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Info BSkyBs investment case praised - 04-February-2009, 14:10

BSkyBs investment case praised

Last week BSkyB slashed the costs for installing its HDTV kit to 49, and what some might see as a killer punch to rival BBC-backed Freesat which costs more than 200 for a receiver plus dish.

Of course, nothing is for nothing, and Sky subscribers will need to pay 9.75 a month on top of their core subscription to receive Skys bundle of (currently) 31 HDTV channels. Freesat viewers get a single BBC highlights channel in HD as well as some output from ITV.

However, BSkyBs strategy received praise from investment bankers Morgan Stanley in a Feb 3 note. Last weeks results demonstrated that Sky Television remains a product in hot demand, despite the increasingly difficult consumer environment. Gross additions for the quarter to December 2008 were up 3% year on year, while net additions were up by 2%. We believe that this is the result of consumers choosing to stay at home rather than to go out. Thus, just as home delivery pizza companies, such as Papa Johns and Dominos, are enjoying strong growth in sales as consumers dine in rather than out, so too Sky has benefited from the demand for home enterstayment. While we have been generally positive on Skys ability to withstand the effects of the recession, the numbers last week were meaningfully better than we had expected (171k vs our 147k) and on the back of this, we are increasing our assumptions slightly for gross additions, and lowering slightly our churn forecasts, says the banks report.

However, it is not just these strong results that have prompted our forecast for stronger net additions to the pay-TV business, adds the bank. Additionally, we believe that the announcement of a new price point for the HD box - 49 versus an average of 150 in the previous six months - also strengthens the Skys appeal, both in absolute terms and versus the competition. We note that, today, Freeview offers no programming in high definition (there has been a test broadcast in London, but nothing in the mainstream) and this is likely to be the case for some years. Similarly, BT Vision does not offer any programming in HD.

Meanwhile, although Freesat (backed by ITV and the BBC) offers HD programming from the free to air broadcasters, the box costs considerably more, and installation is also more expensive. Finally, the only HD channel that Virgin Media currently offers is BBC HD, although it does also offer some content on demand in the new format. In our view, the growth in the number of widescreen televisions will inevitably lead people to adopt HD, simply because of the lower picture quality - SD looks OK on a small screen, but try it on a 42 incher. This will cause HD to become increasingly the standard, in our view, which in turn will mean consumers come to expect HD from their entertainment service provider. By promoting the low cost HD box, we believe BSkyB will benefit vs other platforms, and this too causes us to feel more comfortable with a higher number of new subscriber additions to the pay-television business.
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