Sky: content, for now

Sky, the television company, has come back to earth. For years it broadcast over a satellite infrastructure that it controlled, offering sports content that its rivals could not. Market forces have prompted it to rethink its strategy. This may mean giving up some of its previous advantages.

Still, it is hardly suffering. Third-quarter results on Tuesday revealed a robust 20 per cent growth rate in operating profits due to record subscriber additions in the UK and Ireland. Results were a bit better than analysts expected but well ahead of what the market had sought. Sky's share price leapt 5 per cent on healthy share volume.

Good news came from lower customer turnover, or churn. Citi thinks that figure fell to under 10 per cent in the quarter, Sky's best performance in more than a decade. Stronger economies in the UK and Ireland have helped to add and keep customers. Together, the countries accounted for almost all of Sky's profits last quarter.

Critically, there is no evidence so far that subscribers have given up their satellite television contracts and switched to Sky's cheaper pay-as-you-go broadband product, Now TV. Even though Sky charges Now TV customers a fraction of satellite contracts, the cost of acquiring each Now customer is perhaps a seventh of the £350 of that for satellite. Sky does not regard Now TV as a discounted substitute.

Yet, as the satellite model ages and Sky moves towards broadband dependency - with more users watching on mobile devices - it will become more dependent upon its infrastructure suppliers, such as UK-listed BT Group. This partly explains why Sky added its voice to the clamour for BT to separate fully the shared Open Reach national fixed-line network from the rest of BT.

Sky maintains that BT's network ownership is unfair because BT uses the steady cash flow from its captive broadband customer base to subsidise other offerings, specifically sports. BT's recent bid for Premier League football television rights accounts forced Sky to pay another couple of billion pounds for the 2016-19 seasons. That was 83 per cent above the previous auction.

Sky's valuation multiple has reached giddy levels of over 20 times earnings, near five-year highs. That is a tad expensive, given consensus estimates putting 2017 earnings per share at the same level as 2014. Seat belts, please.

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