Outgoing CEO John Fellet and his possible successor, current CFO Jason Hollingworth (image: Duncan Greive)
Outgoing CEO John Fellet and his possible successor, current CFO Jason Hollingworth (image: Duncan Greive)

BusinessAugust 24, 2018

Sky TV completes a very rare feat in legacy media: raising underlying profits

Outgoing CEO John Fellet and his possible successor, current CFO Jason Hollingworth (image: Duncan Greive)
Outgoing CEO John Fellet and his possible successor, current CFO Jason Hollingworth (image: Duncan Greive)

The pay TV giant has lost customers, it’s making less out of each one, and has cut prices. Yet Duncan Greive reckons their annual result shows they might yet find a way out of the woods.

Sky has completed a highly unusual feat in legacy media – reporting an increase in underlying profit, up 2.6% to $119.3 from 2017’s $116.3m. Against a backdrop of having slashed prices on its core product to as little as $25, facing a huge increase in online competition and a continuing drop in subscriber numbers, the achievement is one of the more impressive in recent local media history.

However it has been a case of shrinking the business to squeeze more out of it, the lift achieved by going lean – dropping operating expenses by $47m. This came predominantly from a mix of content costs – “about getting better deals”, according to outgoing CEO John Fellet, while his CFO Jason Hollingworth pointed to decreased costs in customer service, which has declined from $100m to $83m.

The lift in underlying profit comes despite a number of critical metrics trending downwards. Most significantly its overall revenue continued its gradual decline, back marginally from $83.48 to $83.09. The subscriber base, which once sat comfortably over 800,000, continued its slide, with 57,000 lost year-on-year on its way to 768,000. And ARPU – a much-watched metric describing the average revenue they make per customer – has declined for the first time in company history.

For all that, this still represents a low-key triumph, and a fitting way to farewell Fellet, an iconic CEO who leaves a business which is by no means secure, but has plenty of tools with which to complete an orderly transition to this new era. A one-time one-time goodwill writedown of $360m is predictably leading the reporting on our major sites, but it’s arguably more a sideshow than an event with major practical business implications.

In some ways the loss is Fellet carting some garbage out the door, leaving a cleaner house for his successor. He said that the recruitment company had narrowed it down to a field of four or five, and CFO Hollingworth admitted to having “considered applying”.

The positives are not of the headline-grabbing variety, but are nonetheless noteworthy. The loss of 57,000 customers is far from desirable, but much of the decline happened earlier in the year, with 45,000 customers lost in the first half – but just 11,000 in the back half.

The second half of the year coincided with a series of announcements which collectively represented a sea change for Sky – the first true strategic plan which seemed to mesh with the dynamics of the current era from an audience, platform and content perspective.

First, it slashed prices, halving the entry level Sky package, and allowing customers to access sports for under $50 a month, a significant gain in price accessibility. Second, it announced a range of future apps, platforms and packages coming March 2019, which would finally allow it to deliver much of its extraordinary content offering in a modern style. This will comprise a multitude of Netflix-style interfaces (in the past it has built its own often appalling tech; now it’s relying on a Cisco platform solution – that working is perhaps the most critical current agenda item for Sky). The third part was CEO Fellet’s retirement, allowing a successor to run the transition to a more internet-focused business.

The fact ARPU declined so marginally despite the changes to billing should be scored as a major win, another less gaudy one is a slight decline in customer churn. Just 9% of customers opted to reduce their package as a result of the new, potentially cheaper pricing, showing that despite the declines there remains a huge and loyal audience for its core satellite service. That’s crucial as it represents a large, loyal and relatively low-maintenance base to operate from. Sky has quietly stopped its long-running ‘three months free’ advertising campaigns in recent months, which were understandably aggravating to current customers, and managing a slow decline is less labour-intensive than onboarding vast numbers of new subscribers, meaning the sharp drop in  call centre labour costs could well be sustainable.

Significant question marks remain, some specific to Sky and New Zealand, others part of the global content war which likely remains in its early stages. One number which should trouble Sky is an 8,000-strong drop in Neon (its version of Netflix or Lightbox) customers – a significant setback in an area which should theoretically be an area of consistent growth. Hollingworth attributed it to the absence of new seasons of Game of Thrones this year, which will have had a major impact – but surely part of the reason you spend so much on content is to have more than one hit show to move subscribers. Netflix hasn’t had a breakout hit in months if not longer, yet still piles on subscribers thanks to its fresh content and extraordinary UX.

Globally there are other clouds gathering. Disney and a number of other major studios are currently assembling their own direct-to-consumer platform solutions, which will eventually arrive in New Zealand. And Sky, for all its strengths, is much more of a distributor of content than a creator of it. Fellet’s view is that the new world is likely to be made up of more hybrid models of content distribution – that it might lose some exclusive deals, but be able to take advantage of correspondingly cheaper wholesale prices to sell into its own customers.

That, like so much else with Sky and the media, remains to be seen. But it’s worth noting the assets it retains. While TVNZ crows about raising profit to $5.1m, and NZME and Stuff report major profit declines, Sky has just hauled in nearly $120m. The rise of fibre has made internet-driven content much more accessible, but satellite remains far more reliable and understood for hundreds of thousands older, richer New Zealanders who are far less likely to flip services on and off than their children’s generation.

Behind all that, an extraordinary wall of content. There are 791 content contracts which make up Sky Sport, and over 3,000 across Sky in total. They complete over 400 outside broadcasts of sports a year, a skillset and infrastructure advantage the likes of Spark will have to work very hard to overcome. Fellet shadily talked about “Premier League and Formula One” as low value sports due to their largely being played overnight, knowing full well that Spark has bought one and is strongly rumoured to have purchased the other. A slide pointed out that just 0.24% of viewing time was spent on the EPL last season, another suggestion that his new crosstown rival has overpaid.

Spark, meanwhile, will not be deterred by Fellet’s barbs. They have their own locked in legacy customer base, and the advantage of being able to view content as marketing as much as product. And while the All Blacks are only locked in until 2021, and thus their retention remains a major future hurdle to overcome, many of Sky’s other key deals – notably with HBO – are long and broad. If it can finally figure out how to sell product online as well as via satellite it has the chance to once again build a sustainable future.

What this result shows, more than anything, is that those expecting Sky to swiftly head toward the grave – myself included at times – might have underestimated its ability to strip back and fight. It’s by no means saved, but Fellet leaves it with a longer runway than many of its doubters might have predicted.

Mad Chapman, Editor
Aotearoa continues to adapt to a new reality and The Spinoff is right there, sorting fact from fiction to bring you the latest updates and biggest stories. Help us continue this coverage, and so much more, by supporting The Spinoff Members.Madeleine Chapman, EditorJoin Members

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