Few businesses are more affected by technology and social change than Sky TV. My last column talked about the Warehouse Group, and the potential for the "disruptor" to itself become disrupted. Sky TV continues the theme, although its need to keep transforming is even more extreme.
I remember Sky TV's early 1990s UHF frequency launch as a Christchurch teenager: they'd launched in Auckland a year or so earlier, and the howls of anguish from the South at "missing out" were palpable. It seemed Sky's three channels (Movies, News and Sport) brought a whole new world of content to New Zealand. Even though Sky TV had to educate potential customers about its technology, the impact it had on family lives was apparent as people flocked to Sky to expand their TV entertainment options beyond TV1, TV2 and TV3.
Sky has owned the lion's share of the "premium television content" market for a long time. Unfortunately, that was reflected in its customer service ethos.
At a personal level, I was called repeatedly to be asked if I'd like to join Sky for a bargain rate. When I said I would love to take them up on their offer, even though I was an existing customer, the phone went strangely silent; at best, I was brusquely informed the offer did not apply to me, at worst the call was simply disconnected. I am sure I was not the only one.
There's not much more frustrating than the loyalty of existing customers being ignored. Especially when the investment required to pick up new customers is a whole lot greater than maintaining the customers a business already has.
Recently, that behaviour seems to have changed for the better. From Sky's perspective, their new-found customer ethos is no doubt influenced by the plethora of new competitors all vying to bring content to your living room. Netflix. Amazon Prime. Lightbox. Spark Sport. Vodafone. Disney Channel. Even TVNZ and TV3's "on demand" offerings. And many, many more. Sky has been forced to think hard about its core offer to its customers, and the technologies it uses to serve them, to carve out its future niche in an ever-changing landscape.
Investors & performance
The current incarnation of Sky TV's listed history began in 2005, as a merger of Independent Newspapers (Sky's majority owner at the time) and the original Sky TV broadcasting business. Rupert Murdoch's News Corporation wound up with a 44 per cent stake in the "new" Sky TV.
The company was a steady performer, paying regular dividends and maintaining a steady share price, peaking at $6.92 in July 2014. The company's performance was buoyed by an increasing number of subscribers, who were spending more each year on Sky's services.
But things started to change from then, as Sky grappled with the new disruptive forces in its market. With the benefit of hindsight, News Corp's exit from Sky TV in early 2013 at about $4.80 a share now looks like exquisite timing.
By 2015 it was clear that Sky's continual investment in upgrades to its satellite-based content delivery systems represented an outdated technology. Investment in old technology meant there was no cash left over to invest in new-breed streaming technologies that would sustain Sky's pre-eminent place in New Zealand homes.
Compounding the problem, new offerings and competitors began to arrive, creating new choices for Kiwis. Quickflix had already started in New Zealand in 2012, but it was the arrival of global giant Netflix in 2015 that brought Sky's under-invested technology chickens home to roost.
In response, Sky attempted a merger with Vodafone NZ in 2016 — its favoured solution for plugging the technology hole it had found itself in and allowing it to sustain its customer base. Unfortunately for Sky, the Commerce Commission declined the merger.
Somewhat ironically, Spark Sport was set up in 2018 — using the exact blend of broadband technology and content that Sky/Vodafone had been trying to create.
From a content perspective, Sky's core sports offering was being eroded, with the initial notable loss of English Premier League matches in 2013. The advent of Spark Sport highlighted a sudden competitive market for broadcast rights in New Zealand. Football, Formula 1 and even New Zealander's staple diet of rugby and cricket were now being streamed by a new provider.
From its $6.92 high in July 2014, Sky now trades for about 12c-13c (albeit with four times as many shares on issue) — an incredible fall from grace for what had been one of the staples of the New Zealand consumer diet.
The company has just completed a capital raise and rights issue of $157 million, to shore up its post-Covid balance sheet and allow it to maintain its transformation momentum in developing new services and technologies for customers.
Assets, cash and transformation
It needs it. In 2018, Sky wrote off a large portion of its value — represented by "goodwill" on its balance sheet — by about $670m. Its latest interim report, published in February, highlights an interesting conundrum: the value of all the company's physical and cash assets is less than the debts it owes.
Given that, why do the shares have any value at all?
There are two key answers to that question. First, the company is maintaining positive free cashflow, if the impact of the Lightbox acquisition is excluded. Second, and importantly, the company has a clear transformation plan to complete its transition to a customer-focused content provider, focused on multiple content delivery technologies.
Right now, Sky's bankers and investors believe the transformation strategy can succeed.
Call me old-fashioned, but I believe that positive free cashflow still means something, even for technology companies. Sky generates enough cash from its core operations to pay its bills, invest in the new equipment it needs to sustain its business and have a little bit left over.
In terms of transformation, the new(ish) chief executive Martin Stewart is bringing new energy and momentum to the company. Sky's recent acquisition of Lightbox and global service Rugby Pass give strength to the company's assertive claims that it can complete its planned changes. Tellingly, it talks less about "satellite subscribers" these days, and more about overall customer numbers. Lightbox and its other initiatives have seen total customers (including streaming) grow to well over 1 million — a glimmering ray of sunrise on its horizon.
Those total customer numbers are a position of strength that the company can leverage in creating new products and services. Sky has finally recognised that its customers are just as important as its technology — a long overdue change in focus.
In the big rugby club that is New Zealand, the rights to broadcast live rugby matter. In 2019, Sky inked a five-year deal with NZ Rugby taking a 5 per cent ownership stake in the company. That certainly represents a clear alignment of interests when it comes to investing in rugby in New Zealand.
Sky's cashflow and transformation plans won't save long-time shareholders from investment losses, but it makes the company interesting (albeit extremely adventurous) for new or recent investors.
Sky's transformation is a long game, all about expanding reach into NZ households and transitioning them to new and more flexible streaming services. The new, customer-focused Sky is creating choice for customers, both in terms of platform and content flexibility.
From a financial perspective, the challenge will be to create new revenue from those services at the same pace as it is being lost from its traditional subscriber base. At the moment, that revenue transition does not seem to be occurring fast enough, with traditional satellite revenue in absolute terms dropping far more quickly than the increase in streaming service revenue.
Sky's next announcement will relate to its June 2020 full year, and is expected some time this month. That will indeed be fascinating, including the impacts of Covid-19, the postponement of sporting events such as the Tokyo Olympics, the recent capital raising and ongoing transformation activity.
But more importantly, we'll all get an insight into whether Sky's efforts to transform itself are paying off. For Sky, it's "do or die"; the combination of customer focus, technology platform and content security will determine whether Sky maintains a sustainable business or shrinks towards irrelevance.