So-called triple-play packages, which combine the provision of a household's telephone, internet and TV needs, are providing high-yielding TV and telecoms companies with growth opportunities and the potential for re-ratings.
Triple-play packages are usually good for the customer. Individual services are cheaper when bundled. The tricky part is how to deliver attractive bundles without costs spiralling out of control. It's a feat that BSkyB (BSY) and Virgin Media (VMED) - the UK's two biggest triple-play operators - appear to be pulling off. As our table shows, both have strong EPS growth as well as a much higher average revenue per user (ARPU) than their telecom rivals. BSkyB also offers a hearty yield and the two new players in the sector, BT (BT.A) and TalkTalk (TALK), look even more compelling on valuation grounds. The question is whether this is a developing growth story or if problems will start to emerge as competition heats up.
New players on the pitch
After much delay, set-top boxes delivering YouView - an internet-based TV service - are now on sale. YouView is an initiative by various broadcasting companies, plus BT and TalkTalk, to offer free and pay-as-you-go content. It's pitched as an alternative for those not willing to splash out on monthly pay-TV subscriptions from BSkyB and Virgin Media.
TalkTalk is now offering YouView 'free' to new customers - including a 12-month subscription to LoveFilm, Amazon's 'over-the-top' TV service - so long as they sign an 18-month contract to Plus, its more profitable voice and broadband service. Existing customers get the same deal, but they need to take Plus for another two years. TalkTalk says it has around 29,000 YouView subscribers, growing by around 1,000 per day.
| Company | TIDM | Market cap | Price | Forward PE | Forecast EPS Growth | DY | Triple play subs (000s) | Total subs (000) | Yearly ARPU (£) | ARPU growth (%) |
|---|---|---|---|---|---|---|---|---|---|---|
| British Sky Broadcasting | BSY | £12.1bn | 745p | 14 | 10% | 3.4% | 3,516 | 10,308 | 550 | 15 |
| BT* | BT.A | £17.1bn | 219p | 9 | 4.3% | 3.8% | 707** | 10321 | 343 | 5 |
| TalkTalk | TALK | £1.9bn | 219p | 13 | -5.0% | 4.1% | 29 | 4043 | 23.92 | 0.8 |
| Virgin Media*** | VMED | £5.7bn | 2131p | 22 | 315% | 0.5% | 3,139 | 4852 | 48.73 | 18 |
TalkTalk and Virgin Media ARPU are latest reported monthly figures
Source: S&P Capital IQ & companies data
*Subscriber figures for BT Retail (consumer)
**BT Vision subscribers
***Subscriber figures for cable consumer segment only (excludes mobile).
"We're a utility with growth potential, which is unusual," claims Dido Harding, TalkTalk's chief executive. There are good reasons to agree. With rising gross margins, thanks to a shift in its customer mix towards 'on net' subscribers, Barclays forecasts an adjusted full-year EPS of 12.5p, rising to 17.7p the following year, while pre-tax profits are expected to grow from £191m to £210m.
BT has also recently launched a YouView service, although no subscriber numbers have been disclosed. YouView might make a dent in the triple-play market shares of BSkyB and Virgin Media, but that assumes there will be lots of customers willing to forgo their regular access to premium content in return for lower bills. More likely, YouView will simply expand the triple-play market. Indeed, BT has its own subscription pay-TV service over broadband - BT Vision - on which it has spent lavishly to secure football and rugby broadcasting rights. BSKyB has also launched an internet-based service of its own, NowTV, to offer Sky content to customers without satellite dishes.
Sporting chance
While download TV services, such as Netflix and LoveFilm, pose a threat to BSkyB and Virgin Media, BT Vision looks a bigger danger. BSkyB has already felt the impact of BT's desire for premium content. When BT entered this summer's bidding to broadcast Premier League matches, prices soared. In its current three-year deal, which expires next August, BSkyB paid £1.6bn for 115 matches a season. Its new three-year deal, starting in the 2013-14 season, has cost a hefty £2.3bn. At £760m a year for 116 matches, that works out at an eye-watering £6.6m a game (up from £4.7m). BT, meanwhile, splashed out £738m for 38 games a season in a three-year deal. And in September, at a cost of £152m, BT took over the rights held by Sky and ESPN to broadcast Premiership Rugby for four years from the 2013-14 season.
