Sky Deutschland : Snap, crackle and pop; up to Buy
● We are adjusting our estimates for Sky Deutschland (SkyD) to reflect
the costs of launching the OTT Snap service. This has a marginally
dilutive effect on 2013 financials (which the company will report on 6
February), but has a greater impact on 2014. We assume further, but
more limited, dilution of profitability in 2015 and thereafter a positive
contribution, meaning that our long-term estimates rise.
● While we have been concerned about the launch of NOW TV in the
UK, and how this could cannibalise take-up of the fully priced Sky TV
service, in Germany we believe that there is room for a cheaper
product. Premium penetration is, after all, below 10%, against more
than 50% in the UK. Snap offers different content to that which is
available via satellite, so is likely to be less of a direct substitute, in our
view.
● We note that management has taken a relatively cautious approach to
the launch of this new service, with relatively short (12-24 month)
contracts for content. Thus, if the service was to not achieve sufficient
take-up so as to be profitable, it could be shut down without major
liabilities. That being said, the drag on profits in the near to medium
term is quite large in percentage terms.
● The market has struggled to digest these downgrades, as well as
slightly softer guidance on 2013 net DTH additions. Nonetheless, if
Snap creates value, ultimately these cuts to near-term earnings will
have been worth it. We note that SkyD should benefit from leveraging
its existing investments in content and technology. While the success
of Snap is not assured, we retain our bias towards believing in
management’s ability to execute successfully. Ahead of the Q4 2013
results, we upgrade to Buy with an unchanged price target of €7.6.