Kate Bulkley, Media Analyst.

Why is Sky’s tightening of its EPG rules so sensitive & Why has ITV's stock fallen so far?

By Kate Bulkley

Broadcast News

For Broadcast November 14th, 2007

Kate Bulkley on why it looks like the EPG shake-up may be as sensitive for Sky as it is for the broadcasters.

It's been over a month since Sky said it would close its EPG due to "significant memory constraints" on many Sky boxes. In that time a path has been beaten to Ofcom's door as broadcasters have asked if Sky's policy is "fair, reasonable and non-discriminatory" (FRND).

To many of its smaller broadcasters, Sky's behaviour seems far from FRND-ly. Sky has had the savvy to issue its new EPG rules under the title of "consultation" with its "channel partners". NB: send Sky your comments by 6 December or forever hold your peace.

While Ofcom watches and Sky consults, a healthy market has sprung up for EPG slots and places in the launch queue. Slots are selling "in the single-digit millions" and launch slots are commanding upwards of £250,000, according to sources.

This EPG marketplace clearly favours bigger broadcasters that can afford to take out smaller, more marginal channels. Will this cull benefit viewers or limit their choices? Is one man's dross another man's candy floss? Sky will be hoping it doesn't fall foul of the regulator, because upgrading the limited capacity set-top boxes would be costly.

At last count, there were around 6 million non-Sky HD and non-Sky+ boxes in the market (ie older digiboxes). My guess is about 3 million of these are "capacity constrained" and do not have enough memory to take on board the new Sky EPG planned for next year.

I figure it would cost Sky about £600m to swap these for new basic digital boxes and shelling out for new boxes to accommodate a better EPG is unlikely to deliver massively better ARPU. It looks like the EPG shake-up may be as sensitive for Sky as it is for the broadcasters.

Why has ITV's stock fallen so far?

Michael Grade wants BSkyB out of ITV and has asked the Competition Commission to make it so. On 7 November, when Grade's desire became public, ITV's share price hit a new low of 91p and has fallen further since, hitting 86.2p on 12 November.

First of all, the fall is a technical readjustment: if Sky is forced to sell its entire 17.9% ITV stake, the market will be flooded with shares at a time when ITV buyers are rather thin on the ground. Given the state of the credit market, a private equity bid is unlikely, meaning any kind of "takeover premium" has also been erased from ITV's share price.

Morgan Stanley downgraded ITV this week, saying the stock is "overvalued". Deutsche Bank media analyst Paul Reynolds explains: "ITV is an expensive, faith-based stock and there are not too many people of long faith at the moment."

All the upside in ITV - including a relaxation of CRR, returns from a content acquisition strategy, changes in PSB obligations and returns from online - is in the future, which is a problem for a City made edgy by a shifting economic climate and prospective consumer slowdown that may hit advertising.

Perhaps ITV's submission to the Competition Commission has also caused concern. It argues that Sky could block "a number of strategic investments" that would require "significant investment" from ITV. The timescale is "in the relatively new future" and the City may not be convinced that now is the time to be splashing the cash.

In his 12 September strategy update, Grade underlined the "self-funding" nature of any ITV acquisition plans, saying, for example, that the sale of £200m of non-core assets would fund the possible acquisition of complementary production businesses. But how does this self-funding mantra square up with the "significant investment" of the Competition Commission submission? That might be a question the City wants answering.

Articles Menu