SKY Broadcasting – don’t the city understand?

You know, the direct marketing business is very simple and you don’t have to be that talented to be reasonably successful at it. Which is why I’m so surprised that most city investment analysts seem not to understand it at all. But perhaps I shouldn’t be surprised and they are just thick. Look at this. A few days ago Sky Broadcasting announced their latest figures, their subscriber numbers had increased by a net 192,000 for the quarter. The analysts looked at this and the share price went up. Then they got beyond the headline numbers and looked at how much money was being spent on recruiting new subscribers, an increase of £43 million driven by “higher acquisition and retention costs, reflecting increased direct marketing and installation offers across all product categories,” and the share price went down. Did the analysts think Sky could get new subs for free?

Now if an analyst had spent a week with a direct marketing agency or, better still, a good old-fashioned mail order company or a mobile phone operator, they might have understood the Sky figures better. Mind you, perhaps the thicker ones might have needed to spend a little longer understanding the dynamics. All they need to understand is recruitment numbers and costs, churn and annual average revenue per customer. Sky tell us that their churn was just 9.5% (amazingly low) and annual average revenue per customer £386. That was £17 up on twelve months ago and you don’t have to be a genius to work out that if you’ve got 7.6 million customers and you can squeeze an extra 17 quid out of each of them, then you’re doing quite well!

What the analysts would also have understood after a week with a mail order company, is that eventually, all the low-cost customer recruitment methods get worn out and that you can’t rely on Member Get Member promotions and discount offers to get new customers. So if you’ve already got 7.6 million customers that’s going to be tough. They would also understand that eventually you need to start recruiting a different type of customer because you’ve saturated your existing market place. This costs money and it seems to me that Sky have been spending £43 million very wisely to achieve this. What they have also done very well is gently reposition their brand with their new target audience so that they don’t just come across as a sport and movie provider.

If there is any good to come out of this, I suppose it is that a direct marketing expert and even quite a few of the inperts, could make a few bob out of investing in Sky. What’s more, if I were running the Institute of Direct Marketing, I would seriously think about running a dm basics course for city analysts so that they could understand the business.