British Sky Broadcasting Group Plc Annual Report and Accounts 2003 a Year of Positives Annual Report
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British Sky Broadcasting Group plc Annual Report and Accounts 2003 A year of positives Annual Report 01 Chairman’s Statement 02 A Year of Positives 04 Operating and Financial Review Programming 14 News 15 Sports 16 Entertainment 18 Movies 20 Digital Channel line-up Financial Statements 22 Directors’ Biographies 23 Directors’ Report 24 Corporate Governance 26 Report on Directors’ Remuneration 31 Directors’ Responsibilities Auditors’ Report 32 Consolidated Profit and Loss Account and Consolidated Statement of Total Recognised Gains and Losses 33 Consolidated Balance Sheet 34 Company Balance Sheet 35 Consolidated Cash Flow Statement 36 Notes to Financial Statements 61 Five Year Summary 62 Shareholders’ Service 63 Corporate Shareholder Information Chairman’s Statement Rupert Murdoch, Chairman + A year of positives Sky’s excellent financial results for the year clearly demonstrate that we are starting to realise the benefit of our significant investment in digital television in Britain. Indeed throughout the last five years, Sky has always been the driving force behind making the UK the world leader in digital television, and I fully expect Sky to build on its market leadership to deliver increased financial and operational strength over the next year. The winning formula of offering an unrivalled entertainment product combined with excellent customer service has helped Sky to win many new customers and maintain world-class levels of customer loyalty. As a result, by the end of June 2003, Sky digital had reached over 6.8 million subscribers and succeeded in consistently outperforming its operational targets. With the Company poised to sign up its seven millionth customer later this calendar year, the focus is now on returning to, and exceeding, the levels of profitability previously achieved in analogue. Sky’s channels continue to grow in both their reach and popularity. Real progress has been made this year towards achieving our ambition of Sky in every home. Three of our Sky channels are now broadcast free-to-air via the digital terrestrial network that will, in due course, replace analogue broadcasting, thus completing the revolution in UK broadcasting started by Sky digital. Sky recognises its responsibilities as a broadcaster and as one of the largest British companies. Our commitment to the community is expressed through a host of initiatives, which are particularly focused on encouraging young people to reach their full potential. There have been a number of changes to the Board during the year. I would particularly like to thank Leslie Hinton and Martin Pompadur, who left the board in February 2003, for their contribution to Sky’s development over many years. The new non-executive Directors who joined the board during the year were Chase Carey, James Murdoch, Jacques Nasser, Gail Rebuck, and Lord Wilson of Dinton. Finally, I would like to thank Sky’s staff for their continued support. It is their dedication to serving the needs of our customers that has ensured Sky’s continuing success. 11 August 2003 This year’s positives + We continued to experience strong growth in DTH subscribers, adding 744,000 subscribers during the year + Customer loyalty has remained very strong, with churn below 10% for the year + For the first time, Sky has distributed its channels on free-to-air terrestrial television, with the launch of three channels on Freeview + Revenues increased 15% to £3,186 million + Operating profit before goodwill and exceptional items increased by 94% to £371 million + Profit before tax, goodwill and exceptional items of £260 million Operating and Financial Review Sky delivered strong growth in profitability in the year to June 2003, building on the excellent operational performance of the business. Sky is now looking forward to delivering increasing financial returns on the considerable investment it has made in digital television. Tony Ball Chief Executive Martin Stewart Chief Financial Officer The business, its objectives and its strategy British Sky Broadcasting Group plc and its Consistent reductions in SAC means that it DTH subscribers (million) subsidiaries (“Sky”, the “Group”) operate the has become increasingly profitable for Sky to leading pay TV broadcasting service in the acquire new subscribers. Reductions in SAC United Kingdom (“UK”) and the Republic of have principally been driven by the combination of 01 5.5 Ireland (“Ireland”), deriving revenues from lower costs of set-top boxes and other installation- 02 6.1 television broadcasting services and certain related hardware, together with increases in the 03 +++++++++++++++++++++++++++++++ 6.8 ancillary functions which are provided to both contribution made by the customer towards the retail and wholesale customers. installation cost, particularly for those customers on lower-tier packages. There has also been a Sky is an established and widely recognised brand, favourable impact on the costs of marketing for DTH revenue (£ million) with a reputation for quality and innovation. Sky acquisition purposes due to a change in the mix operates and distributes 26 wholly-owned channels of customer acquisition routes towards lower-cost (“Sky’s Channels”) and retails a further 96 third party direct sales. 