Tuesday, July 18, 2006

Loads of bandwidth

It's 9:05 AM in the UK, and the Sky broadband launch webcast has just kicked off. Initial headlines include:

  • £400m operating profit hit over three years, EPS-accretive from 2010, IRR of at least 16%, return on capital of 15% in 2011;
  • SAC is forecast at £80 (a blended number consisting of various combinations of the following: £35 connection fee payable to BT, £50 for Netgear router, £45 for installation, £16 - 22 for marketing and CRM), and taking into account incremental depreciation, EBIT impact in year one is £170m;
  • The company is using bandwidth as a blunt weapon - top tier product is 16Mbps unlimited usage for £10 per month, with an optional call package for £14 per month. In Q4 of this year Sky will come to the market with PSTN line rental of £9 per month, though I would expect the marketing message to strongly emphasize that a telephony product is not compulsory, thus drawing a clear distinction between it and Carphone/Orange;
  • Underlying market assumptions are 80% broadband household penetration by 2010 (in line with my own assumptions), with bandwidth demand per household doubling every five years (this seems a bit conservative to me).

Update: Company has just confirmed it will be at 50% reach of UK homes with ULL by Christmas of this year. BT's full ULL product is deemed to be not ready for primetime yet, so the focus initially will remain on partial unbundling. "We don't want our customers to be guinea pigs," says James Murdoch. (I had a chat with a journalist a couple of weeks back who had the same concerns - Sky customers have not typically suffered the sort of misery associated with UK DSL CRM, so Sky has created a high bar for itself in a new product set, where it is to some extent at the mercy of the Regulatorium and the capabilities of a wholesale provider.)

In the Q&A session inevitably the AOL question has come up, and Mr. Murdoch described Sky as not having a strong appetite for acquisitions, though he made tantalizing reference to market research suggesting that a large number of AOL customers are Sky customers already. Overall he intimated that the due diligence process has not moved very far.

By 2010 the company is expecting to have 30% of customers on the broadband product, with half of those taking the telephony product. Depending on your assumptions, that's something like 2.5 - 3.0m broadband customers and 1.2 - 1.5m telephony subs - a significant dent in the UK broadband market - in fact, that's 15% broadband market share on Sky's market assumptions. Perhaps somewhat ambitious, but then again Sky+ penetration is moving towards 25% well ahead of schedule, so Sky does have some credibility in selling into the existing customer base and should not be underestimated.

This is all fantastic news for those who embrace a view of telco deflationary spiral (keep in mind that DT and Vodafone have yet to get their feet wet, and Telefonica is just getting started). Sky shares are down 3.9% at 10:00 AM, but Carphone Warehouse is down 4%...

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