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The gray clouds part for pay-TV provider Sky Deutschland

After years of negative headlines, pay TV provider Sky Deutschland has reported some good news – its third-quarter losses narrowed and its subscriber base grew. But profitability is still a distant goal.

TV sets

Sky Deutschland had strong third-quarter customer growth

Sky Deutschland, the loss-making Germany pay-TV provider, saw its sagging fortunes take a turn in the third quarter of this year as new products and platforms stabilized the customer base and began attracting new subscribers. While the company still lost 89 million euros ($123 million), the results were a great improvement over the same period in 2009, when the company lost 117 million euros.

The better-than-expected results sent the company's stock up. On Thursday, it jumped more than 10 percent to 1.25 euros. On Friday, it climbed to 1.26 euros before settling down to 1.24 by the afternoon.

Quarterly sales were 243.2 million euros, above the average forecast of 237 million euros.

In addition, the company added 45,000 subscribers to its service in the third quarter, compared to 7,000 added during the entire first half of this year.

"We have more planned in the run-up to the key Christmas trading season and expect net subscriber additions well ahead of the third quarter 2010," Brian Sullivan, the company's third CEO in four years, said in a conference call with reporters.

He has reason for optimism, analysts say, although many caution that the latest good news does not mean the long-struggling company has left its difficulties behind.

Test pattern on TV

Sky Deutschland's financial picture has been anything but impressive up to now

Strategic moves

But, media watchers say, Sky Deutschland has made some strategic moves that have increased its attractiveness to customers. It launched Germany and Austria's first 3D channel and has been a market leader in high-definition (HD) content, which has proven popular with customers.

In May, it began offering a Sky Sport app for Apple's iPad, providng video on demand. The app has been downloaded more than 60,000 times. The company plans to offer HD content on the iPad in the near future.

"This combination has been relatively well accepted by the market," Dirk Voigtlaender, an analyst who follows Sky Deutschland for Commerzbank, told Deutsche Welle.

"But the subscriber base still needs to be expanded further in order to put the company in the profit zone."

Sky Deutschland has said it needs about 3 million subscribers to make a profit. At present, the company has 2.52 million, each of whom pay about 29.45 euros per month.

The company has begun work on other technological fronts that make it easier for consumers to see Sky Deutschland content.

The pay-TV provider announced that it will introduce a CI Plus module before Christmas. When inserted into a compatible TV set, the module allows a user to subscribe and watch the service without a set-top box. The company also reached an agreement with Kabel Deutschland, Germany's largest cable TV provider, for Sky's programming to be accessible via its CI Plus device.

"Sky Deutschland has modernized and made the service easier to access," media analyst Werner Lauff told Deutsche Welle. "Those are two things the company has gotten right, so I'm not surprised their numbers were good."

Turnaround?

But whether the good quarterly results signal a real turnaround in the long-term fortunes of the company is hard to say, analysts say.

Pay TV has had a hard time in Germany. While it has Europe's largest TV market, there are only about 4 million pay-TV subscribers in the country. In the UK, by comparison, pay-TV provider BSkyB announced this week it had reached its long-held target of 10 million customers.

woman in front of TV

Many Germans think they've got enough free TV, why pay for it?

Since Germans already pay TV license fees every month, it has been difficult to persuade them to shell out more money for paid programming. Many feel their 35 free-to-air channels are sufficient.

"Germany has a long tradition of having a very broad spectrum of free television channels," Jo Groebel, media analyst and director of the German Digital Institute, told Deutsche Welle.

"When it comes to TV, Germans almost regard it as a natural right to have free content," he said.

While British and French users were long limited to four or five free channels, Germans have long had many more to choose from.

"Pay TV in the UK was seen as a salvation from boredom," said analyst Lauff. "Here, we have always had a diversity of programming so Sky Deutschland doesn't play that role."

Nevertheless, he thinks there is still an untapped market for pay TV in Germany, if viewers can be convinced they receive something from pay TV that they don't get from the free-to-air channels.

Lauff says Sky Deutschland has begun to show them that with its HD and iPad offerings. Currently, football fans have to subscribe to Sky Deutschland if they want to see Bundesliga games live.

Challenges

Nevertheless, the company is still faced with challenges. In August, it scrapped its goal to become profitable by 2011 and is facing growing competition from telecoms giant Deutsche Telekom, which has launched its own foray into pay TV.

"We're in a time when many things in the industry are changing, especially from a technical point of view," Lauff said. "So it's hard to estimate exactly how things will go for the company."

But, he added, the company is staying up with those technical developments with its iPod application, and continued to offer attractive content with a service that is easy to access.

"So I'm optimistic they'll be around for a while," Lauff said.

Author: Kyle James
Editor: John Blau

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