BSkyB: trick or treat?

British kids keen on the Toy Story's Halloween special will be nagging mum and dad to sign up for Sky. The pay-TV provider has the rights to the series' UK premiere. This sort of exclusive helped British Sky Broadcasting's revenue grow 8 per cent from a year earlier in the quarter that ended in September. That news got investors out of their armchairs, pushing the shares up 7 per cent. The spooky thing is how much the growth is costing BSkyB: its operating profit fell 8 per cent over the period, to £285m.

The danger for all pay-TV providers is that the cost of content is rising as competition for viewers heats up. The battle with BT for the three-year Premier League football deal left BSkyB paying an extra £220m than before. Now it must compete for rights to the Uefa Champions League, the cost of which has not changed since 2008. BSkyB's outlay should be worth it if revenue per customer growth can keep pace with growth in content costs.

The broadcaster has had a good run. Now it looks to be stabilising - the average customer spent £559 in the first quarter, down £10 from the previous one. Competition requires more spending on marketing. Although BSkyB added 37,000 new pay-TV customers over the quarter, marketing costs rose at more than twice the pace of revenues. BSkyB says those costs will stabilise, as a proportion of revenue. But if rivals such as BT go on a promotional rampage to retain customers, BSkyB will be forced to respond. Churn - the rate of customers leaving BSkyB's business - has been edging up for four consecutive quarters.

BSkyB's shares have gained 140 per cent in the past five years, just behind its FTSE media peers. Its shares trade on 16 times forward earnings, in line with its five year average. But given the real prospect of a rising cost base, that valuation is more trick than treat.

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