Sky TV shares have cratered over the past two years amid falling subscriber numbers, profit payout to shareholders halved and a failed merger with Vodafone NZ.

Here are five ways to turn the company around.

1. New leadership

The phone is off the hook. Whatever its strategy, investors won't be jolted into taking a fresh look at Sky until there is change at the top. A new face is on the way. Sky's long-time chief executive John Fellet announced his intention to resign way back on March 26, saying he would stay on until a replacement was found.

Advertisement

But there is a big question around the prolonged search for a replacement: Will Sky's board promote from within, or bring in an outsider more likely to render some creative disruption?

The length of time the CEO search has taken so far is possibly bad news for potential internal candidates such as chief financial officer Jason Hollingworth (who won't confirm or deny if he's a candidate) and director of sport Richard Last (ditto).

Then there's the key complication that Fellet plans to stay on as a director after he finally quits as CEO. Will the new boss have much wiggle room with Fellet's five-year plan in place, and the American looking over the new hire's shoulder to see that it's implemented?

NZ Shareholders Association chairman John Hawkins says there can be a place for a former boss on a board but "the difficulty with an immediate appointment or continuation is that the ex-CEO will carry too much influence and may inhibit necessary change being made – particularly if it casts his or her tenure in a poor light and seeks to change or reverse earlier strategies and policies."

Hawkins says there are exceptions to this rule, such as Ebos chief executive Mark Waller.

But he adds that Ebos was a strong performer at the time of Waller's transition.

"If Sky was trucking along well, our view might be different," he says. "But it's struggling. It would be better to make a clean break."

It could also be time for a more sweeping boardroom refresh. Chairman Peter Macourt has been a director since 2002, putting him well beyond the NZSA's nine-year rule-of-thumb limit.

Derek Handley and Geraldine McBride - both up for re-election at Sky's annual meeting on October 24 - have both been on the board since 2013.

2. Zap the ads

Advertising is a huge annoyance on Sky, but a relatively tiny contributor to its bottom line.

In the year to June, Sky had revenue of $39.0m from ads run on its pay TV channels (plus another $18.0m from its free-to-air Prime) representing just 4.6 per cent of its total revenue of $839.7m.

And there are indications it costs a lot to get that ad revenue in the door, so the net profit from advertising is probably tiny. Sky has a small army of salespeople and in its annual report it says "Other costs [of $50.7m] mainly include advertising costs and the overhead costs relating to corporate management."

By all means, keep advertising on Prime, but cull it from Sky's own channels to make them more attractive against the ad-heavy free-to-air competition and the ad-free Netflix.

Sky shares were recently trading at $2.11. The company offered no guidance at its full-year result but is expected to offer a forecast at its annual meeting on October 24. Chart / NZX
Sky shares were recently trading at $2.11. The company offered no guidance at its full-year result but is expected to offer a forecast at its annual meeting on October 24. Chart / NZX

3. Put everything on-demand.

A set-top box or decoder is totally alien to a new generation of viewers - and, increasingly, not the way middle-aged people watch programmes, either.

Earlier this year, Sky turned to the low-tech tactic discounting in an effort to reduce churn, cutting the price of its Basic package in half.

The tactic was effective, to a degree, as subscriber losses slowed. Total subs fell from 824,782 in June 2017 to 767,727 in June this year or a 57,055 full-year loss - but there were only 11,049 defections in the second half.

Long-term, however, price-chopping traditional services won't cut it. More digital initiatives are needed.

Sky already has an on-demand service for its satellite subscribers and the standalone Neon and Fanpass (for which it refuses to release numbers) but all are a frustrating subset of total content.

With the sports-focused Fanpass especially, Sky seems to have a morbid fear of cannibalising its traditional business.

Sky released no subscriber numbers of Neon and Fanpass for the year to June (for the previous financial year, it said they had 79,000 regular subs between them). Fellet did say Neon was "highly seasonal", however, explaining that many joined for a new series of Game of Thrones, then departed as it wrapped up. The implication was that Neon has suffered during the long wait for the final season of GoT, with no hit content to fill the gap.

