Challenges from internet for Sky
Sky TV's shares staggered on Wednesday after a sideswipe from new football broadcaster Coliseum.
It was an interesting development for football fans, but it also showed how in the daily dance of sharemarket investment it takes two to tango.
When shares trade, every seller needs a buyer. And typically they will have different views on the attractions of a particular business.
Some will have seen Coliseum as the thin end of a wedge that will ultimately shatter Sky's business into a dozen fragments and end its reign as a dominant force.
Others saw it as just another lightweight hoofing it in a heavyweight game with as much impact on Sky as a rat on an open plan office - there is a frisson of alarm and then life goes on.
The net result of these views was a sudden drop in the share price from the $5.67 open down to $5.20, followed by a slow climb back above $5.43.
Sky has been a popular blue-chip stock for years and is firmly ensconced in portfolios big and small around the country. Perhaps it was no surprise then that initial comments from analysts and fund managers saw little impact for the pay TV company.
They are probably right. Some say the rights to the English premier league are likely to have cost Coliseum $2 million to $3 million. If so, they would be about 1 per cent of Sky's total programming rights cost - last year the total was $216m.
A Sky Sport package costs about $26 a month or $312 a year more than the basic package, and about 558,000 subscribers get Sport.
If 1 per cent of Sports subscribers were die-hard fans of English football and switched to Coliseum, that would represent about 5500 subscribers, or revenue for Sky of $1.7m a year.
With Coliseum's EPL subscription costing $150 a season, that would represent revenue of $825,000 a season for Coliseum, or $2.5m over its three-year licence period.
Using these numbers we can start to gauge the effect of the new service on Sky, and it looks like the football fan base would have to be large before it made much of a dent. In that sense, the share-price drop was probably a buying opportunity - a drop of 24c a share represents a cut on Sky's market value of about $90m, way more than the likely financial impact of the EPL rights loss.
But if Coliseum was not itself a significant problem for Sky, maybe it was the harbinger of greater competition for content as the internet becomes a realistic delivery system. This is an interesting question, and analysts were alive to it before Coliseum announced its play. A research note from Tristan Joll and Lance Reynolds at UBS last month declared Sky TV a "buy" with a 12-month price target of $6.30, citing an "earnings sweet-spot" as the company enjoyed the benefits of previous investment.
"Risks to our rating include entry of internet competitors, fragmentation of entertainment content and pressure on NZRFU rights at the 2015 renegotiation window," they said. But "all are factored into our forecasts, with declining content margins a fact of life going forward."
Greg Main, at First NZ Capital, was also positive in a May 15 research note with Sky "riding a cash flow sweet-spot for the next two to three years". His outlook was more cautious with a 12-month target of $5.70 and a rating of neutral, although there was some upside because Sky could offer a special dividend or on-market buyback.
Both research notes followed an investor day in which Sky briefed analysts on its current thinking.
Main wrote that the briefing "discussed and again discounted the risk of sports bodies going direct where the current relationship with SKT is strong (ie, SKT pays them a lot for their content already). While it could happen in some overseas sports with a small New Zealand following, the cost requirements and coverage required for the main sports makes this a harder proposition."
The potential for a Coliseum-type move was evidently well understood by Sky, and its view that local sports such as rugby were less vulnerable to internet competition looks justified. However, the presence of NZRU board member and former broadcasting executive Brent Impey at the Coliseum press conference indicated the rugby establishment is taking a close interest in developments. Even if Sky is unchallenged as a rugby broadcaster, come 2015 the NZRU, or its international equivalent Sanzar, may demand widespread internet distribution for the product.
Although we don't know how change will happen it would be wrong to assume the internet won't pose challenges for Sky. The comfort for investors is that the company has so far proved highly adaptable and can eye the future from a position of strength.
Last week's Portfolio column incorrectly stated Wynyard Group's expected revenue was $19 million this year and $24.6m in 2014. The prospectus figures are in fact $21.5m and $27m respectively. I apologise for the error.
Tim Hunter is deputy editor of the Fairfax Business Bureau.
Sunday Star Times