Ann: Sky Investor Day presentation - 29 June 2021, page-32

Some thoughts I shared on ST regarding what I perceive to be a misunderstanding of Sky's programming costs, republished here.

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I think part of the issue we have for Sky (in terms of SP) is this false narrative that Sky are faced with ever increasing programming costs.

The 'analysts' have drawn the conclusion that because there is more competition in the market, and the cost of individual rights have gone up in many cases that therefore the total spend on programming for Sky will have to go up by x% a year ad infinutum.

That is just not true at all. Each year Sky set a budget on how much programming costs will be. We had a lot of savings due to Covid recently, so the HY1 results had artificially low programming rights. From HY2 those costs will increase to normalised amounts.

Sky have a budget for a given year of around $350M max I believe on rights. Managements job is to secure as much premium entertainment and sport content that they can for that money. Once it is spent, no more content can be acquired.

As the cost of rights increase (from competitive forces) what happens is that Sky has to be more picky on what they acquire, keep and let go. So long as they can keep the most compelling content to ensure their bundles are attractive they are fine. There are hard choices they have to make, but fortunately they have a lot of viewership data to leverage in the decision making process.

We won rugby and had to pay more for that content. So something had to be let go...which turned out to be domestic cricket. But domestic cricket was less critical because we already had the international stuff.

We secured a new NRL deal, and that cost more...so to stay within budget we have had to let go of the UEFA tournament.

We are also doing co-exclusive deals where it makes sense to make savings so that we can still go after other content.

So the total amount that we are spending in content (largely dictated by projected revenue and anticipated operating costs + CAPEX needs) isn't actually changing that much. It is just that we are now unable to win everything and have to be much more deliberate in keeping the 'truly important' stuff. Having the soccer is great, but if only a small percentage of your base are staying up to watch the games then you will let it go if it means keeping the more popular NRL etc.

And this is why Sky is able to remain cashflow positive (in a big way) even though individual content contracts cost more.