Beyond Television Sky Deutschland AG Annual Report 2010

Transcription

1 Beyond Television Sky Deutschland AG Annual Report 2010

2 Key Figures Change (absolute) Change (in %) Subscribers Direct subscribers at beginning ( 000) 2,470 2, % Gross additions % Churn % Net growth >100% Direct subscribers at end 1) ( 000) 2,653 2, % of which Flex % HD penetration 2) (%) Subscription ARPU 3) (in, monthly) % Churn rate 4) (in %, annualised) Churn rate 5) (in %, 12 months rolling) Financials (in million) Revenues % Operating expenses 1, , % EBITDA % Depreciation and amortisation % Amortisation of subscriber base/trademark % EBIT % Financial result % Income taxes <-100.0% Result for the period % Consolidated balance sheet as of 31/12/ (in million) Total assets 1, , % Shareholders equity % Net debt % Employees as of 31/12/ Full-time employees 1,420 1, % 1) Direct subscribers comprise monthly contract subscribers (residential customers, sportsbars and hotel rooms) to at least one of Sky s channel packages and subscribers who purchased pay-per-view, and other ad hoc-services on a prepaid basis via the Flex range of products. Subscribers in the process of migration to new Sky packages are given up to ten days grace at the end of their prior contract before termination. 2) HD penetration is defined as relation of direct subscribers which have subscribed for the HD channels in relation to the total number of direct subscribers at the end of that period. 3) Subscription ARPU is defined as monthly average subscription revenues (formerly direct program revenues) for a given period divided by the average number of direct subscribers in that period. 4) The churn rate for a given period is defined as the number of direct subscribers that terminated their subscriptions during the course of a given period, divided by the average number of direct subscribers in that period (calculated by dividing the sum of the number of direct subscribers on the first day of that period and on the last day that period by two) and multiplied by four when referring to a quarterly period, by two when referring to a half-year period and by one when referring to a full-year period. 5) Is defined as the number of direct subscribers that terminated their subscriptions during the course of a 12-month period, divided by the average number of direct subscribers in that period. Explanatory notes on the key figures. The financial statements of Sky Deutschland group are drawn up on the basis of International Financial Reporting Standards (IFRS), with due regard to the interpretations of the International Financial Reporting Interpretations Commitee (IFRIC). Due to the totalling of individual items, the table may contain rounding differences. 2 Sky Deutschland AG

3 Beyond Television With Innovation and Enthusiasm for our Customers With Consistency and Dedication to our Shareholders With Team Spirit and Vision for our Targets

4 Beyond Television Sky recorded a net subscriber growth of 131,000 subscribers only in the last quarter of the year 2010 alone and now has a total of 2.653m subscribers. This means 2.653m individual programme interests Sky serves every day. And millions of reasons to offer first-class top-quality customer service to satisfy the needs of our subscribers every day. That is why the wishes and expectations of our subscribers are always at the heart of our business decisions. With our selection of programmes and packages we offer individual solutions for every customer need. Our customer service is fast, practical, and aims to serve the needs of our subscribers. We continuously develop products and services that offer impressive and unique added value for everyone of them. Our customers feel the same and use our offering and technical innovations to realise a better entertainment experience while watching TV. And that is what our offering is made for. We have portrayed some of our subscribers for this business report. We met them in private and asked them about their personal experience with Sky. They showed us what they find special and unique about our product and how we provide them special TV moments each and every day. for Customers who want more than TV

5 The right programme for everyone: Markus is using Sky Multiroom in his shared appartment and suddenly has more guests than expected. Two adults, four children a lot of different programme interests. Thanks to the Sky+ PVR none of Saoudatous family members miss their favourite programmes. Rudi experiences major sports events live even when he is away on business: He has downloaded the Sky Sport App for his ipad. For Jutta and her family, watching TV is something special. With Sky 3D, watching TV is an memorable experience for the entire family. With the Sky Sport Mobile App on the iphone, Christian is independent when it comes to where and when he is following the UEFA Champions League live on Sky.

