MediaRoom: Sky rolls out its new game

Sky TV’s share price sank to a record low last week after it announced a big loss. The red ink was due to a huge writedown in the value of its assets as new CEO Martin Stewart sets out to transform the company. Mark Jennings looks at his chances of success.

Sky’s shareholders have watched the value of their company nosedive in recent years as the pay tv operator continued haemorrhaging subscribers; but a decent-sized dividend provided some comfort and a floor beneath the share price.

Based on last year’s payout of 15 cents, the dividend yield on Sky shares was around 12 percent; a drawcard for some investors in our current low interest rate environment.

Then came Thursday’s results announcement and Martin Stewart kicked open the trapdoor.

The Sky board had decided to retain the $62 million they could’ve paid in dividends and use it to fund Stewart’s strategy. Sky was suddenly no longer an income stock but a growth story.

Well, that’s what Stewart wants investors to believe, but it is a hard sell in the most challenged media market in this country’s history. The shares dropped 4 percent and hit a record low of $1.10. They are now sitting at $1.15 but have sunk 55 percent in the past 12 months.

This time a year ago reporters sat around the board table at Sky’s Mt Wellington headquarters as outgoing CEO John Fellet and CFO Jason Hollingsworth (also now gone) briefed them on the 2018 result.

Fellet and Hollingsworth explained how they’d lopped $360 million off goodwill - the intangible asset, being carried in the company’s books.

The goodwill was recorded when Sky merged with Independent Newspapers Ltd way back in 2005. The writedown had no cash impact on Sky but on paper the company reported a loss of $240 million.

It wasn’t all bad news though, and over coffee and croissants Fellet pointed out that underlying net profit of $116.3 million was 2.6 percent up on the previous year and he had managed to cut $47 million of cost out of the business.

Cheerfully and proudly, he talked about the new platform Sky was building for delivering TV over the internet. Based on US giant Cisco’s Infinite Video Platform (IVP) the new system would offer a user-friendly interface like Netflix’s and content would follow viewers from TV screens to their mobiles and tablets. Voice search would also be available across all Sky content.

Once IVP was in place, a newer, better version of the My Sky box would be rolled out.

Sky “was heading in the right direction,” said Fellet.

What a difference a year makes.

This week reporters were invited to join stockbroking analysts and a string of newish executives for a briefing on Sky’s 2019 result.

Instead of a cosy chat around the board table, the briefing took place in the Sky Sport studio and was live streamed to those who couldn’t make it to Mt Wellington.

Using an autocue like he was born to be news anchor; Stewart delivered his spiel with a relaxed charm that eludes many of his own sports presenters.

It started with news of a whopping clean out: $670 million more of goodwill was written off to go with the previous year's  $360 million.

The IVP project, which Stewart stopped earlier this year, was written off to the tune of $38 million. There would be no new My Sky boxes – the old ones were good enough.

The value of programmes on hand was cut by $6 million and redundancies took another $5 million.

Net operating profit at $97.4 million was down $19 million on the previous year. Taking into account the writedowns, SKY lost $608 million.

Stewart interlaced his presentation with plenty of theatre, at one point disappearing out of the studio and then suddenly reappearing on one of the big screens with a paint roller in his hand.

The new Sky logo

A few strokes later Sky’s new logo was revealed – the old one “had been nagging him” he said.

In the six months he’s been at SKY, Stewart has been highly energised and busy buying new things.

The most significant acquisition has been for $62 million. It is an international rugby news and streaming site. It currently has the rights to stream SANZAAR matches into 62 countries.

Back here, a new streaming app for sport (55,000 watched the last All Black test on it) was launched two weeks ago and, in a major marketing play, Sky has bought the naming rights to Wellington’s stadium.

Improving and developing Sky’s streaming services is Stewart’s major focus. It makes sense to follow the global trend and there are strong signs already that it is the right strategy with the growth in streaming subscribers now greater than the loss of satellite customers. Streaming revenues were up 16 percent on the previous year.

The big problem for Sky, though, is that it makes a lot less money from streaming subscribers than it does from DTH (direct to home) subscribers. It is also planning to continue its satellite leases through till 2031. It currently pays about $35 million a year for these and although a new deal kicks in 2021 it is still likely to be a heavy impost.

Then, there is the elephant in the room – rugby rights.

While just 10 percent of Sky subscriptions are for sport only, rugby remains a cornerstone of the business.

Stewart must spend much time thinking about why his predecessor, Fellet, let Spark out bid him for the Rugby World Cup rights. It is not that the event itself is pivotal or even profitable but it means Spark is in the game and now has a big beast to feed.

It’s spent tens of millions on its streaming platform and already has 60 employees working on the RWC.

When the tournament in Japan is over Spark Sport executives will push desperately hard for the company to outbid Sky for Super Rugby and Rugby Championship matches.

Without a long run, top-tier competition Spark Sport will go nowhere and it boss Jeff Latch will be determined to land one.

On the other hand, Stewart knows he will have to take a serious cost hit if he is to hold Latch out.

The other alternative is for Sky to do some sort of deal with Spark.

Stewart has shown himself to be adept at building relationships. In the six months he has been here the Englishman has formed partnerships with other media companies and built bridges with the sports bodies that have felt neglected.

Can he build something with Spark CEO Jolie Hodson? It’s possible, and if he can, Sky shareholders might then see their shares nudge upwards, even if there is no prospect of a dividend in the foreseeable future.

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