Pay TV phase three document - Stakeholders - Ofcom

Pay TV phase three document – non-confidential version
the closing balance is too low. In addition, the shorter the period being looked at, the
greater the reliance tends to be on opening and closing asset values.
6.179 Oxera’s IRR analysis is supported by other measures of profitability, including ROCE
estimates, which also rely on estimates of the appropriate capital base. Hence
assessment of the appropriate capital base is a central part of Oxera’s work.
6.180 To determine Sky’s asset base at the beginning and end of the period (as required by
the IRR methodology), Oxera has measured off-balance sheet intangible assets by
looking at the minimum loss that a firm would suffer were it deprived of the use of
that asset. This loss is determined by looking at the options available to a business at
any point in time:
� Replace the assets – the replacement cost or cost of a modern equivalent asset
(MEA) becomes the appropriate cost.
� Sell the assets – the net realisable value (NRV) becomes the appropriate
valuation.
� Continue to use the assets – the value would be the NPV of cash flows from
continuing to use the assets.
6.181 The largest component of intangible assets not listed on the balance sheet is Sky’s
subscriber base, which can be valued in a number of different ways. Oxera’s
approach treats the subscriber base as being similar to capital expenditure, in which
Sky ‘invests’ each year in order to obtain new customers.
6.182 The subscriber base is valued on the basis of capitalised subscriber acquisition costs
(SACs), which are depreciated each year. The depreciated customer capex figure
from prior years can be valued at the end of each period based on the current
replacement cost of the remaining subscribers, which can be estimated from the
most recent SAC figures.
6.183 Other intangible items that may not be fully captured on Sky’s balance sheet include
contractual obligations related to future programming obligations, e.g. FAPL rights.
Oxera looked at the underlying terms of the rights in order to assess what value of
future contractual obligations should be capitalised.
The results of Oxera’s analysis
Sky’s asset base
6.184 As explained above, Oxera considers a number of different approaches to assess the
appropriate value of Sky’s asset base making specific allowance for intangible assets
on a replacement cost basis. Figure 58 compares these valuations with Sky’s book
value and market value for the period 1995 to 2008 443 .
Figure 58 Value of Sky’s asset base under different valuation approaches (£m)
[ � ]
6.185 The figure shows that the inclusion of intangible assets substantially raises the value
of Sky’s asset base relative to book value. However, as Oxera notes, it also
443 See Annex 9, Figure 4.1.
215