Broadband costs dent BSkyB

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British Sky Broadcasting on Wednesday reported interim profits down by nearly 9 per cent – better than analysts had been expecting – as it absorbed the costs of setting up its broadband service.

Pre-tax profits dropped by 8.7 per cent at £356m, while revenues increased by 10 per cent to £2.22bn.

BSkyB said year-on year profit growth in the first half had been affected by a substantially weaker TV advertising sector, continued decline in cable wholesale revenue and high levels of new customers and upgrades, which led to higher short-term costs.

James Murdoch, chief executive, said: “In 2007, we will continue to drive towards our goal of being the leader in entertainment and communications in the UK and Ireland. We’re on track for our targets and our expansion into broadband and telephony positions us well to take advantage of a growing opportunity in a £20bn industry.”

Mr Murdoch added that the expansion into the UK broadband and telephony sectors had got off to a good start, saying it had signed up 259,000 broadband customers by January 28. High definition television subscribers nearly doubled in the second quarter to 184,000.

The number of broadband subscribers opting for paid-for services had exceeded expectations, with 70 per cent opting for the paid-for products. Mr Murdoch added that 20 per cent of its broadband customers were new to Sky.

But the underlying subscriber “churn” rate - which measures the rate at which subscribers leave - rose quarter on quarter to 11.9 per cent, with the number of customers leaving Sky’s platform during the quarter reaching 27,000. Mr Murdoch said that the company faced “a few quarters of adjustment” as it reduced package discounts. He added that the underlying rate was 10.6 per cent and that he “didn’t see any reason” why the company could not get this rate down to 10 per cent.

Simon Wallis of Collins Stewart said: “The Christmas period should actually be a seasonally low period for churn and with Sky’s subscriber base reaching 8.4m it is an increasingly critical variable to Sky’s valuation. Shareholders had better hope this increase in churn is temporary. ”

Operating costs excluding programming were up 36 per cent at £1.08bn. Marketing costs rose by £43m to £375m, while subscriber management costs rose by £94m, or £66m on a like-for-like basis, to £313m. Other operating expenses rose by £148m to £389m, which included £124m of Sky Broadband and Easynet Enterprise costs.

Operating profit dipped 4.6 per cent to £395m. Earnings per share for the six months ended December 31 were 14p compared with 14.9p last time.

The interim dividend increased by 20 per cent to 6.6p per share. BSkyB shares dipped 5½p to 539½p in early London trading.

MPs are ratcheting up the pressure on the government to intervene over BSkyB’s recent move to take a stake in commercial broadcaster ITV. An announcement by Alistair Darling, trade and industry secretary, on whether the government will exercise its power to overrule regulators on the deal – originally expected last week – will not now be made before next week, officials said.

BSkyB took a 17.9 per cent stake in ITV last November, thwarting a bid from NTL Telewest.

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