Bloomberg News

BSkyB's Third-Quarter Net to Drop on Broadband Costs (Update1)

May 01, 2007

British Sky Broadcasting Group Plc (BSY), the satellite pay-television company chaired by Rupert Murdoch, may say third-quarter profit fell as costs to start a new broadband service hurt earnings.

Net income for the three months ended March 31 probably fell 13 percent to 132 million pounds ($264.3 million) from 151 million pounds a year earlier, according to the average of four estimates compiled by Bloomberg. Isleworth, England-based BSkyB is scheduled to report results tomorrow.

BSkyB, the U.K.'s biggest pay-TV operator, bought Web provider Easynet Group Plc for 234 million pounds last year and plans to spend 400 million pounds over three years to sell broadband with its TV and phone services. BSkyB began offering high-speed Internet in August as rivals including Virgin Media Inc. started bundling services to attract customers.

``Broadband costs are ongoing and ramping up over the next several quarters,'' said Omar Sheikh, a London-based analyst at Dresdner Kleinwort, who rates BSkyB shares ``sell.'' The strategy is a ``three-year investment.''

Sales at the company, led by Chief Executive Officer James Murdoch, probably rose 7.7 percent to 1.14 billion pounds in the quarter, according to the average of six estimates. BSkyB spokesman Robert Fraser declined to comment for this story.

Shares of BSkyB rose 9.5 pence, or 1.7 percent, to 584.5 pence in London. The shares rose 5.1 percent last year.

Broadband Costs

The company is estimated to add 30,000 net new subscribers and 247,000 net new broadband subscribers, according to the median of 11 estimates compiled by Bloomberg.

Broadband is a key part of BSkyB's strategy to attract customers and reach its forecast of 10 million pay-TV customers by 2010 compared with 8.4 million at the end of 2006.

Results in the quarter were probably hurt by an estimated 87 million pounds in expenses related to broadband, Dresdner's Sheikh wrote in an April 23 research note. Marketing costs rose to 417 million pounds from 397 million pounds, he estimated.

Sheikh also said that 2008 profit will be hurt by a legal and programming dispute between BSkyB and Virgin Media, the biggest U.K. cable company. Hook, England-based Virgin Media in March stopped airing five BSkyB channels. Each company blamed the other for rejecting offers to extend a distribution agreement.

While Richard Branson, Virgin Media's largest investor, said the company would lose few clients, BSkyB said the dropped channels might cut 15 million to 20 million pounds in operating profit from the company's results for the year ending in June.

Dresdner's Sheikh said BSkyB fiscal 2008 earnings per share may be reduced by 8 percent because of lost revenue from the dropped channels.

Virgin Media Battle

Virgin Media sued BSkyB last month over claims that BSkyB took advantage of its dominant position to charge exorbitant rates to distribute its content.

Virgin Media and BSkyB are in a separate dispute that began when BSkyB bought an 18 percent stake in U.K. broadcaster ITV Plc last year, blocking Virgin Media's bid for the company.

Branson said in an April 24 interview that Murdoch's control and influence in the media is ``verging on dangerous'' as BSkyB's purchase of the ITV stake, the ownership of the U.K.'s Times and the Sun newspapers give Murdoch and BSkyB too much power.

``We are obviously in a battle with him and it's not a personal battle,'' Branson said. ``They have abused their position.''

BSkyB may be probed by the U.K.'s antitrust authority after regulators said BSkyB's stake in ITV may harm competition. Last month, U.K. telecommunications regulator, Ofcom, recommended the case be referred to the Competition Commission.

To contact the reporters on this story: Alex Armitage in London at aarmitage@bloomberg.net

To contact the editor responsible for this story: Zimri Smith at zsmith@bloomberg.net


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