The truth will out
After more leaks than a Swiss submarine, it's happened. I would have posted this earlier, but I was busy writing a note on the deal for clients. Needless to say, as a fan of market disruption, this is pretty damned exciting stuff. Europe's largest single-market digital pay TV player drops a bomb on the incumbent telco, which is also its primary co-marketing partner. Or should I say was?
Clearly the market is reading this correctly. As I write BT is down 2.6%, Sky only 0.7%. What's more, the reaction to Sky's acquisition story (which usually elicits negative responses initially in any event) is complicated by reports that the EU is going to remove Sky's hegemony on Premiereship content on Monday. Whatever this may mean for Sky, the news for the incumbent players in the UK DSL market is less than good. Prior to this announcement, Easynet planned to unbundle 350 exchanges, taking it to within reach of around a quarter of homes in the UK. Under Sky's control, this will expand to over 1,000 exchanges, or 70% of UK homes, just below the coverage of Freeview.
That's what I call making up for lost time.
Back in February I produced a hideously long initiation of coverage note on Sky, in which I made the point that having the biggest, baddest, deepest, broadest TV offering imaginable was no longer enough, if it was only broadcast TV. Without broadband connectivity, it was highly unlikely that the company would achieve the growth targets it had publicly issued - that was my conclusion.
I sent the note to my contact at Sky (who has since left the company) for a fact check ahead of publication. I received a call in response, which went something like this:
Sky: Interesting note, lots of helpful information, nice to have it all in one place. But...
Sky: But of course we completely disagree with your conclusion. I mean, of course we're aware of all the interesting things happening on the internet, but we don't believe any of it is capable of going up against what we've got.
Me: Well, I did say quite clearly in the note that you guys have the best TV offering in the UK, hands down. My point is that, given technology and demographic change, people might not want so much TV, or at least not on its own. (I noted today that James Murdoch cited the large proportion of teenagers who publish blogs as an example of how things have changed.) And you guys look really exposed if I'm right. Maybe we should just agree to disagree on the philosophical stuff and focus on numbers and factual details.
Sky: Okay, your numbers look fine. Your valuation, however, seems to be well below most of the market. (For the record my valuation was 549p, most brokers were well above 600p - Sky has since traded in a range between 510p and 590p. My recommendation was, and is, NEUTRAL.) What sort of terminal growth rate are you using in your DCF?
Sky: (stunned silence). Zero?
Me: Yes, that's what I use for telcos.
Sky: That may be fine for telcos, but we've got the best content anywhere, 24/7, on a platform with unlimited bandwidth. And we're still growing.
Me: Will you be growing in 2016, when my forecasts terminate?
Sky: Okay, your numbers look fine. Go ahead and publish, and please make sure I get a copy. But I should say that if we get questions on this, we're going to respond that we think that this internet angle is overblown.
(I wasn't sure if this was meant as some sort of threat, probably not. I was amazed that he seemed concerned that I would have a problem with the company not sanctioning my views.)
Me: That's fine. I'm certainly happy to defend my views. Anyway, it takes two to make a market.
Eight months later, Sky spends GBP211m on a broadband connectivity play, and has a roadmap to address all the issues I highlighted. This company seems to have changed its DNA, and whatever this means for Sky itself, clearly other players should be scared. Personally speaking, I'm impressed. Over to you, Sky Italia.