Sky launches 3D footie and defies slump

SATELLITE broadcaster BSkyB will broadcast Manchester United’s clash with Arsenal this weekend in 3D at a handful of pubs.

The event, which Sky is billing as a world-first, will drum up interest for its 3D TV service, which launches in April. Nine pubs in London, Manchester, Cardiff, Edinburgh and Dublin will take part.

Sky announced its plans alongside first half numbers yesterday that show it continuing to sidestep the recession, with revenues up by ten per cent to £2.9bn.

It added 172,000 net new subscribers in its second quarter, bringing the total to 9.7m – near to the firm’s long-held target of 10m.

High definition television (HDTV) continued to draw customers, with 482,000 signing up in the three months to December, bringing the total to 2.08m.

First half operating profit, analysts’ preferred measure for Sky, was up four per cent to £401m. Pre-tax profit rose from £276m in the third quarter of 2008 to £358m.

And average revenue per user – the amount Sky makes from each customer – was also up from £444 to £492.

The cost of programming and marketing rose in the first half however, as Sky shelled out on premium sport and aggressively promoted HDTV. Programming costs rose nine per cent to £920m while marketing costs were up 22 per cent to £540m.

Chief executive Jeremy Darroch said he was raising the interim dividend by five per cent to 7.875p a share.
Sky has to start squeezing the pips
SKY might be handing 3D glasses to pub-going punters this weekend, but investors may also think they’re seeing things. The firm’s first half performance was a knockout; by far the biggest achievement was the 482,000 high-definition (HD) subscribers it added in its second quarter. This was well-ahead of consensus estimates of 320,000, although an aggressive £70m marketing campaign surely helped.

Analysts at Citi think that it will sign up 2.7m HD customers by the end of the year, up from an earlier estimate of 2.4m and consensus expectations of 2.2m.

Innovations like HD TV are now the future for Sky: as it gets closer to its long-held 10m subscriber target, the market is becoming saturated. Now it has to squeeze as much cash as possible out of the customers it already has. There are already signs it is doing well in this regard, with all-important average revenue per user (ARPU) jumping from £444 in the second quarter of 2008 to £492 – an extra £48 per person.

In the short term, additional subscribers actually hurt Sky, as it has to subsidise the cost of bringing them online; analysts at Numis reckon that near-term earnings will take a £40m hit. Investors shouldn’t be unnerved however – the pay off will be worth it.

There is of course uncertainty around Ofcom’s pay-TV review, which could see Sky having to wholesale sports and movies at regulated prices. But if Sky can increase the number of customers taking three or more products (just 18 per cent do so currently), then they will make it much harder for subscribers to leave.

The firm’s stock isn’t cheap, trading at around 16 times estimated earnings for 2010, according to Citi. But as Sky has proven with its products, quality is worth paying for.