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4 February 2021

Sky’s mixed performance suggests clear streaming strategy is needed

For the first time since Comcast acquired Sky, we have been granted some fairly in-depth insights into the European operator’s performance. Greater spending and declining revenues have led to a squeeze on Sky’s profit by over $1 billion, with the only sugarcoating available being that Sky’s subscriber numbers have very nearly returned to pre-Covid levels.

Nonetheless, the fact that Sky is carving out a growing portion of Comcast’s financial report shows it is finding some favor with its parent. This nurturing relationship looks set to grow and Sky may even supersede NBCUniversal in terms of capital expenditure, if spending trends continue.

With a distracting focus on almost-flat subscriber numbers, the press release failed to note that Sky’s profit margin has shrunk by over $1.1 billion. While annual revenues were down 4.2% to $18.6 billion, operating costs and expenses were up 2.2% to $16.6 billion.

Comcast’s CFO, Michael Cavanagh, noted on the investor call that Sky’s marketing spend was driven up by launching a mobile product in the UK, broadband services in Italy, and the persistent promotion of Sky Q.

Comcast says that Sky’s total customer relationships and overall revenue in Europe is essentially back to 2019 levels in the UK and Ireland, Germany, and Austria. Sky now has 23.9 million subscribers, marking 99.8% of subs held before Covid-19 hit. This figure is up 244,000 on a quarterly basis, but down 56,000 year on year.

In the UK, penetration of Sky’s OTT-integrated offering, Sky Q, has expanded to over 60% of the available market, although there was no word on how the fiber-to-the-home (FTTH) version of the brand is finding its feet in Italy, where the Sky WiFi triple play service launched last year. This made Sky Q available to Italian customers without a satellite dish and made Sky’s valuable broadband offering even stickier.

Sky’s Q4 revenue shrank 0.9% YoY to $5.2 billion. The largest source of revenue came from the Direct-to-Consumer segment, which made up 81% of Sky’s annual revenue for 2020, however, this segment had shrunk by around 3% YoY on both a quarterly and annual basis.

Sky attributed this decrease to the persistent lockdowns that kept many of the hospitality venues that fund a large portion of these revenues closed. Cavanagh noted on the investor call that when excluding hospitality, this segment was essentially flat.

While all segments were down on an annual basis, the quarterly figures show a recovery is being made, especially in the Content and Advertising segments. Content revenues of $426 million in Q4 were up 10.4% YoY, which Sky attributes to stronger monetization of its original programming, while Advertising revenues of $702 million were up 3.9%, reportedly driven by the UK advertising market.

It seems that unlike Comcast’s other major media subsidiaries, Sky is ramping up its spending. Q4 saw Sky’s capital expenditure increase by 35.6% YoY to $310 million, comprising 11% of Comcast’s total capital expenditure of $2.8 billion. Meanwhile, Cable Communications and NBCUniversal saw capital expenditures decrease by 1.1% and 41.2%, respectively.

For the whole year, Sky’s capex increased 24.8% to $959 million, while NBCUniversal’s decreased by 28.3% to $1.5 billion. If trends continue this way for a year or two, it could be the case that Sky begins to spend more than NBCUniversal, which would be a clear mark that the European operator is only set to receive more favoritism from its parent.

This new set of Q4 results marks a new level of depth that Comcast is willing to share regarding Sky’s operations since acquiring the operator in 2018. While financial tidbits have graced the headlines of previous quarterly results, rarely have we been granted insight into subscriber numbers.

Comcast still has a huge chunk of debt from acquiring Sky – $90 billion, to be exact. This is down 16.7% on the $108 billion debt at the end of 2019, which is a seriously impressive repayment percentage in such a short period of time. Although, even for a reenergized Comcast, it will take some time to move this mountain.

Sky X, the pay TV IPTV service that launched in Austria in 2019, barely got a mention in the latest set of results, having experienced a confused 2020. Instead of expanding the service to Switzerland, Sky employed Zattoo as its IPTV partner in all but name, with Zattoo Premium added to the Sky TV stick so that the entire pay TV channel line-up could be watched via OTT.

However, this unexpected left-turn was far from a bad idea. It removed Zattoo as a competitor and took the pressure off Sky from running its own OTT service, which was likely not feeling too buoyant after shutting down its Spanish operations in July of last year.

The still unanswered question is what this means for Sky X, which was certainly snubbed by the partnership with Zattoo, and the arrival of Sky Q over FTTH in Italy, which was yet another brand being employed for streaming? There is no doubt that Sky wants to expand its European footprint in OTT, but it is still not clear how, or if, it will consolidate its strategy.