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Sky Network TV - John Fellet

By Jenny Ruth

Thursday 11th September 2003 1 Comment

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 Jenny Ruth
Last month, pay TV operator Sky Network Television reported a $671,000 net profit for the year ended June 30, only the second time in its 13 year history that it has been in the black. The last time it had a profitable bottom line was in the year ended June, 1999 when it made a $4.5 million profit.

Chief executive John Fellet says if his company was something like a corner dairy, it would be much easier to measure its true value:

Sky Network TV chief executive John Fellet : In our business, we start off with a dairy and by the time we're done we have a shopping mall. All the money goes into expanding the business.

Earnings per share or net earnings aren't a good measurement of a pay TV company. $800 million has been invested in the last 12 years. You have to keep looking at the EBITDA (earnings before interest, tax, depreciation and amortisation) to get a good valuation of the business. (EBITDA has grown from $73.7 million in 1999 to $150.8 million in the year just passed.) Two years ago the business was still losing money and it still had a valuation of $1.6 billion. The company isn't that much more valuable than it was a year ago.

SC: Capital spending is reducing now, but what is the risk that some new technology will come along and require big spending again (the company's losses since 1999 are directly attributable to its introduction of digital satellite technology)?
JF: That's a primary risk to the business. It's part of management's responsibility to manage around this primary risk. We've done that in a couple of ways. We still have a large number, 120,000, UHF subscribers that are still trucking along and doing great. It's not like the new technology wipes out the old one, it just limits its growth. We have 120,000 people using (decoder) boxes I wrote off two or three years ago. (Sky writes off the boxes over a five year period.) The key is the timing of making these transitions. I don't want to be on the railroad tracks before the train takes off and get run over. Neither did Sky want to be left at the station. We could have stayed with UHF and we would have been profitable for the last seven or eight years, but the company would've had a market cap (italisation) of about $400 million instead of $1.87 billion and there would have been all sorts of other competitors. If there's any criticism, maybe we jumped in a year too early. The original boxes used to cost about $1,000 and now they're down to $543. The first year of the digital satellite revolution came at a price.

The other way we've handled it is that Sky's pretty unique. Most pay TV companies say, you have to buy my decoder. We think New Zealand's too small to take that attitude so we will go over anybody's platform. (Sky's capital spending fell from $105 million in 2002 to $86 million in the year passed and the company's guidance is that it will fall to about $70 million in the current year.)

SC: How have you managed to cut programming costs so much (from 48% of sales in 2002 to 43% in 2003)?
JF: We've just got a lot tougher in our negotiations. When I took over in 2001 (he was previously chief operating officer), programming costs were around 50%. There was a tendency for us to make a lot of decisions on the basis of we've got to have this channel because everybody expects a pay TV company to have this channel. I said we can't do it that way now we've got ratings data. We're going to have to stop knowing the cost of everything and the value of nothing. We started saying, look we're just not getting a return on that channel. We started making some tough calls. We said, look, we're not going to pay. Go ahead and give it to someone else. We monitoring what the viewer wants. It's one of the lowest percentage costs for a pay TV company. I don't know that we can get it much lower than that.

SC: Every year you talk about churn having got as low as it can and every year it gets lower (gross churn fell from 19.8% in 2002 to 18.2% in 2003). Why is this happening?
JF: The biggest reason and the figure that we monitor more than any other figure is viewership hours, the total viewership divided by the number of subscribers. Over the last year, it's gone up 35%. If subscribers have spent 35% more time watching our product, all of a sudden that value relationship becomes a lot stronger. If the subscriber wants to cut spending, they're more likely to cut something else rather than Sky. That's the primary key.

Too often in Sky's history we've tended to be more male oriented. Consequently, there was a feeling that it disrupted family life, that it's not family oriented, it's just him and his mates. A year or two ago, we took a punt on channels that are more female oriented, the E! network and Lifestyle.

Then there's the deals we've done in partnership with telephone operators (where subscribers pay a bundled price for the combined services). People who get these services can't even tell you what the pay TV component is.

These three areas are all helping drive this figure lower. The first three months of this year, July to September, are tracking to be the best we've ever had.

SC: Sky's likely to make a much larger profit this year (analysts forecast between $29 million and $47 million while the company's guidance is towards the lower end of that range) and people are asking questions about when a dividend might be paid?
JF: That will be a board call. Probably no firm call will be made until this INL/Sky deal is settled (Sky's 66% shareholder INL, having sold its newspapers plans to buy out the minorities in a cash/shares deal). Until we know what the ownership structure is going to be, everyone's somewhat reluctant. Rest assured, we're not out there looking at other businesses to use our cash flow on. We're pretty much a pure play - I have a short attention span.

SC: The number of subscribers was up 26,160 to 542,891 in the year ended June. How much more capacity is there for that to grow?
JF: There are about 1.35 million households in New Zealand. We don't see anything in the next 10 years keeping pay TV from getting to 70% of the population. It's sitting in the 90s in the US. (He tells an anecdote of how his children's former baby sitter recently set up house and had Sky installed before she thought of the phone and electricity.) Everyone seems to be coming to pay TV in their own time. The younger demographics are forming new households and wanting Sky to be a part of that.

SC: While you still have a lot of UHF subscribers, the numbers are declining. How long will you continue to offer UHF services?
JF: My objective is to try and make it last to 2010. A couple of years before that we will know whether we can have an extention of our UHF licences.

SC: Your advertising revenue is growing rapidly, but it's still tiny. What is the potential for it to grow further? (It contributed $19.6 million to the $391 million in total sales in 2003.)
JF: Right now we have about 40% penetration and in Sky homes they spend 50% of their time watching Sky channels, so that's about 20% of eyeball time. Advertising (on Sky) represents about 5% of the total TV advertising spend. We will gradually get that ratio better. We don't treat the ad agencies with the szame honour that maybe our free-to-air brethern do. We really need the subscribers on a monthly basis. The advertisers are nice icing on the cake. We have a lot of viewing where we don't interrupt with advertising - in sport and the same thing with movies.

SC: Everything from (a lack of new) technology to (the lack of) competition seems to be going in Sky's favour now
JF: We're a 13 year overnight success.

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Comments from our readers

On 25 June 2014 at 12:41 pm paula carruthers said:
Not sure how to reach JOHN FELLET but am really fed up that you are not covering Wimbledon this year. After a lengthy search, I find the only channel giving us ANY coverage is ESPN on channel 56. Only offering Live coverage from 11 p.m. -7 a.m. which includes masses of Soccer and Golf, baseball and all other sports with huge memory being used to record this vast 'bite'. 500,000 NZ Tennis lovers want to watch Wimbledon and have intelligent daily highlights. You have always offered us TWO channels before especially in the second week so we can choose which of Two exciting matches to watch - or go back and forth. PLEASE make us a daily Highlights of Wimbledon hour with your usual bright commentators to select the best matches. Thank you.
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