Sky has started to reap benefits from its substantial reduction in sports rights costs in Italy and Germany, helping to grow group EBITDA by 76% in Q3, despite a slight drop in revenue

With this change in strategy, the business model in Italy is undergoing an upheaval. Meanwhile, the UK continues to perform well, with further promise on the horizon thanks to the bold launch of Sky Glass

This streaming TV is a future-proofing leap forwards in Sky’s ever-more-central aggregation strategy, starting the business down the long path to retiring satellite, though this is probably still over a decade away

Sky’s revenue was up 15% in Q2, back to pre-COVID levels despite some lingering pandemic effects such as most pubs and clubs remaining closed. EBITDA fell by a third, driven by higher costs from sports rights, since very few live sports events took place in Q2 2020

The impact of “resetting” football rights is already evident in Germany and Italy, with 248k net customer losses across the group despite growth in the UK. However, Sky will make substantial savings, and we expect this will more than offset lost revenues

Meanwhile, Sky continues to strike deals with other content providers, solidifying its position as the leading household entertainment gatekeeper. In time, apps for NBCU’s Peacock, ViacomCBS’ Paramount+, ITV Hub, and, in Germany, RTL TV Now and DAZN, will all be aggregated within Sky Q

After a strong post-pandemic rebound, Sky has the opportunity to leverage its strong reputation with consumers to meet the challenge posed by new competitors and the studios’ direct-to-consumer transition, establishing Sky Q as the ultimate gatekeeper of video subscription homes.

Sports rights costs in Germany and Italy have been cut significantly, while Sky’s spend on UK Premier League rights will decrease in real terms. Savings will ease the financing of the shift to original content, which, associated with owner Comcast’s NBCU output, anchors the aggregation strategy.

Fibre deployment in the UK and Italy presents a subscriber and revenue growth opportunity, and underpins the gradual shift away from satellite to online content distribution.

Advertising income has been the lifeblood of commercial TV for decades, but declining linear audiences—combined with digital video alternatives—mean the TV advertising model must evolve to ensure it remains as potent a medium for brands as ever.

Lack of effective audience measurement and somewhat opaque advertiser/agency/sales house relationships are hampering linear TV advertising revenues. Both issues need resolving to underpin a healthier ecosystem overall.

Flexibility is key to this evolution. A move to audience buys across most linear and BVOD inventory would provide greater flexibility and targeting for advertisers, and would sit alongside some premium context buys. A greater onus on volume deals would give broadcasters more certainty to invest in content and their advertising propositions.

Europe’s larger MNOs are falling over each other to demonstrate support for OpenRAN, which has become a primarily operator-driven standards initiative, with governments also firmly behind it.

This is driven by a desire to improve equipment interoperability from the current de facto monolithic standards, improve supplier diversity, and ultimately drive down cost.

While some movement towards interoperability is perhaps overdue, OpenRAN is not a panacea, and some trade-offs between price, performance, supplier diversity and reliability have to be accepted.

The value of certain sports rights can be appraised through three major metrics: the ability to command viewing/engagement, the ability to drive subscriptions incremental to other rights, and the propensity of those subscribers to provide the rights holder with additional revenues.

In this report we examine these three metrics in order to gain an understanding of the tensions in the market, along with the reasons as to why there is competition (or not) for certain rights.

Unsurprisingly, outside of a few primary sports rights, there are an abundance of secondary rights which find it difficult to display their value over others. Their value relies just as heavily on whether rights holders are committing to, or retreating from, major rights.

Sky appears to have weathered the COVID-19 crisis, revealing an encouraging turnaround in its Q3 operating results, with revenue growth flat overall as each stream saw significant improvement from Q2.

Rights costs from a condensed sporting schedule began to hit EBITDA, which remains guided to fall by 60% across H2, with most of the impact in Q4. This was anticipated long ago, and Sky’s ambition remains to double 2020’s EBITDA “over the next several years”.

Having disclosed contrasting performances between its markets, Sky now appears more clearly committed to replicating its UK success in both Italy and Germany, with tangible plans in place to streamline costs and rebalance content expenditure—namely by “resetting” its spend on sports rights.

Growth deteriorated by 3.5ppts, with the UK the weakest and Italy most robust thanks to its early onslaught of COVID-19, usage pickup in a largely pre-pay market and reprieve from a particularly competitive environment.

More operators (Orange and Telecom Italia) cut their guidance at the Q2 results and others (Deutsche Telekom and Iliad) sounded a note of caution regarding the likelihood of them reaching their full year targets.

The outlook for next quarter is mixed—roaming revenues will be even harder hit and competitive intensity is bouncing back but where usage has been depressed it will begin to recover well post-lockdown.

The COVID-19 crisis and suspension of sport has hit Sky hard, with Q2 revenue falling 12.9% year-on-year, and EBITDA (while flat for now) expected to fall 60% in H2 as the rights costs from a condensed schedule hit the bottom line

Underlying trends are hard to discern amidst massive disruption, but the UK remains strong, and increasingly less dependent on sport, with continental Europe a work in progress to repeat this model

Longer-term initiatives continue, with new branded channel launches in the UK, broadband launched in Italy, and scope for further moves in Germany provided by significant sports rights cost savings following recent auctions

Premium sports subscriptions are the primary sector weakness in the current crisis, and they look set to drive fixed operator revenues down 10% next quarter and Sky’s EBITDA down by 60%.

As lockdown eases, latent broadband demand can be more easily sated, and sports subscriptions will bounce back from the September quarter. A surge in working-from-home is likely to increase both the quantity and quality of home broadband demand, with ‘failover’ mobile backup also likely to be of greater interest.

Openreach will benefit from accelerated demand for full fibre, converged operators will be best-placed to offer mobile backup for broadband, and operators with a strong corporate presence will most easily target demand for home-working products.