Kate Bulkley, Media Analyst.

Media money: DCD Media and BSkyB

By Kate Bulkley

Broadcast News

For Broadcast August 13, 2007

When is DCD Media going to get the respect of the City?

Respect has to be earned and DCD Media is doing its best to earn it from the City with a strategy of consolidation. Since it was formed in 1999, DCD has tootled along producing music, education and arts programming and watching others grow into more powerful super-indies. DCD's stock failed to catch much attention even though the company made some successful shows.

But when former Five chief exec David Elstein was appointed chairman in early 2005, DCD began to flex its muscles and now it looks ready to move up a league. Its £19.1m purchase of Prospect Films, September Films and West Park Pictures last month will more than double DCD's £13.1m first-half 2007 turnover. So size-wise, DCD is starting to get noticed, particularly as it becomes apparent that bigger indies are consistently getting the big broadcaster commissions. Added to this is the important foothold in the US that September Films gives DCD through its hit Bridezillas.

DCD has raised £8.5m through issuing additional shares at 80p and another £4m from institutional investors via a convertible loan, to help pay for recent purchases. The final move designed to leave DCD's penny stock memories firmly behind is a share consolidation that took place this week and effectively moves the stock out of pennies and into pounds which should attract more institutional investors.

There seems to be little room left for midsized indies, so DCD has taken the steps to get bigger and get noticed. Now chief executive Chris Hunt has to make the synergies work and the profits grow. Even before the latest trio of buys, DCD's house broker Evolution Securities expected profit before tax to be £1.3m this year. The City's respect will only rise if DCD delivers that and more.

What is Sky going to get out of being in the set-top box business?

The great thing about Sky is that it keeps everyone in media on their toes. James Murdoch has just paid £125m for Amstrad, one of the UK's leading (if somewhat struggling) set-top box makers. This rather surprising purchase makes sense on several levels, but it also raises a question mark or two.

First, the plusses: because Amstrad was so dependent on Sky for its business the purchase price was relatively low – a 24% premium to Amstrad's market value the day before the deal.

Second, buying Amstrad seems similar to the strategy when Sky bought EasyNet to get into the broadband business, progressive thinking outside of the pay-TV box.

But does Sky really (I mean really) want to be in the manufacturing business? Is there a master plan to start supplying Sky-made set tops to other pay-TV operators, both in and outside the News Corp pay-TV family?

Suppliers such as Pace have already felt the repercussions of the Amstrad deal, posting a 14% share price drop the day the deal was announced, knocking about £30m of Pace's market cap. The price has since recovered but will Pace or other suppliers share their technology roadmap with a client which now has its own in-house box maker?

Sky says bringing set-top box making inhouse will give it more control and speed up development, and some City analysts think Sky will attract more subscribers with high margin boxes with HDTV and PVRs.

For me, this looks like a short-term need not a long-term business move: pressure is mounting on Sky to reach its 10 million sub target and the competition for its subscribers is coming from all sides. For now, at least, controlling the box looks like the best way to make sure Murdoch doesn't get boxed in.

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