The Sky Network Television Ltd (ASX: SKT) share price has dropped 15.6% to $4.28 in midday trading, after the New Zealand pay TV operator forecast it would lose 45,000 residential pay TV subscribers by the end of June 2016.
Implications
That's a big problem for Sky and the company has acknowledged that while it won't have an immediate impact on the 2016 financial year (FY16) results, it will 'adversely impact FY17 earnings' compared to current analyst consensus estimates.
While the loss of those subscribers will be partially offset by a 25,000 increase in other subscribers, including to its Neon subscription video on demand (SVOD) and Fan Pass services (streaming sports channels), the residential pay TV subscribers generally pay much more for their subscriptions.
Sky's Basic package (not including movies or sport) costs NZ$49.22 per month, with Movies and Sports addons respectively costing NZ$20.93 and NZ$28.29 per month extra.
Neon, by comparison, charges NZ$20 per month, while Fan Pass costs NZ$14.99 per day, with no long term contracts.
It clearly shows the impact that the king of SVOD, Netflix, is having on pay-TV operators and commercial television networks around the world and it's not good news for them.
When pay TV companies want to charge 3, 4 or 5 times the subscription price for their basic service than for Netflix – which charges $8.99 a month for one device – and then around $20 for access to their movie channels, it's easy to see why subscribers are dropping off.
What about the future?
Sky says it doesn't expect the rate of subscriber loss to continue in FY17, with churn already reducing and the positive impact of subscriber numbers from upcoming major sporting events including the Rio Olympics and the Lions Rugby tour in 2017.
Implications for Australia
The loss of subscribers has negative implications for Foxtel in Australia. The Pay TV operator is jointly owned by Telstra Corporation Ltd (ASX: TLS) and News Corp (ASX: NWS), but likely faces the same issues as Sky does in NZ given it has similar pricing problems – despite slashing the pricing of its packages.
Foolish takeaway
Sky says it still expects to meet the low range of guidance reaffirmed in February 2016, but FY17 could be one to forget for the company and its shareholders.
