British Sky Broadcasting Group plc Annual Report 2001 Digital delivered Digital Delivered 08 Chairman’s Statement 10 Chief Executive’s Statement 14 Operating and Financial Review 18 Acquiring and Keeping Customers 20 Winning Hearts and Minds 22 Innovations that Add Value to Life 24 Creating a Personal Rapport Operational Review 26 Subscriber Growth 27 Programming Overview 28 Sky One 30 Sky News 32 Sky Sports 36 Sky Movies and Sky Box Office 38 Digital Channel Line-up 40 Sky Ventures 42 Advertising 44 Accounts Digital Inventive. Creative. Entertaining. Challenging. By focusing on these core values, Sky has delivered its digital promise. Substantial investment has made this promise a reality for millions of people across the country. Delivering to 5.5 million DTH customers By enhancing the richness and diversity of programmes and services on our digital platform, we will continue to increase our Direct-To-Home (“DTH”) customer base. We aim to have 7 million customers by the end of 2003. And we are focused on keeping them. More customers Delivering a 90% loyalty rating Our churn rate – currently around 10% – is the lowest in the broadcasting industry. It means that around 90% of customers who join Sky choose to stay with us. We will build on their loyalty by delivering more compelling programmes, more inspired services and enhanced customer care. Increased customer loyalty Delivering an average revenue per customer of £313 Compelling programmes. Inspiring services. Professional customer care. These factors already persuade our customers to spend a quarterly annualised average of £313 with us. By the end of 2005, we anticipate that this figure will reach £400. Higher customer revenues are the key to transforming our digital promise into a profitable business. Promises delivered 08 Chairman’s Statement British Sky Broadcasting Group plc At the end of 2000/01, British Sky Broadcasting’s Chairman’s Statement Digital vision innovation and creativity have ensured that the Group remains at the forefront of the UK’s digital revolution. Rupert Murdoch, Chairman Our digital vision is shared by many more customers than at any time in the Group’s history. In 2000/01, Sky increased its total number of Direct-To-Home customers by almost one million. Allied to this sustained strong growth, market- leading rates of customer retention are providing a compelling endorsement of Sky’s constant innovation in programming and its commitment to the highest standards of service. With more than 200 channels and a unique array of interactive services, Sky digital puts one in four UK viewers in control of how they watch news, sport, movies and entertainment. In the past year, independent service providers, including the BBC and Channel Four, joined BSkyB in embracing digital satellite as the distribution platform for interactive enhancements to their own programming. Record levels of multi- channel viewing demonstrated continuing consumer demand for increased choice. The achievements of the past year are all the more remarkable given the ever-stronger competition faced by Sky’s content and distribution businesses. Sky’s continued leadership in Europe’s most competitive digital television market is testament to the energy and commitment of all of its staff. As BSkyB reaches yet another milestone with the closure of its analogue service, I am confident that we will again meet the challenges of driving the UK’s switch to digital broadcasting and create lasting value for shareholders. Finally, on a personal note, the Board extends their thanks to Morton Topfer – who stepped down as a director on 30 April 2001 – for his valued contribution since his appointment in 1999. 09 Chairman’s Statement British Sky Broadcasting Group plc 10 Chief Executive’s Statement British Sky Broadcasting Group plc This has been a year of delivery: delivering digital Chief Executive’s Statement Digital delivered to more customers who stay loyal and keep spending with Sky. With this we have built strong foundations for a thriving future. Tony Ball, Chief Executive Sky made significant progress this year in continuing to drive the roll-out of digital. After three years of investment, we are now starting to harvest the returns. Operating profit before goodwill and exceptionals rose by 88% during the year to £160 million. This performance was underpinned by strong subscriber growth, increasing average revenue per subscriber and low churn. In addition we added substantially to our portfolio of attractive content. Overall, we are well placed to deliver strong revenue growth and increasing profitability over the coming years. Subscriber growth Subscriber growth remained healthy over the year, with a similar rate of growth as the digital roll-out entered its third year. Including cable, Digital Terrestrial Television (“DTT”) and subscribers in the Republic of Ireland, there are now 10 million homes with access to Sky’s channels, an increase of 1 million over the year. The number of Direct-To-Home (“DTH”) subscribers rose to 5.5 million – 5.3 million of whom were digital subscribers. This represents a rise of 1.7 million digital subscribers in 2000/01. Subscriber growth was such that we were able to reach our target of 5 million DTH subscribers by the end of December 2000 with six weeks to spare. We remain committed to the target of 7 million DTH subscribers by the end of 2003. 