In the attached note we present our analysis of BSkyB revenue and cost trends over the five years 2006 - 2010 and our forecasts to 2015

More than a year has passed since News Corp proposed to buy the 61% of BSkyB that it did not already own. With clearance of the proposed transaction now imminent, this note examins the strategic value of the BSkyB acquisition to News Corp. In examining the business prospects of BSkyB it concludes the business is embarked on a high growth trajectory in revenues and operating profits over the next three to four years, putting BSkyB in a good position to face more challenging competitive conditions in the future

We have revised our central case forecasts of total year-on-year NAR (Net Advertising Revenue) growth in 2011 from 5% to 1%, as the advertising outlook has progressively worsened since mid April

2011 is marked by a further round of consolidation in airtime sales and a number of noteworthy channel and programming changes

Channel 4 Sales, and above all its flagship Channel 4, appears the most challenged of the leading market players, while we expect the ITV group to continue to outperform the NAR market in the rest of 2011 and 2012

Sky is managing to sustain strong underlying growth in the face of a challenging retail environment, in which it has maintained strong growth rates in quarterly gross TV additions and home communications products

Revenues were slightly down on the previous quarter, but this was mainly due to the January increase in VAT and seasonal variations in advertising spend, while the results confirmed the company’s strong discretionary control over costs

As the period of peak product additions passes, we can look forward to a strong growth trajectory in operating profits over the next three years

The concept of demerging Sky News is evidently a plausible one and we consider it very unlikely that critics of the deal will have much success undermining its appropriateness as a protection of plurality

However, it is harder to judge whether the proposed implementation secures the channel’s independence as fully and clearly as it might

We outline a series of issues that the information supplied for the public consultation does not appear to deal with. We note, in particular, that the proposed undertakings seem not to block Rupert Murdoch, or members of his family, from buying the 60.9% of the shares in Sky News not to be held by News Corp

The year ended on a strong note, as Sky broke passed its milestone of ten million homes and achieved yet another record breaking quarter for multi-product take-up

Home communications once more achieved exceptional growth, with triple play penetration jumping from 18% to 24%, while HD take-up resumed strong momentum after halving in Q1 2011

Financially, the company has never looked in better shape, with good prospects for continuing strong multi-product growth, leaving the question of where Sky will choose to invest next to drive further revenue growth

Jeremy Hunt announced on 25 January his intention to refer News Corp’s bid for BSkyB to the Competition Commission

However, he is first providing News Corp with the opportunity to address Ofcom’s concerns, and in so doing protecting his department and Ofcom from any legal threats

If Ofcom or the OFT say the News Corp remedies don’t go far enough, Jeremy Hunt will be then almost obliged to refer the transaction to the CC

With the completion of digital switchover still on track for mid 2012, stabilisation of the main digital broadcast platforms is expected, with roughly equal numbers of subscription pay-TV and free TV homes, though with marked differences between the platforms in terms of demographic composition and the proportion of pay-TV customers

Further marked differences exist between the satellite, cable and terrestrial platforms with regard to PVR adoption, notably higher in pay-TV households where distribution can benefit from box subsidies and greater product consistency. National PVR penetration of TV homes is expected to grow from slightly below 50% in 2010 to over 70% in 2015

As DSO nears completion, the stage is set for broadband connectivity. Although household penetration of internet-enabled TV devices is expected to exceed 50% by 2015, the emergence of hybrid broadcast and broadband services is expected to proceed much more slowly, limited by a number of factors – not least the ability of service providers to monetise their non-linear on demand offerings

A large gap has opened up between the different platforms in the five years since HD launched in the UK, with the pay-TV platforms – above all Sky – gaining a large lead over the free-to-air satellite and terrestrial platforms

With HD Ready TV sets now counting for almost half the total population of TV sets in the UK, the big issue facing the free-to-air platforms is the number of channels, where Sky (now 52 HD channels) and Virgin Media (now 28 HD channels) are expanding their lead over the free-to-air platforms Freeview (now 4 channels) and Freesat (now 3 channels)

Freeview in particular offers no clear evolutionary pathway beyond five channels in the next five years, except through acquisition of more capacity in the coming spectrum auction, where the outcome is very uncertain or via streamed high capacity broadband, which faces significant challenges in building penetration

This report on Sky Italia and Sky Deutschland, News Corporation’s Continental Europe pay-TV assets, complements our coverage of BSkyB in the UK. We look at the market environment, including regulation and competition. The report also provides subscriber, revenue and earnings forecasts and SWOT analysis.

VMed’s Q3 results showed continuing strength in the face of heavy marketing by BT Retail and BSkyB, although cable churn increased significantly

There are plenty of further challenges on the horizon, including a downturn in consumer confidence and later, the launch of YouView and wider deployment by BT of next generation access

The broad based nature of the company’s growth and its plans for further product development in TV and broadband continue to give us confidence in the potential for further growth in cash flow, albeit at a more modest pace