Overview: broad outlines

Overview: broad outlines

Prospects: BskyB enters the broadband fray. But will it pay off?

The gloves have come off in the fight for broadband supremacy with the
announcement from BSkyB that it is entering the internet fray. But with its
preliminary results due to be released on 28 July, can it afford the £400m hit
to its accounts?

what’s happened…

Last week, chief executive James Murdoch and chief financial officer Jeremy
Darroch revealed BSkyB’s long-awaited broadband packages. On paper, the deals
look attractive, especially to those who want to combine it with the satellite
broadcaster’s pay-TV and telephony packages. But this will come at a cost –
Darroch thinks there will be a charge to the accounts of around £400m over the
next three years. Unfortunately for shareholders this was twice market
expectations and BSkyB’s share price slumped nearly 5% on the news. So investors
will be hoping for better figures in the prelims.

what’s going to happen…

Jeremy Darroch has declared that the move will be very positive as it will
increase the group’s revenue growth. He believes they will be able to access
previously unavailable markets, which should see their addressable market worth
grow from £4bn today to £25bn in the future. And they will be able to sell more
products and services to their existing customers, so markets such as search,
security and online advertising will open up to them. Full of optimism, he said
the investment would be EPS enhancing from 2009/10.

The broadband offering will be building on the group’s £211m acquisition of
Easynet last year and Murdoch has not ruled out a bid for AOL’s European
internet operations. If BskyB did go for AOL, that would send a very aggressive
signal to the market.

But looking wider, investors will also want to hear good news on TV customer
numbers – the growth rate in subscribers for the third quarter were
disappointing and the churn rate, where customers switch away from the satellite
broadcaster, was running at about 11.4%. Investors are also keen to know what
happened during the World Cup high definition trial – is this the way forward
for broadcast quality or are there simply not enough punters that insist on such
high quality pictures? And they’ll want a decent return on the cash splashed on
the Premiership football rights – BskyB won the rights to show 96 live matches a
season from August 2007.

TRIPPLE WHAMMY

According to BSkyB’sCFO,Jeremy Darroch,selling broadband internet packages to
itsTV customers will reduce the number cancelling their contracts.

Darroch has estimated that a one percentage point fall in the churn ratewould
produce an extra
£100min profits over a five-year period.So,in effect,the group is offering
additional services to keep its existing customer base,while at the same time
hoping to attract newcustomerswith a triple play package ofTV,internet and
telephony.

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