11 Chief Executive’s Statement British Sky Broadcasting Group plc 12 Chief Executive’s Statement British Sky Broadcasting Group plc Chief Executive’s Statement continued 01 Sky News’ coverage of the 01 June General Election drew We were particularly pleased that around 20% record audiences in the face of fierce competition. of our new customers cited recommendations 02 The high-profile launch of from friends as the reason for their decision to Sky+ demonstrated Sky’s uncompromising commitment take our product. Thus we are benefiting from to expanding its offering. 03 In August 2001, Sky Sports a real network effect. will begin a deal that will extend its live coverage of the F.A. Premier League for a further three years. In addition, it is clear that we are attracting a disproportionate number of higher income 02 customers, which is encouraging as we begin to market premium services such as the Sky+ integrated personal television recorder (“PTR”) and service. Average revenue per customer Increasing the income we can generate from our 03 customers is crucial to our continued success. Here again, the evidence is encouraging: 58% of customers take the top tier package, including premium movies and sports channels, and we are providing additional revenue generating services such as pay-per-view and interactive services. The quarterly annualised average revenue per DTH subscriber (“ARPU”) rose to £313. This comprises £302 of core ARPU – compared to £281 last year – and £11 from interactive services, included this year for the first time. We remain committed to our target ARPU of £400 by the end of 2005 and we are about 22% of the way to our target of around £50 from interactive features. Already we have raised revenue from interactive gaming, quizzes and voting, we will be rolling out these and other interactive features to more channels in the coming years. Churn 04 During the year, Sky won a 04 DTI/Quality Foundation Business The churn rate is a crucial indicator of the success Impact award for its community initiative, Reach for the Sky. of our product and a major profit driver. This year 05 Eminently approachable and churn fell to a new record low of around 10%, down-to-earth, Bob the Installer converted many new customers to despite our first price rise in nearly three years. Sky by communicating its digital vision clearly, concisely and No other pay television company in the world convincingly. has managed to get churn down to this level. 13 Chief Executive’s Statement British Sky Broadcasting Group plc Growth in digital subscribers Total number in millions of digital We place great emphasis on subscriber service subscribers by quarter to June 2001 in order to maintain this level of customer Q1 4.1 satisfaction. We have invested heavily in state- Q2 4.7 Q3 5.1 of-the-art customer relationship management Q4 5.3 technology at our call centres in Scotland, and we are starting to allow our customers to access their bills on screen through Sky digital. Keeping churn low will continue to be a major priority going forward. Content Our success in delivering subscriber growth, higher ARPU and low churn would not be possible without our commitment to compelling content. Overall, the viewing share of Sky channels grew to 5.76% across all UK television homes, compared to 5.28% last year. Sky One remains the leading cable and satellite channel in multi-channel homes, and we have invested in original programming in order to deliver to our target audiences. Sky News continues to be the highest rating 24-hour news channel and regularly outperforms its publicly funded competition. Sky Movies has continued to increase its share of viewing, and its 12 screens are a major driver of digital take-up. Sky Sports has an unrivalled line-up of live sports, with extended contracts to show high quality football, golf, cricket and rugby. Conclusion This has been an exciting year. We met aggressive targets on growth and are on track to meet new demanding targets on subscriber levels and ARPU, while keeping churn low. The rewards of our considerable investment are now starting to come through into strong and accelerating operating profit growth. We are continuing to develop new interactive services to enhance our product and increase our revenues. We have delivered on our promises and now confidently face the challenge of continued delivery.