BSkyB’s results released this week saw strong subscriber growth once again with the operator now at over 8.4 million subscribers. However, one of the main talking points among analysts was the churn figure which has now reached nearly 12 percent, a high figure despite some mitigating circumstances. Analysts were divided in terms of its significance. Nick Bell, a media equity analyst at Bear Stearns, said in a research note that "Q2 ’07 churn was 11.9 percent, the highest rate since Sky went digital, although the company attributes 1.3 percentage points of this to its new policy to cut retention spending, and quotes an underlying churn rate of 10.6 percent. However, in our view, this market shows a continuing trend of rising churn in what is becoming an increasingly competitive market place given the NTL/Telewest rebrand to Virgin Media this quarter, and BT is still to fully roll out BT Vision."

Sarah Simon, a media equity analyst at Morgan Stanley, was more positive. She asserted in a research note that "churn of 11.9 percent is obviously way off the medium term target. However, this was the result of a policy to phase out discounting, both for retention and acquisition. The latter point means that Sky will not continue to feed the pipe with more discounted customers, so once it has cleaned out the ‘offer riders’, churn should come back to more normal levels. Q3 churn will be higher, but is now well flagged."

Ian Whittaker, a media equity analyst at UBS, stated in his research note that "a step increase in churn from 10.6 percent last year to 11.9 percent was the initial focus of attention. Churn was impacted by Sky’s decision to reduce its reliance on pay-TV package discounts as a customer retention and acquisition tool, given the opportunity to now offer significant value and savings on voice and broadband. Sky estimates that around 27,000 customers left as a result of this change in policy, and that excluding these customers churn was around 10.6 percent. This change will have a further impact in Q3 where we expect churn to be circa 12.5 to 13 percent; however, this will have a positive impact on ARPU and profitability in the medium term, and Sky expects to make good progress on reaching its target of 10 percent churn in 2008."

Broadband

One of the other big talking points was BSkyB’s performance in the broadband arena. It had just under 260,000 broadband subscribers by the 28th January. Whittaker believes BSkyB is "executing well" here. He said "the run rate for orders is currently 28,000, and given Sky’s ‘See, Speak and Surf’ marketing campaign we believe that Sky’s 700,000-plus target by June will prove to be conservative. Importantly, we expect new pay-TV customers to be a significantly higher proportion of net additions versus the 15 percent seen in H1, demonstrating that this is an offensive opportunity to grow the pay-TV market and take further market share from cable."

While the churn figure was probably the major talking point, BSkyB’s ability to show strong growth in subscriber additions was a positive. New customer additions in the quarter were over 430,000, its highest figure for six years. Net customer growth was 183,000. Whittaker said "gross additions of 432,000 in Q2 were the strongest for six years with the breadth of Sky’s product offering attracting new customers to the platform. Customers taking Sky+, Sky HD and broadband represented over 31 percent of gross additions in the quarter, or 72 percent of net additions. Net additions were 183,000, slightly below the consensus of 190,000 given the exceptional churn rate."

In analyzing the strong net additions figure, Simon said "Sky is using new products to drive demand, even though one would expect gross additions actually to be slowing given the increasingly competitive environment and the greater maturity of the pay-television market. We regard this result, the second quarter of growth in gross additions, as supportive of a more positive stance towards the company’s ability to reach its 10 million subscriber target."

–Mark Holmes

Contact: Sarah Simon, Morgan Stanley; e-mail: [email protected]

Ian Whittaker, UBS; e-mail: [email protected]

Nick Bell, Bear Stearns; e-mail: [email protected]