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The Sky Tv Analysis

Essay by   •  September 29, 2016  •  Case Study  •  1,603 Words (7 Pages)  •  716 Views

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  1. Introduction

With the increasing availability of high speed broad internet and fierce completion of telecommunication industry, Sky network Television Limited (SKY) continues to embrace changes which involves making more efforts to entertain kiwis in more ways than ever before as well as offering more exclusive content (Samuel, 2016). However, the SKY TV is facing the risk of losing subscribers in recent years, which results in flat revenue growth (Samuel, 2016). In order to address the problem, the SKY TV made a decision that a combination of SKY TV and Vodafone New Zealand Limited (Vodafone NZ) to create a leading integrated telecommunications and media group in NZ (Samuel, 2016). The purpose of the report is to help potential investors understand the rationale of merge and whether the SKY TV make a sound decision through analysis of SKY strategies and financial report as well as the future of telecommunication industry.

  1. Background and strategy analysis:

2.1 Overview of strategies

The SKY is the leading pay television operator in New Zealand and the strategy of the SKY TV is to satisfy variety demands of customers including the content of entertainment and preferable transmission channel (SKY, 2015). The objectives is to expand opportunity to serve the market broadly through multiple channels (SKY, 2015).

2.2 Strength

2.21 Market leadership

The SKY TV is based in New Zealand and has been provided TV services to New Zealanders since 1987. And Over 48% of New Zealand homes enjoy the best of TV on SKY every day, which indicates longer product life and more customer loyalty due to customers’ self-interest (Samuel, 2016). Besides, new customers may prefer purchase services from them for less perceived risks.

2.22 Unique contents:

SKY TV have made huge efforts in recent years in order to increase the range and quality of the programs they put on screen, right across their channel portfolio (SKY, 2015). Good quality of TV’s programming can help SKY TV to attract and retain subscribers.

2.3 Weakness

Without a meaningful broadband or phone service offered through a tie-up with Vodafone, Sky TV is in a "strategically weak position" to attract and retain customers (Samuel, 2016). Therefore, as a stand along pay-television operator, SKY TV is not attractive over the longer term because there is an increasing demand of broadband.

2.4 Opportunity:

2.41 Growth demand:

The New Zealand Government has implemented policies and invested capital to provide improved broadband access for households and business, thus there is an increasing popularity of high speed broad band internet, which requires an innovation for SKY TV to supply their series of contents through the method (Samuel, 2016).

2.42 New acquisition:

 For Vodafone, the country's largest mobile phone provider and second-largest broadband service, the merge gives it access to content to feed through its channel. Thus, the Combined Group will improve its competitive position in the telecommunication market because they have the largest set of pay television and telecommunications customers in New Zealand, with the opportunity to deliver a suite of products and services to those customers that will be differentiated from those provided by its competitors (Samuel, 2016).

2.5 Threat:

2.51 Increasing cost

With growing competition for content, the programming costs continues to increase in recent year in order to retain and attract subscribers. The programming expenses are the single largest expense of the business, representing approximately 54% of SKY TV’s total operating costs     (SKY, 2015). Despite the good quality of contents, some consumers prefer lower price from other competitors.

2.52 Subscribers loss:

Due to an increasing popularity of high speed broad band internet and the entry into the New Zealand market of Netflix in March 2015, there is a decrease in subscriber numbers and pressure on subscriber pricing because the fierce competition from Netflix and other video providers (SKY, 2015). As a result, the effect of the loss of subscribers affected the financial performance and will be discussed next.

3. Financial analysis

3.1 Financial statements:

In reviewing SKY’s TV historical financial performance, the total revenue increases steadily from $769.5 million in 2011 to $927.5 million in 2015 while the total revenue growth rate declined from 7.4% in 2011 to 2.0% in 2015 (Samuel, 2016), the main reason is the slowing subscriber growth and increasing programming costs. Compared with 2014, the earning before tax and depreciation (EBITDA) just slightly increased by $0.8m in 2015 (Samuel, 2016). Thus, based on the historical data and financial trends, the SKY TV is forecasting a decline in EBITDA, one reason is the subscription revenue is projected to be significantly down because of expected reduction in the number of subscribers(Samuel, 2016). Another is the programming costs are expected to increase sharply due to fierce competition globally for content (Samuel, 2016).

3.2 Ratio analysis

3.21 Solvency;

Current ratio defined as total current assets divided by current liabilities, which reflects short-term liquidity (Fridson & Alvarez, 2011). For example, how much current liability can be covered by its current assets within one year. According to the data extracted from annual reports form SKY, the current ratio decreased from 74% in 2013 to 66% in 2014 (SKY, 2014), and then increased to 93% in 2015 (SKY 2015).The increased current ratio during 2015 suggests improved liquidity of the company or a more conservative approach to working capital management (Fridson & Alvarez, 2011). However, the ration of 2015 is lower than industry norms 1.69 may be a risky strategy that could entail liquidity problems for the company (REUTERS, 2015).

In long term, Debt to equity is used to measure the extent to which a company is using its debt financing capacity (Fridson & Alvarez, 2011). According to calculation, the ratio decreased steadily from 61% in 2013 to 45% in 2015 (SKY 2015), which indicates that a company has less risk in defaulting on the repayment of its liabilities, which gives more confidence to investors and lenders for considering the security of their investment or loan.

3.22 Profitability:

Return on shareholder’s equity equals operating profits divided by total assets, which measures how efficiently a firm can use the money from shareholders to generate profits and grow the company (Fridson & Alvarez, 2011). As calculated, compared to ROE in year 2013 (SKY 2013), it increased to 13% in 2014 (SKY 2014) and then slightly decreased by 0.2% in 2015 (SKY 2015), which indicates that based on the money invested by investors, the company can earning more in 2014 but no growth in 2015, mainly due to the decreasing numbers of subscribers.

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