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Concerns about threats to BSkyB are overstated, says Morgan Stanley

Concerns that BSkyB’s growth is leveling off and that BT’s foray into sports represent serious threats to the UK pay TV leader are largely overstated, according to a note on Sky from Morgan Stanley Research.

Morgan Stanley said that it believed concerns that Sky’s earnings per share growth, while rose 16% in the first three quarters of its current fiscal year, was a “danger signal” because it indicated that the business had become mature, were misplaced.

The analysts said that while traditional pay TV growth had slowed, product growth was up 9% year-on-year as the company continued to sell HD and broadband to existing customers, as well as services such as Sky Go Xtra.

Morgan Stanley said it thought the impact of the imminent launch of BT Sport would be “limited” because the telco had restricted its spend to a fraction of Sky’s and was more focused on targeting free-to-air viewers as well as upselling its own customers.

BT’s winning of a right to appeal against the Competition Commission’s decision that Sky did not need to wholesale its own sports services at regulated rates had made the market nervous, said Morgan Stanley, but fears were likely to dissipate. Sky’s position is that it is willing to sell its sports channels to BT on the same terms as TalkTalk and Virgin Media and it will not be expected to wholesale its channels if BT chooses to sell its own channels independently on the satellite platform rather than wholesale them via Sky.

Morgan Stanley said Sky faced “modest competitive risk” from OTT services – notably from YouView and cannibalisation of its base by Sky’s own Now TV service. The analysts estimate that Sky added about five million DTH customers in the last quarter, with the remaining 25,000 attributable to Now TV.

However, Morgan Stanley said that Now TV represented a viable way of targeting a new market of Freeview customers and that revenues from film subscribers were not far short of those from basic DTH customers.
Morgan Stanley noted that Sky also faced a risk of continued decline in its pubs and clubs business, although the impact on this of BT Sport is likely to be limited.

In summary Morgan Stanley said BSkyB represented an attractive investment, with some concerns from a possible slowing in growth and the need to absorb English Premier League costs over the next quarter.