Sky Deutschland AG (SKYD), the German pay- TV provider half owned by Rupert Murdoch’s News Corp. (NWSA:US), is betting its growing customer base and expanded offerings will help support higher subscription fees and reduced discounts.
The operator this month boosted tariffs for its premium packages for new or renewed contracts by 1 euro ($1.31) per month, the first increase in almost two years. Unlike European peers such as British Sky Broadcasting Group Plc (BSY), also partly owned by News Corp., Sky Deutschland hasn’t scheduled regular price increases.
Chief Financial Officer Steven Tomsic says he wants to lift subscribers’ average 32-euro monthly bill by 5 euros to 10 euros to where “a normal pay-TV business should be” in Western Europe, at a time when convincing consumers to dish out more on TV content may become more challenging. Germany’s government this week cut its 2013 growth forecast for the country, which has so far relied on exports and domestic spending to help insulate the economy from Europe’s debt crisis.
“We will have more pricing power as people get more and more attached to the product and we will start to see that come through in terms of rate increases as well,” Tomsic said in an interview at Bloomberg’s Frankfurt office this week. “There is still a lot of headroom, particularly in an economy where GDP per capita is higher than in any other economy in Europe.”
Sky’s stock is the best performer in the 27-company Bloomberg Europe 500 Media Index (BEMEDIA) this year, having gained 133 percent. It rose as much as 0.8 percent to 3.28 euros and was up 0.5 percent as of 9:26 a.m. in Frankfurt trading. News Corp., which owns 49.9 percent of Munich-based Sky, gained 0.9 percent to $25.42 in New York yesterday.
Chief Executive Officer Brian Sullivan is counting on higher-paying subscribers to help Sky reach its target for an operating profit in 2013, which would be the first since News Corp. began investing in the company almost five years ago.
Sullivan has introduced access to Sky’s programs on mobile devices, deployed hard-disk recorders and increased the number of high-definition channels. The number of subscribers surged 14 percent to 3.13 million in the second quarter. Average monthly revenue per user in the period rose 4.8 percent, or 1.47 euros from a year earlier.
Tomsic wouldn’t say when the higher customer spending level may be reached. Sky plans to increase tariffs in regular intervals, he said, declining to discuss figures.
Sky is working to decouple the timing of contract renewals and the expiration of discounts to avoid giving customers the choice between dropping the package and negotiating a better deal, the finance chief said. It’s also shifting discounts from monthly fees to one-off expenses like recorders, he added.
Expanding Sky’s offerings is key to revenue growth, which can be augmented by adding new channels, such as through its partnership with Liberty Global Inc. (LBTYA:US)’s German cable provider Unitymedia KabelBW. The pay-TV provider is in “constructive talks” over a similar agreement with Kabel Deutschland Holding AG (KD8), Tomsic said.
Sky in April signed a four-year agreement, paying 485.7 million euros annually, to expand its hold on broadcasting rights for Germany’s Bundesliga soccer matches, edging phone company Deutsche Telekom AG (DTE) out of its license for Internet- based broadcasts. Sky said it may allow Deutsche Telekom access to the broadcasts if an agreement would move Deutsche Telekom customers over to Sky quickly.
“We paid a strategic price for strategic rights,” said Tomsic, who was News Corp.’s director of corporate finance and planning for Europe and Asia before taking his current role in February last year. “We don’t want to sacrifice that position by doing a wholesale or sub-licensing deal. That’s completely off the table.”
Tomsic said he expects to reach an agreement with German tax authorities this year to ensure that Sky can in principle retain previous tax losses on its balance sheet in case an investor obtains a stake of more than 50 percent. The company had a retained deficit of 2.2 billion euros as of June 30, according to its financial reports.
Approval by authorities would help Sky reduce taxes on future profits, the CFO said. The European Court of Justice is also expected to rule on the issue, he said, adding that a verdict may not come before 2014.
Tomsic declined to say whether News Corp. may be planning to obtain a majority of the shares. Murdoch’s company has the option of converting credit provided to Sky into stock, which would bring the stake to as much as 54 percent, Tomsic said.
“It’s for them to make their decision,” he said.
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