BSkyB May Shift to Service Growth as Subscriber Target Nears

British Sky Broadcasting Plc may have moved closer to a year-end target of 10 million subscribers last quarter, setting the company up for a strategy shift to sell more products to existing customers.

The U.K.’s biggest pay-TV operator may report tomorrow a net gain of 69,000 customers for the three months through September, taking it to a total of 9.93 million subscribers, according to five analysts in a survey supplied by BSkyB.

“We are going to hit the target in the Christmas quarter this year, that’s for sure,” said Nick Bell, an analyst at Jefferies International Ltd. in London. “Then you will see a slight shift in the priority of the group away from just driving the subscriber growth towards selling more products into the base that they already have.”

BSkyB’s growth spurred Rupert Murdoch’s News Corp.’s to make a 7.8 billion-pound bid ($12.3 billion) for the rest of the company as it seeks access to the broadcaster’s increasing cash flows. News Corp., the owner of the Wall Street Journal, is in the process of seeking regulatory approval.

When James Murdoch, Rupert’s son and a former chief executive officer of BSkyB, announced the 10 million client target in August 2004, the stock had its largest ever drop as investors fretted that investment costs would weigh on earnings.

Tomorrow, BSkyB will probably say earnings before interest and taxes, excluding one-time items, rose 22 percent to 242 million pounds in the fiscal first quarter, according to the average estimate of five analysts surveyed by Bloomberg. Sales may have increased 7.9 percent to 1.49 billion pounds, driven by demand for high-definition television services.

‘New Standard’

High-definition is “establishing itself as the new standard” for television, Chief Executive Officer Jeremy Darroch said in July.

BSkyB had 7.4 million subscribers when the 10 million target was announced in 2004. The company is unlikely to announce a further customer goal after 2010 as the pay- television market matures, said Patrick Yau, an analyst at KBC Peel Hunt in London.

“They will shy away from setting a new target for growth,” Yau said. “It’s going to be very hard for them to push brand new subscribers to their services. The game is to make better use of their marketing database.”

A BSkyB spokeswoman declined to comment on whether the company will set a new subscriber target and change its strategy.

Sales Potential

Only one in five customers so far takes television, broadband and telephone services, BSkyB said in July.

“HD has taken over and now they’ve started to market 3D, which they very rightly see as being a massive uplift,” Mike Jeremy, an analyst at Daniel Stewart Securities, said in an interview.

Reaching the company’s subscriber target will also help BSkyB investors to push for a higher bid from News Corp.

“It’s delivered on subscribers, it’s launched 3D, so if you’re like us and thought that the indicated bid of 700 pence was an extreme undervaluation of the company, then I think you would feel strengthened in that view,” said Stephen Adams, head of U.K. equities at Aegon Asset Management.

Aegon holds 1.26 percent of BSkyB’s stock, according to Bloomberg data.

BSkyB in June rejected News Corp.’s offer of 700 pence a share. The independent directors, led by Nicholas Ferguson, chairman of SVG Capital, said they may accept an offer of more than 800 pence a share. There is a “significant gap” between News Corp.’s proposal and the company’s value, Ferguson said.

Increasing Competition

Winning new subscribers is also set to become more difficult as BSkyB faces more competition from phone company BT Group Plc and public broadcaster British Broadcasting Corp. The two companies and partners won regulatory approval to start an Internet-television platform, which may compete with BSkyB’s television offering.

The venture, to be named “YouView,” will build an open Internet-connected on-demand television service and is scheduled to start in mid-2011.

“The market is about to become more competitive just at the point that Sky is breaking through to that 10 million mark,” Daniel Stewart’s Jeremy said. “The shareholder move is timely because you get the sense that you are at the start of a big change in the industry.”

To contact the reporter on this story: Jonathan Browning in London jbrowning9@bloomberg.net.

To contact the editor responsible for this story: Vidya Root at vroot@bloomberg.net.

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