01 1,537 channels to direct-to-home (“DTH”) viewers via its 02 1,929 digital service. In addition to this, Sky operates +Growing the popularity of Sky’s channels 03 ++++++++++++++++++++++++++++ 2,341 the Sky Box Office service (“SBO”), which provides Sky’s Channels generate significant advertising pay-per-view services covering films, sporting revenues for the Group and contribute to the events and concerts. appeal of the Sky digital platform. Sky One remains the UK’s most watched non-terrestrial Operating margin (before goodwill and Sky’s main objective is to build upon its position channel; together with Sky One Mix, which was exceptional items) as the leading provider of multichannel television launched in December 2002, it had an average services in the UK and Ireland in order to deliver multichannel viewing share of 3.5% for the financial long-term growth in shareholder value. Sky has year. Sky News has a reputation for impartial, 01 6.9% established a series of key operational and financial authoritative and up to the minute coverage of 02 6.9% targets, which ensure focus on certain priorities that breaking news. During 2003, Sky launched three 03 ++++++++++++++++++++++++++++ 11.6% will drive the business to achieve its main objective. new music channels, featuring an innovative These are as follows: interactive scheduling system. As the universe of multichannel homes has grown, Sky’s Channels + Continued expansion of the total DTH have been able to grow their share of the UK subscriber base advertising market and Sky currently expects Sky seeks to achieve this expansion in two this trend to continue. main ways; firstly, through the acquisition of new DTH subscribers and secondly, through the + Quality programming maintenance of a low churn rate. Sky’s current Investment in attractive programming is a key target is to reach 7 million subscribers by the end factor in generating the subscription revenues that of calendar 2003. Maintaining a low churn rate make up 80% (2002: 80%) of Sky’s total revenue. is currently a key component of maximising the Sky’s strategy is to acquire exclusive pay TV rights return Sky makes on its investment in customer for films, live sporting events and for other general acquisition. entertainment programming. At the same time, Sky’s priority is to control the costs of all of these Sky’s customer relationship management (“CRM”) types of programming in order to help deliver centres, principally based in Scotland, play a key improved operating margins. role in addressing this priority. The CRM centres deal with the handling of orders from subscribers, + Innovation in products and services, and the establishment and maintenance of subscriber investment in the future accounts, the invoicing and collection of revenue Sky has a strong track record of innovation, and telemarketing and customer services. These operating in a highly competitive environment, activities, together with a high level of customer which is reliant on technology that is subject to service and familiarity with customer needs, allow rapid change and development. Sky therefore the centres to play a key role, both in customer seeks to invest and adapt in order to remain acquisition and customer retention. competitive and keeps under review emerging 12.2m technologies for the distribution of entertainment + Maintenance of subscriber quality content or for the provision of new services to The record number Sky evaluates the financial return on its subscribers Sky’s subscriber base. of households in by, amongst other things, measuring Average Revenue per User (“ARPU”) and Subscriber Sky has successfully introduced new products the UK and Ireland Acquisition Cost (“SAC”). Sky’s current strategy and services such as Sky+, Sky Talk and the receiving one or more is to increase the revenues earned from its Extra Digibox and these continue to increase subscribers to achieve its ARPU target of £400 in popularity. Sky’s DTH customers also have of Sky’s channels by the end of the calendar year 2005. Growth access to Sky’s digital interactive services, in ARPU is expected to be derived from a Sky Active, and a range of other digital interactive combination of growth in revenues from core services, accessible either through stand-alone subscription products, new services such