MARKET COMMENT
Television To Watch This Christmas

By Maynard Paton (TMFMayn)
December 19, 2002

Stock market connoisseurs should have a look at British Sky Broadcasting (LSE: BSY) over the festive holidays. Not just to avoid the Bargain Hunt and You've Been Framed Christmas specials, but in the hope of making some long-term money.

Earlier this week, the Office of Fair Trading effectively commended Sky to buy-and-hold investors. Following a three-year investigation into Sky's business practices, the OFT concluded the broadcaster had not breached various competition laws. The watchdog also found Sky was "dominant in markets for the wholesale supply of pay channels with certain premium sports and film content". With a green light from the OFT, Sky's governing position in the pay-TV market spells further bad news for its rivals, notably failed cable companies Telewest (LSE: TWT) and NTL.

Indeed, the OFT decision comes at a time when Sky's longer-term business plan is beginning to bear fruit. The costs involved in switching to a digital platform have now been expensed and the company's latest quarterly figures showed a return to operating profitability. With the competition struggling (or bankrupt, in the case of ITV Digital), Sky should also be able to keep a lid on costs. Certainly those rather large cheques to acquire football television rights may be a thing of the past.

During September, Sky's 6.3m direct-to-home subscribers were each paying an average of £348 a year. Various growth assumptions give cause for brokers to pencil in earnings per share of around 18.5p for 2004, putting the shares (at 651p) on a somewhat racy price to earnings ratio of 35. While the company's long-term competitive advantage looks rock solid, rosy subscriber projections are required to rate the shares 'good value' at the moment. Sky may have won the battle with the OFT, but encouraging fans of free-to-air telly to subscribe could still be the broadcaster's greatest challenge.