Sky needs to back itself, and believe that people will pay for the no-contract Neon and Fanpass on a regular basis if it beefs up their content and features, and makes both available through more platforms. Neon ($20 a month including movies or $12 a month TV series-only) brings in less revenue that a satellite sub. But as Fellet is fond of pointing out, there are no decoder or installer costs, and in some cases no programming expense - or at least beyond what Sky has paid to secure rights for its traditional service, minimising the impact that Fanpass and Neon have on average revenue per user (to what extent Fellet's theory pans out is unknown, as Sky has not broken out costs, but it has a certain logic to it).

Unfortunately, product development was frozen for the best part of two years while Sky and Vodafone courted, then formally began their attempted merger. Had it been successful, Sky would simply have adopted the living room and mobile TV products that Vodafone has already deployed in Europe. Now, it has to get a wriggle-on with plan B.

As it is, you can't even get Sky over UFB fibre.

Sky does have quite a good product pipeline, with cloud storage on the way (that is, unlimited online storage rather than having to constantly delete programmes from your decoder's hard drive to make room), an Android-powered "puck" that will be similar in size and interface to Apple TV and include support for a Netflix app (a radical move by Sky TV NZ standards, but something that's become a standard co-option move by pay TV broadcasters overseas) and plans for an app-only service.

It's all good stuff, but it would have been better if it had been done five years ago. The new leadership will have to make up for lost time.

And he - or she - will have to make sure there is much better focus-group testing for new products than that which accompanied the Sky OnDemand upgrade that so frustrated some subscribers.

4. Make an example of a pirate.

Sky and other pay TV broadcasters around the world face a rising threat from so-called Kodi boxes, which make it easy for a non-technical person to access illegal online streams of a sports event or offshore free offshore coverage ordinarily geoblocked to New Zealanders.

Sky has taken successful legal action against two sellers of Kodi boxes here.

And in the UK, the Premier League recently won a court order forcing the largest ISPs to block sites that offer illegal streams. Similar action has been taken in Australia.

But taking action against Kodi box makers is a bit Wac-A-Mole, and cajoling ISPs to block sites could be tricky. Spark and 2degrees have already made it clear they don't want the cost and hassle of being internet police, and will fight any such move.

An alternative is to go after an individual pirate, putting the willies up everyone else.

Sky says it prefers to go after the Kodi resellers and websites who facilitate piracy. No doubt it's wary of the PR blow-back.

But an alternative is to use a proxy. The New Zealand Screen Association, which represents the interests of the major Hollywood studios here, could serve the role of designated attack dog.

The NZSA has laid a grand total of zero complaints under the so-called three-strikes law, citing costs and bureaucratic hassle. Unsurprisingly, after an initial round of outrage, that the once so-feared "SkyNet law" - officially, the Copyright (Infringing File Sharing) Amendment Act - has disappeared from the public consciousness altogether.


5. Prepare for a future of shared sports rights

After Spark grabbed rights to the Rugby World Cup, it seemed like we were heading for a scenario in which the telco would duke it out with Sky TV for rights to different events, and different competitions.

But the future will probably be more like Indian Premier League cricket or Premier League football in the UK, where a single competition is broken into several chunks of rights.

In the UK for example, a football fan will have to shell out for subscriptions to Sky, BT Sport and Amazon to see all games in the Premier League competition.

If you were Sanzaar, you would have to be thinking along similar lines. Why sell Super Rugby rights to only Sky or Spark (or Amazon or Facebook) when you can divide the competition into a series of packages and bleed every party dry during an auction process, maximising your return?

Then there's the threat from sporting bodies increasingly using apps to reach their audiences directly. In the NBA's case, its app is not geoblocked (though at US$329 a year, it's also pricey for Kiwis).

For local games, Sky has long-touted its near-monopoly on outside broadcasting services. But that changed in May last year when the world's largest outside-broadcasting services provider, NEP, set up shop in NZ.

The bottom line is that it's hard to see Sky maintaining its near-monopoly on top-flight sport, and shared rights are worthless. That means its new chief executive will have to find ways to cut costs.