Investment View: Sky is thriving but now is the time to cash in

Sky's customer churn rate is growing, and it's going to get harder to replace lost customers and maintain growth
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The Independent Online

Now TV was launched by BSkyB in an attempt to attract people who didn't want any part of Sky TV. It's a sort of pay-as-you-go service which allows you to buy movies over the internet for a monthly fee but without a contract and was designed to attract people who don't fancy paying out for Sky long term. A sports version is coming.

I took a shot at the plan when it was launched – why waste a bunch of money creating a new brand when you have a very powerful one already? But actually, it now looks quite clever when it comes to Sky's relationship with its existing customers.

Sky doesn't want to cannibalise them with its pay-as-you-go business. It wants to keep hold of them, because they are on longer-term contracts and are therefore more valuable (and more highly rated by the City) than people who can easily just, say, stopping buying Now TV when they happen to be going on holiday.

This is still a very real danger. Now has been very successful. BSkyB attracted 88,000 new customers in the last quarter of the year (its second quarter financially). Of those, 50,000 bought its TV services and half of those went for Now TV, rather than buying a full Sky subscription.

Overall sales during the first half of Sky's year grew 5 per cent to £3.53bn, not much off the 5.5 per cent growth turned in last year, while pre-tax profits grew 8 per cent, to £642m. That's a long way off the 28 per cent surge recorded last year, but not too shabby, and the company says it is investing in new products and services.

That could pay dividends. One happy number for Sky was its Arpu – or average revenue per customer – which came in at £568 in Sky's second quarter, ahead of forecasts, and the first quarter (£550). So customers are buying more from Sky.

There are people in Britain who view it as more important than food. And spend more money on it.

So all's rosy in the garden, right? Well, here's the downside. The competitive landscape continues to get tougher. Sky's customer churn rate is growing, and it is going to get progressively harder to replace lost customers and maintain growth. Its customer service doesn't always live up to expectations – my experience moving house with Sky means I am no longer a customer, and won't be again.

Sky's rivals for providing broadband are snapping at its heels, and it can't help the company when the controlling shareholder, Rupert Murdoch, generates negative publicity, even though he isn't interfering with Sky as much as he once did and won't be launching any takeover bids anytime soon.

The shares are pricey at 14 times this year's forecast earnings, albeit with a respectable yield of 3.5 per cent.

Sky is an impressive commercial machine that seems to print money. But the going is getting harder. Last February I said hold at 689.5p, and I reiterated that in September. Now might be a good time to cash in. Take profits.

Usually when I look at Sky I take in ITV, although it will be a few weeks before the terrestrial giant reports. The last couple of times that has proved to be embarrassing. I said no way at 77p and no way at 88p. Now the shares are passed 110p. And I'm still saying no.

Look, Adam Crozier's plan to reduce the broadcaster's dependence on ads seems to be working. The company has managed to make – or get behind – several hit shows, and has been successfully selling them overseas. While ad revenue is flat, and forecasts for its future are cloudy, the company has at least been doing better than might have been expected. And it has paid off in terms of the share price.

But producing hits is a cyclical thing, and ITV needs to find answers for when blockbusters such as X Factor and Britain's Got Talent reach the end of their lives. At 12 times this year's forecast earnings, with a prospective 2.6 per cent yield, ITV is no longer a cheap recovery play. At the risk of getting burned again: avoid.