6 6 Sky Deutschland AG

7 Content Key figures Sky world of entertainment 12 To the shareholders 28 Letter to the shareholders 28 Members of the Management Board 30 Share information 31 Sky AG combined management report 38 Business and strategy 38 Corporate functions 48 Key metrics and quarterly trends 52 Earnings, financial and net asset position 54 Opportunities and risks 58 Subsequet events 64 Outlook 64 Consolidated financial statements 74 Consolidated balance sheet 74 Consolidated statement of total comprehensive loss 75 Consolidated statement of cash flows 76 Consolidated statement of changes in equity 78 Notes for financial year General information and basis of preparation 80 Notes to the consolidated balance sheet 98 Notes to the consolidated statement of operations 118 Other explanatory comments 125 Responsibility statement 135 Auditor s report 136 Further information 142 Review and monitoring report by the Supervisory Board 142 Corporate governance at Sky Deutschland AG 150 Corporate responsibility 156 Contact information and financial calendar 158 Geschäftsbericht

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9 Thanks to Multiroom everyone in Markus K s shared appartment can see the Sky programme he or she wants to see

10 More TV Fun

11 For Markus, football is everything and it has always been this way: after attending a private football college he had a stint in professional football. For three years Markus played side by side with future first league players under 19 s team of the Bundesliga. Since then, the 31-year old has changed sides, and works as a freelance sports manager for his former team mates. He regards himself as a second Marcel Reif. The football coverage on Sky is just amazing: live, professional and always right to the point exactly what I want to see and hear. My friends too, by the way. That s why they regularly raid my flat, occupy my sofa and loot the fridge of our shared flat when important matches are on. To avoid trouble with the girls who are less crazy about football than we are, we found a solution: We have Sky in two rooms. Since I ve already been Sky customer since 2005 and my receiver and TV set arrived here even before me I immediately took the chance when we got a Multiroom-offering. Now we boys can watch football in peace while the ladies can watch their favourite films or series in the other room at the same time. But when my club has the lead the truce ends: We have to celebrate! After our triumphal entry in the female party zone the ladies send us back to the football room quite fast but no-one can avoid our house parties in the end: we can still celebrate after the final whistle. Thinking about it we have a lot more house parties since we got our Sky subscription. And I like it!

12 The World of Sky 12 Sky Deutschland AG

13 Sky subscribers want premium quality TV with programmes that are different and better than regular TV. Sky meets these demands with the highest levels of programme quality, individual offers for every kind of interest and state-of-the-art TV innovations. For a unique TV experience whenever you want and wherever you are. Discover the world of Sky. Annual Report

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15 Entertainment for everyone Sky Welt is the basic package with 25 channels covering all genres, including fascinating documentaries, children s programming, Hollywood classics, action, crime, series, soaps, music and erotic content. All in one package around the clock and without commercial interruption. Four unique HD channels are included without any additional charge. Sky Welt NEW: incl. 4 HD channels TM Satellite customers who book Sky Welt in combination with at least one other premium package will receive an additional 17 channels with film highlights, comedy, live sports, action, documentaries, children s programming, lifestyle, anime and music Disney Channel Sky Welt Extra Big photo: Boardwalk Empire on TNT Serie Small photo series (left to right): NFL on ESPN America, Morgan Freeman: Mysterien des Weltalls on Discovery Channel, Disney Micky Maus Wunderhaus on Playhouse Disney Annual Report

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17 Your own personal cinema The Film package from Sky gives subscribers the choice of around 80 films every day across all genres: blockbusters, classics, action films, drama and entertainment for the entire family all without advertising breaks. Enjoy the best picture quality and superb sound along with the option of original language on Sky Film channels Film Package Big photo: Robin Hood - Director s Cut on Sky Cinema Small photo series (left to right): Alice im Wunderland on Sky Cinema, Inception on Sky Cinema, Wolfman - Extended Version on Sky Cinema Annual Report

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19 Live sports for fans Sky broadcasts world class football including all UEFA Champions League matches, the DFB Cup, the biggest UEFA Champions League games (all German games guaranteed) as well as the top matches from the English Premier League. In addition, Sky offers all Formula One races and other motor sports, as well as major international golf tournaments, the top games from the Deutsche Eishockey Liga, tennis and wrestling. Sport Package Big photo: DEL on Sky Sport Small photo series (left to right): Premier League on Sky Sport, Golf on Sky Sport, Formel 1 on Sky Sport Annual Report

