LONDON -- The move was vintage Rupert Murdoch.
The doyen of predatory pricing decreed on Wednesday that henceforth
British Sky Broadcasting
, the satellite television company in which
holds a 40% stake, would give away free decoder boxes for its digital TV service. Not only that, customers will also get free Internet access and a 40% discount on standard telephone calls.
Sky's offer is a knock-out punch aimed squarely at the other digital providers, and investors fancy Murdoch's chances in the price war he has sparked off.
Sky's market capitalization increased by $1.6 billion as its shares rose 11.7% after the deal was announced, while
, partners in the digital terrestrial venture
, fell. Cable companies
Cable & Wireless Communications
also took a beating.
The hubbub over, Sky closed Thursday down 4.6% at 579 pence.
Some Good News On Sky News
Sky certainly needed some good news to give to investors. Last month, the government nixed the company's plans to buy the U.K.'s largest football club
on competition grounds. Also last month, the company lost its second chief executive in as many years.
In one fell swoop, the new free box offer from Sky neutralizes one of the key advantages of cable TV. Growth rates in the number of cable subscribers have outpaced those of satellite in recent years because of their low up-front costs and the ability to bundle cheap telephony with TV.
There is no doubt that, by giving away the $320 boxes, Sky will boost the number of subscribers in the short term. Sky announced that as of May 3, it had a total of 551,000 digital subscribers; 39% are new customers. This growth appears to make Sky's target of one million digital subscribers by October look feasible.
The scheme should also encourage more of its existing analog customers to switch to the digital service. As a result, Sky has moved up the date it will switch off its analog service to 2002, which
believes will result in cost savings of about $80 million per year.
To finance the venture, Sky is giving with one hand but taking with the other. The company has cut dividends to zero and is plowing the money back into the business. When the dividend will return is unclear. Also, Sky is hollering about free boxes, but at the same time mumbling under its breath that it will increase monthly charges by $3.20 and installation costs will rise to $65.
As a result, in a poll of 17 brokers by
, a British equities information provider, expects earnings growth to be negative this year, but will swing to 34% in 2000.
Credit Suisse First Boston
, which has a buy rating on Sky and an investment banking relationship with the company, estimates that five-year earnings growth will be 12% per annum.
While this sounds well and dandy for Sky, in the long term the company faces more fundamental business problems. According to Gareth Thomas, media analyst at
, which has no investment banking relationship with the company, Sky has to concentrate on growing its subscriber base because other parts of its business are in decline.
"Sky resells programs but its ability to do so in the long term is not certain. Sky's stranglehold on broadcast rights is coming to an end and other platforms will be in a position to do their own deals," Thomas says. As a result, Thomas is maintaining his sell rating on Sky -- and his buy rating on competitor Carlton.
In fact, this offer from Sky could actually backfire spectacularly. Sky is still losing more subscribers than it is gaining as people give up their analog service and go elsewhere. By forcing other providers to also give away boxes (ONdigital has already said it will match Sky's offer), existing Sky customers will find it that much easier to switch.
Although Sky is trying to bundle Internet and telephony with TV, Thomas notes that "cable remains an inherently superior platform with a broadband two-way pipe, capable of offering much higher speed Internet access, superior interactive services and VOD
Video on Demand."
Finally, free set-top boxes are nothing more than a short-term measure, as the advent of integrated digital televisions will remove the set-top box barrier; forecasts say that, sometime between 2004 and 2010, 50% of U.K. households will have iDTVs.
By that time, of course, Mr. Murdoch hopes that everyone will have signed up for Sky anyway.