Forget the politics, BSkyB is doing fine - but for how long?

BSkyB's largest shareholder may be caught up in a legal and political scandal but don't let that confuse you.

While most of us will have a view on Sky and News Corporation, it is by no means certain that the regulator, Ofcom, will take away BSkyB's broadcasting licence.

What is perhaps more likely is that ownership of BSkyB may change. However, the underlying assets will not. And if you are an investor, this is the most important point.

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So how is BSkyB performing? This week's results suggest it is holding its own. Trouble is, we're not sure how long it can sustain that for. Here's why.

BSkyB is confounding the sceptics

So far, Sky has proven the sceptics wrong. Many commentators including me thought the recessionary squeeze on household incomes would see hard-pressed consumers cancel their Sky subscriptions in droves.

We've since learned that pay TV is something the very few people want to give up. In fact, Sky has been able to sell more products to its customers.

The latest results bear this out. Operating profits for the last nine months grew by 15% to £908m. Underlying earnings per share rose by 24%. That's a pretty decent performance.

Perhaps it makes sense. Yes, a full Sky subscription, including the sports and film channels might cost you upwards of £60 a month. But if you compare it to the cost of going to the cinema regularly (let alone live sporting events) then it looks like very good value.

But where does Sky go from here? Competition in pay TV looks set to increase. It's hard to believe that it will be as easy to make money in the future as it has been in the past.

Working hard to keep customers

Here's an example from my own experience: in the days before there was decent Freeview service where I live, Sky TV was the only way to watch digital TV. I also quite liked watching Premier League football. That option costs £40 per month.

But now the competition has increased. I can watch catch-up TV and Premier League football with BT Vision for £22 a month. It's not got the bells and whistles of the Sky package, but it's a decent saving in these tough times.

Companies such as BT will also soon be able to offer live TV channels (known as linear TV) over its broadband network, increasing customer choice.

So Sky is going to have to work harder to hang on to customers. And this is showing in the latest results.

BSkyB subscriber numbers

Sky has 10.26 million pay-TV customers but growth is slowing fast only 15,000 new subscribers joined during the last three months. It is having to offer them more products such as video on demand (Sky Anytime +) and Sky Go (mobile TV) to keep them happy. It is also freezing prices.

Of course the company isn't resting on its laurels. It will launch an internet TV service later this year, which looks like a good defensive move.

And it is also taking the fight to rivals such as BT. One area where Sky is really growing strongly, is in broadband and phone services. Nearly one third of its customers now take TV, phone and broadband services.

This is a great way of keeping customers and earning more money from them, and it means that Sky still has nearly 7 million of its own customers to switch over. This should worry other broadband providers (Talk Talk springs to mind here) and will put pressure on BT to improve its TV offer.

Should you buy the shares?

So Sky is still a good business. And on the face of things, the shares look reasonable value. They trade on 12.8 times June 2013 earnings and offer a dividend yield of 4%. The business is also generating lots of surplus cash flow and is paying down debt quickly.

But I wouldn't buy the shares. The competitive landscape is changing too quickly. The growth of the internet as a broadcasting medium is bringing more and more players into the market, and potentially changes the economics of the business. Apple with its $100bn cash pile is increasingly seen as a potential buyer of broadcasting rights for example.

Sky has been very successful in the past at seeing off rivals, but the risk of losing key film and sporting rights (especially Premier League football) is rising. The damage that this could inflict on Sky's business model is too big a risk to take, despite its excellent track record.

Even if Sky does succeed in keeping key broadcasting rights, an increase in the number of bidders means they are likely to rise in price. Whether it could keep passing these increased costs onto customers is another matter.

Of course, writing off Sky has been the wrong thing to do for the last decade. They could prove doubters like me wrong again. But I'll sleep more easily without the stock in my portfolio.