Satellite broadcaster Sky faces the combined challenges of recession, regulation and new technology. British Sky Broadcasting shares are currently trading at a ten-year low. One analyst report suggests that it will fail to meet its long term target of ten million subscribers in 2010. It says that BSkyB faces greater threats to its business model than ever before.

Broker Collins Stewart says recession, regulation and technology shift could combine to create the perfect storm which could hit as early as next spring.

By then, the United Kingdom could be in recession, the regulator could conclude its review of the pay-television sector, and Sky will be facing the next auction of football rights. As a result, the research note suggests that profits will come under pressure and Sky could fall 600,000 short of its target of ten million subscribers in 2010.

In the view of Collins Stewart, the era of satellite dominance, driven by sports, movies and greater channel choice, could be coming to an end, as a result of new technologies and greater competition. Regulation could impose the unbundling of premium programming, unwinding the business model for the leading pay-television operator in the country.

Up to a 7% of pay-television customers could churn out of subscription services as they tighten their belts according to a survey of over a thousand people conducted by Continental Research.

Nearly a quarter of subscribers to pay-television services surveyed said they planned to reduce the amount they spent on movie and sports channels over the next year.

The study, TV 3.0: The Digital and Internet TV Report, found 15% had chosen Freeview, the free digital terrestrial television option, for financial reasons.

“One of the truisms about how consumers respond to a challenging economy is that they go out less and spend more time at home, watching television,” said Tim Barber of Continental Research. “What is interesting is that it suggests many people are looking to save money yet further by cutting back on their monthly subscriptions for additional TV channels.”

While conventional wisdom has generally held that broadcasting is relatively resistent to recession as it offers comparatively inexpensive family entertainment, consumers now have many more options for television viewing, including free services and those that do not tie families into a subscription contract.

Internet video services have yet to make a serious impact on pay-television, but within three years 20 million homes in the United Kingdom could have broadband connections capable of supporting video-on-demand. With movies made available to broadband operators on a non-exclusive basis, there may be less reason to subscribe to satellite services.

That said, satellite is able to deliver movies in very high quality high-definition, and digital video recorders will enable increasing amounts of material to be stored locally. Furthermore, Sky has made significant investments in broadband, enabling it to deliver on-demand services in the future.

Credit Suisse is still pessimistic, suggesting that Sky will find the consumer environment increasingly challenging and that while it is resilient it is not immune to the economic outlook.

The negative sentiment has cut the value of BSkyB by over 10% in a week. That is more than the amount it has been obliged to write down as a result of its investment in commercial broadcaster ITV, which is also trading near its lowest ever level.

However, although the share value of Sky has fallen steadily since the heady days of 2000, the company has consistently exceeded the expectations of many analysts. While investors may not be making money out of Sky, it continues to deliver profits.

Despite the economic downturn and the downrating by some observers, Sky is likely to do everything in its power to reach its stated objective of ten million subscribers in 2010, a figure towards which it has been slowly and surely rising. At last report it was just under nine million. The latest figures will be available at the end of the month.

www.sky.com
www.collins-stewart.com
www.continentalresearch.com