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The Skytanic has sighted its iceberg

For years now Sky has been the biggest force in New Zealand media, crushing everything in its path. But by ignoring digital it has found itself in a brutal squeeze between rising costs and shrinking revenue – all with thousands of customers poised to flee post-Lions tour. Duncan Greive asks if the end is now inevitable.

It seems a strange thing to say about a $1.3bn company which just announced a $116.3m profit, but Sky TV is in what looks like terminal decline. The broadcaster, for so long the colossus of New Zealand media, today released its 2017 annual results for the year to June 30, and across a host of important metrics they show a troubling decay. Sources say that the company has become colloquially known as the ‘Skytanic’ internally – these results reveal it to be within sight of its iceberg.

A first-ever decline in revenue (image: Sky)

The headline number is a 21% decline in net profit, from $147.1m in FY2016, but the most frightening figure for investors will be the decline in total revenues – from $928.2m to $893.5m – and the loss of 33,800 satellite customers, by far its most lucrative segment.

What’s even more concerning is the fact that at the June 30 end of financial year, the Lion’s Tour was still in full swing. It was the end of a string of three straight years of tentpole sports attractions – following the 2015 RWC and 2016 Olympics – which had kept customers on the hook. The next 18 months yawn as a sporting void: no Cricket World Cup, Rugby World Cup or Olympics – nothing to keep the sports fan hooked. At this point, even sports bodies must be considering what the opportunity cost of taking Sky’s money is – is its product so expensive that it’s actively chasing away younger viewers to replenish their fanbases?

The looming sports cliff was doubtless what drove Sky to essentially destroy its Fanpass online sports product for the duration of the Lions tour – a desperate and likely successful attempt to shore up satellite subscriptions through the end of the reporting period.

Now though, there’s nothing in the pipeline to keep customers on the hook – even Game of Thrones is weeks away from the end of its seventh season. Spurred by social media anecdotes of steep discounts offered to those calling to cancel subscriptions, I called the company’s customer service line and within 10 minutes received a six-month discount which will amount to nearly 50% off the price I had been paying, and a saving of nearly $400 – all with no extension to my contract.

The Skytanic (image: Tina Tiller)

The problem for Sky is that even at $75 per month – significantly below cost – the service remains around five times as expensive as the likes of Netflix, Lightbox and Amazon Prime, the SVOD competition to which consumers are comparing it. Even John Fellet, Sky’s immovable rock of a CEO, has finally acknowledged the primacy of internet delivery, acknowledging as the results were released that “at Sky we are clear that VOD is the future. It is already the most disrupting force in television viewing.”

He went on to try and steady the ship, saying “while now is not the time for a massive conversion of our core business, as a significant number of our customers still rely on our satellite-delivered service for their sports, news and entertainment, we are embracing the opportunity to compete in new media models.”

The lie of that last statement is laid bare in the withdrawal of daily and weekly fanpass subscriptions ahead of the Lions’ tour. It was a pivotal moment for the broadcaster – one which could have been used to on-board tens of thousands of new online customers. The retrogressive move suggested that the fear of cannibalisation was far more present in executives’ minds. In so doing they mortgaged their future for the sake of single reporting period.

In the background is the Commerce Commission’s extraordinary decision to refuse to allow its merger with Vodafone. Instead of a content and distribution behemoth, they left Sky without a life raft, shackled to its aging customer base and without a natural transition into the digital environment that Vodafone could have facilitated. It remains remarkably shortsighted, and the commission deserves as much criticism as Sky itself.

The decision notably blitzed Sky’s succession plan. Fellet has been CEO for over 16 years and was brilliant for a particular business environment. But the disruption era has not been kind to him, and while tech entrepreneur Derek Handley is on his board, the company has clearly not been swayed by him and has a fairly dismal record of digital innovation. Russell Stanners, the younger, savvier CEO of Vodafone was slated to be CEO of the merged entity – and no amount of marketing collaboration can replace that. The chances of Fellet announcing another annual result appear slim at this point.

A lot of brackets (image: Sky)

Sky’s own reporting, while containing some positives in the online space, can’t disguise how deep-seated these issues are. Its combined Neon and Fanpass subscriptions are up around 50% to 80,000 – yet that number serves to show the gulf between it and the pureplay VOD competition. Netflix and Lightbox have surged in to reaching 1m and 630,000 subscribers respectively in less than three years. While not a like-for-like comparison to subscriber numbers, the figures serve to underscore the extent to which Sky’s softly, softly approach to digital has allowed room for competition to devour the VOD moment.

There’s bleak news everywhere. Advertising revenue is down 8% to $68.1m, and nine of the last 12 quarters have seen declines there. (There was a big spike in the most recent quarter – though again, this was likely attributable to the once-in-12-year event that was the Lion’s tour). Satellite revenue was down 3.7%, with a slight increase in per user revenue more than offset by the drop in subscribers.

And we haven’t even got to perhaps the most significant number. Its costs of programming, which is to say the amount it spends on content, rose from 36% to 39% of revenue – from $331m to $349m.

Think about that for a second. It’s losing customers from its lucrative satellite service faster than it’s replacing them at its far lower margin VOD service. At the same time, its costs have risen significantly, thanks to increased competition. It’s now bidding against a bewildering variety of opponents – cashed up middle eastern conglomerates, tech companies with a price-to-earnings ratio north of 200 (Sky’s is 10), content hungry telcos and the traditional broadcast sector.

It’s a perfect storm for the once unsinkable Sky, and it’s hard to see its current strategy as anything but managed decline. With rising costs, shrinking customer bases and the chance to aggressively play for the future nearly gone, it’s hard to see where it goes from here.

Disclosure: The Spinoff is funded in part by Lightbox, the online television streaming platform, but they had no input into this post.


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