Can Sky Replicate Success in Italy and Germany?

With the acquisitions of Sky Italia and Sky Deutschland, Sky is also producing and airing its own shows in these countries. This further distinguishes the firm from its competitors

Allan C. Nichols, CFA 2 September, 2015 | 1:50PM
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Sky (SKY) has succeeded in aggregating some of the best content available and then marketing its services. More than a decade ago, the firm began to enter exclusive deals to carry major sporting events in the United Kingdom.

Incremental business is improving the firm's margins

In addition, it acquired rights to many first-run movies and US-produced television series, which are becoming increasingly popular in the UK.

While it resells the majority of its purchased content to other television carriers, it also produces its own shows to distinguish its product.

The completion of a new production facility in 2011 has enhanced the company's content-creation capability. The new building contains several studios, including one that is large enough to hold an audience and produce live shows, such as game or talk shows with a live audience. With the acquisitions of Sky Italia and Sky Deutschland, Sky is also producing and airing its own shows in these countries.

This further distinguishes the firm from its competitors. In addition, it is selling additional services, such as high-definition television, DVRs, second set-top boxes and video on demand. All of these services increase average revenue per user and increase profitability.

The firm also offers broadband and phone service. These businesses have grown rapidly and are now similar in size to Virgin Media and TalkTalk, though they are still smaller than those of BT Group, the incumbent telephone operator. While BT's new subscriber growth in the UK has been increasing since it began offering BT Sport for free to its broadband customers, Sky continues to increase its broadband subscriber base.

While the firm doesn't have the scale in broadband and telephony that it has in pay TV services, the incremental business is improving the firm's margins and free cash flow. The Italian and German markets are far behind in their development of pay television services versus the UK. By acquiring its sister companies in these countries, management hopes to replicate its British success in Italy and Germany. If it can push pay television penetration in these countries to the level of the UK, there is upside to our fair value estimate.

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About Author

Allan C. Nichols, CFA  is a senior stock analyst and international investing specialist with Morningstar.