). There is potential for this method of distribution to cause problems for companies like Sky however, no-one can pay up like a Sky or an ESPN for these events. New distributors like Netflix are doing a great job and offer a cheap, easy-to-use alternative however, these companies live and die by their access to content. In a lot of cases, it isn't clear if they can reach the number of subscribers needed to challenge incumbents in smaller markets like the UK.

Sky KPIs:

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About the Author

Valuhunteruk

Premium Member

I'm a private investor based in the UK. I run Valuhunteruk a value investing blog started in March 2011 which is a continuation of a private blog I have been running since mid-2010. I publish the research and key ideas behind my decisions and the performance is tracked in a portofolio. more »

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Infinity7
18th Apr '15

Thanks for write-up, I agree that Sky is promising investment for 6-12m horizon

They are #1 content owner in the UK, selling non-core assets, entered Germany and Italy, invented AdSmart to compete with Google Adsense.

People on this forum are also quite bullish http://intwits.com/uk/stock/SKY/
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dmjram
21st Apr '15

Not mentioned above and an additional bear case is that Sky has lost all European football rights from next season onwards to BT (both Champions and Europa league), which forced them to pay a significant premium for the domestic league in the subsequent auction as it became a must buy at any price, with BT also securing a large number of games. Paid for sport according to many analysts is what drives the sector, not film/program content, so their is a large potential impact.

Linked to this, Sky is being forced to bring forward its 4k set top box launch as BT gears up to re-launch its TV offer over fibre internet with live streaming in UHD. It's also worth remembering that Sky entering the broadband market triggered BT's response for sports rights and it isn't going to sit still, especially with its ability to offer quad play folowing its re-entry into the mobile market with the acquisition of the largest UK network.

Interesting times.
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djpreston
21st Apr '15

dmjram

I take it you noted that the main article was a few years old?

I thought that the article was spot on in its summary of how the market works. That sport is a major selling point and part of the retention strategy is a given. However, look at the low churn rate just announced (not just in the UK but also across Germany and Italy), other content is also becoming a major "sticky" - not just bought in programmes like Game of Thrones but also the newly commissioned products like Fortitude or some of its foreign language offerings (1992 in Italy - also well followed in the UK market, which is much more open to Foreign language dramas and crime stories following other successful offerings).

The triple play is well established.and growing strongly. They are not rushing into the quad play market just yet but it will come.

That BT has to "relaunch" its TV service shows how they have struggled with the competition. Yes, Fibre delivery is obviously going be a big advantage but Fiber is still limited in its availablility and BT doesnt have the breadth of content that sky does.

IMO the shares are not expensive (not likely to double overnight though) and have a good dividend yield. What is more likely though is that, at some point (possibly quite soon) someone will make a run at Sky. Someone like Vivendi - debt funding is so cheap right now and with a key asset producing good cashflows, such a deal would make a lot of sense for one of the media titans or telecom companies.

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dmjram
21st Apr '15

djpreston

BT's interest in football was established at the time of the article but it wasn't mentioned, the concentration was on film/TV programming.

BT is relaunching because it now has the content no one else can offer, that lots of people want. Not so much the breadth as owning a crown jewel. Before it's TV offer before was very average. Fibre now reaches c70% of the population.

Most important point is though that Sky will always have to pay top whack to keep its Premier League rights which it relies on now there is another big beast bidding. Hence adding the additional bear case to the original article.
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kenobi
23rd Apr '15

The other thing worth a mention is that in wireless, with all the mergers of recent years, bt buying ee, (which is orange an T mobile), and now 3 buying 02, that leaves vodafone as no3 in it's home market. And while it's been buying up cable companies and tv content providers over europe, who can it buy in the uk ? surely only virgin media, an also ran, or the jewel, Sky. Presumably they'd have to pay a considerable premium to bag sky ? I bet there have been informal talks with Mr Murdoch re what he would want for his stake in the company.

K
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