If BT Vision's sports channel proves successful, Patrick Yau, an analyst at stock broker Peel Hunt, anticipates that content bidding will intensify further when deals come up for renewal. BT will want to keep in the pay-TV and triple-play game. If BT Vision is not successful, the cost of premium sport may well come down.
But BSkyB has claimed an important victory over its rivals. In August the Competition Appeals Tribunal (CAT) overturned an earlier ruling by Ofcom, the telecoms and broadcast media regulator, that wholesale pricing for Sky Sports 1 and 2 should be set by the regulator. CAT judged that BSkyB was not guilty after all of trying to squash competition through unfair pricing. BT and Virgin Media were among those that urged Ofcom to take action against BSkyB. They now have until 26 November to appeal CAT's decision.
Open goal
By contrast, wholesale telecoms pricing for voice and broadband is well established. So, too, is the process of local loop unbundling (LLU). By allowing operators to install their own equipment in BT's local exchanges, LLU gives BT's competitors a way to offer services that are distinct from the incumbent - and all without the expense of building their own network. LLU also avoids the razor-thin margins associated with BT's wholesale products, leaving more headroom to lower retail prices. Expanding LLU reach helps explain the improved cost control at both TalkTalk and BSkyB.
The barriers for triple-play entry, then, are coming down. TalkTalk's projected launch costs for YouView are a relatively modest £15m-£20m. LLU, meanwhile, makes it easier for content providers to offer voice and broadband services. But it's not a level playing field. When it comes to producing and packaging content, BSKyB has a proven track record and BT Vision and other telecom rivals do not. True, BT Vision has assembled a strong management team, some with BBC and Sky backgrounds, but it's still playing catch-up. BT Vision has around 700,000 subscribers compared with BSkyB's 10.6m. And managing content is perhaps a harder skill to master than voice and internet access, which are becoming commodity items. "It's arguably easier for content players to move into broadband and telephony than it is for telcos to move into content," says Mr Yau.
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Investors initially took fright when BSkyB splashed out in the summer for Premier League football rights, but the share price has since recovered (it was below 660p at the time of bidding). The company's strong cash flows and attention to costs show BSkyB can absorb the higher content bill. In the year ended June, BSkyB boosted cash profits by 12 per cent to £1.6bn, while adjusted EPS jumped 22 per cent to 50.8p. ARPU increased by £10 to £548. And the positive trends are continuing. Despite a £54m increase in programming costs in the first quarter, due to the first-time inclusion of Formula 1 and the biennial Ryder Cup, cash profits were still up 3 per cent, to £392m, while adjusted EPS rose 16 per cent, to 13.4p. ARPU is now £550, £2 up on the previous quarter, despite a 3 per cent reduction in overall operating costs. The satellite broadcaster is also embarking on an additional £500m capital return to shareholders via a share buy-back. Peel Hunt anticipates BSkyB will maintain its operating profit margins at around 18 per cent, with full-year adjusted EPS expected to grow 9 per cent to 54.7p. That gives a forecast PE ratio 14, which is not overly demanding. The broker has a target price of 813p. |
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| Virgin Media, which runs a superfast cable network, boosted its operating income by 40 per cent, to £180m, in the three months to September. Growth is being spurred along by TiVo, its interactive TV service. Virgin Media added 205,900 more TiVo customers during the quarter to reach 1.14m. "The current ARPU trend will be helped in the last quarter by Sky premium price increases, which we estimate are worth around 40p in ARPU," says Stuart Gordon at Berenger Bank. However, Virgin's shares offer a substantially lower yield than the other three players, making it our outsider on valuation grounds. |
IC VIEW:
According to Ofcom, only 19 per of UK households had signed up to a triple-play package by March. The market may well support more players. BSkyB and Virgin Media have already shown they can deliver TV and triple-play services on a large scale, so they look well-placed to ride any growth trend in bundled services. BT cannot be discounted as a potential major rival, combining premium content with its superfast fibre-optic network, but the BT Vision management team still has it all to prove. Initial take up of YouView at TalkTalk, which is making progress on improving customer service, looks encouraging.
