National newspaper advertising revenues should be up 6-8% year-on-year in 2010, with ‘popular’ titles in particular attracting display ads from national retailer brands

Local and regional press advertising revenues will fall by about 6% year-on-year, mainly on the continued decline of recruitment classifieds

Publishers are exploring more efficient printing, new digital models, and staking a claim on e-commerce

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.

Ofcom’s decision not to investigate Project Canvas under the Competition Act removes one more regulatory obstacle to the launch of the broadband connected TV service with the brand name YouView

It looks increasingly as if the YouView launch will experience further delay, with autumn 2011 looking steadily more likely as disputes continue over the satisfactoriness of the technical specifications released by YouView for meeting manufacturer needs

Although backed by powerful broadcast and ISP interests, YouView faces stiff challenges to achieving widespread adoption among ‘Freeverse’ homes, with much depending on YouView’s ability both to deliver consistent product quality and to get its message across

Strong FY 2010 adjusted revenue growth of 11% was powered by a 15% rise in subscription revenues, reflecting a mixture of solid subscriber growth in spite of the recession and burgeoning multi-product sales, with HD subscriptions registering a net increase of 1.63 million to end the year at 2.94 million and the telecoms sector breaking into operating profit in Q4

Firm cost control and streamlining of manufacturing and subscriber management expenses now make Sky’s 25% TV operating margin target look very achievable, but also leave it room to increase spend on programming substantially within the guidance limits of pegging increases to the rate of revenue growth

Overshadowing the results is News Corp’s proposal to purchase the 60.9% of BSkyB shares that it does not already own, subject to regulatory review. Assuming it goes ahead, News Corp will have a larger market share in the UK across media (TV, newspapers and books) than any other company in a major market

FT has put majority stakes in Orange Sport and Orange Cinéma Séries on the block, and claims to have held discussions with News Corp. We think it unlikely that an investor would be interested in entering the French pay-TV market, dominated by Vivendi’s Canal+

We believe FT could find a buyer for Orange Sport in Disney’s ESPN, which could prove viable if a cross-retailing deal is reached with Canal+. A Eurosport merger is another option. Orange Cinéma Séries could be viable under a new owner, if it widens it distribution to other platforms

Now officially on the way out of the pay-TV production business, a welcome decision in our view, Orange can focus on improving the consumer value of the basic TV offering on the triple play marketplace

On 2 July News International switched Times online from a free to a subscription service, probably losing at least 90% of its traffic and shifting its strategy from reach and scale to a more traditional targeted brand and loyalty model

The challenges are substantial: while the Times is competitively advantaged with a strong roster of star writers and columnists, NI knows news itself is more commoditised than other content types, and most newspaper and broadcaster sites have been giving away news for a decade

News Corp may well realise the most benefits from the Times subscription service in a larger convergence play, aggregating audiences across group services such as Sky pay-TV and broadband, Sky News and the Wall Street Journal

News Corp’s bid for the shares it does not own in BSkyB is unlikely to generate much concern at the OFT because newspapers and TV will be seen as being in separate markets

But, separately, the Secretary of State for Business, Vince Cable, is entitled to make a ‘public interest’ intervention that requires the plurality issue to be assessed alongside the competition investigation over the next few weeks

We think that there is a strong case that the transaction does raise substantial issues of ‘plurality’ as defined in the Court of Appeal judgment on the purchase of ITV shares by BSkyB in 2006.1 Whether the new Secretary of State has the stomach for a fight with the company must be open to substantial doubt

Subject to BBC Trust approval, Canvas looks almost certain to launch in spring 2011 after the OFT decided that it did not have the jurisdiction to review Canvas under the merger provisions of the Enterprise Act 2002. The OFT decision does not rule out complaints on other grounds, but the chances of persuading the regulators look very small

The launch of Canvas promises to strengthen significantly the free-to-air digital terrestrial platform, otherwise very limited compared with satellite and cable platforms in terms of bandwidth, but mass adoption poses numerous challenges and it is open to question whether Canvas will ever extend to more than half the DTT base

In the long term, it is hard not to see Canvas as an interim step in the growing convergence between the TV screen and the internet, raising the question of how successfully its PSB TV-centric approach can adapt to the coming challenges of the full blown digital age

The News Corp management has given Sky Deutschland a full and costly revamp in 2009, leading to a steep year on year increase in negative EBITDA of around €200 million

Underlying trends of improvement in net subscriber additions, ARPU growth and churn reduction, assisted by its HD offer, suggest that Sky management will get close to, if not actually meet, its 2011 breakeven target

However, there are significant downside risks in the historically tough German pay-TV market, and robust profitable growth beyond 2012 presents a real challenge