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21 Closer to the game As an official partner of the Bundesliga, Sky is closer to the action than any other broadcaster, providing live broadcasting of all Bundesliga and second division Bundesliga games, via single feed or in conference mode. In addition, fans will have access to detailed coverage presented by top football experts with exclusive interviews, background reports, professional game analyses and all the most recent Bundesliga highlights. Sky s Bundesliga programming is complimented by the exclusive shows Mein Stadion ( My Stadium ), Samstag LIVE! ( Saturday LIVE! ) and Sky90. Fußball Bundesliga Package Fußball Bundesliga on Sky Fußball Bundesliga Annual Report

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23 Seeing is believing Sky offers a stunning HD quality: HD means extremely high resolution, vibrant colours, 16:9 format and fantastic Dolby Digital 5.1 Surround Sound. German premieres of the latest blockbusters, new top series, action hits and film highlights as well as documentaries and live football, including Bundesliga, UEFA Champions League, UEFA Europa League and the DFB Cup. HD channels sporthd 1 * actionhd sporthd 2 * cinemahits HD * * Television in a new dimension: Germany s first 3D broadcaster shows select highlights from Sky s exclusive programming: From live sporting events to outstanding films, documentaries and much more all in HD 3D quality. Sky 3D NEW: Disney/Pixar Big photo: Sex and the City 2 on Sky Cinema HD Small photo series (left to right): Formel 1 on Sky Sport HD, Speed of Life Momentaufnahmen des Lebens on Discovery HD, Toy Story 3 on Disney Cinemagic HD Annual Report * Available as part of the Sky Welt package without additional costs

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25 Life for Saoudatou A. is colourful and chaotic. Sky+ offers something for every member of the family.

26 More Timeouts

27 Saoudatou was born in Togo. In her flat things often go haywire not only because of her four children who are between two and 17 years of age but also because of the many German and African friends who visit the family frequently. Then everyone dresses up and all party together. Saoudatou and her husband, warehouse clerk Aliou have made Germany their new home. They have been living and working here for 17 years, speak German, French and their mother tongue Ewe and they love Sky. They have been Sky subscribers since 1997 and love to watch kids and film programmes as well as football.. TV is very important for us. It helped us with improving our German language skills. And the children love it too, of course they like Sky in particular because they can watch all their favourite programmes there. The only difficult thing for us is to agree on a programme or to watch a movie from the beginning till the end it s almost impossible. But now we have Sky+. With Sky+ we can programme the hard disc receiver so we can record the best programme for every member of the family. And then we can watch it when we have the time. And that s exactly how we do it when the children start to fidget or we have unannounced visitors. My husband pushes the pause button and we continue when everything is calm and quiet again usually when the children are in bed and we aren t too tired. But thanks to our hard disc recorder nothing slips through our fingers as they say here.

28 To the shareholders Dear shareholders, Dear readers Customers deserve better. This was the simple principle that was set out when we re-launched as Sky Deutschland in the summer of 2009 that our customers, and in fact all people throughout Germany and Austria, deserve better television entertainment, better technology and innovation, and better service. There has long been a believed fact in the German and Austrian markets that pay TV would never work. What we found instead were viewers who were frustrated with the limited quality, choice and value in the market, and who were hungry for a better experience. At Sky we believe in championing the customer, in challenging the status quo, and never accepting that things cannot change for the better. The seeds were sown back in 2009, and much more was done in 2010 to further this objective. The introduction of our exciting new brand and the promise of quality, innovation and value that comes with it set the stage. The simplifi cation of our premium program packages, the extension of our film offering with several new channels, and most importantly, the expansion of our HD offering all contributed to a new, more positive response for our products and services. In 2010, we delivered many enhancements that brought us much closer to our ultimate goal: creating the best and most dynamic TV offering for our customers. At the front of this effort was the launch of four additional exclusive premium HD channels Sky Sport HD2, Sky Cinema Hits HD, Sky Action HD and ESPN America HD extending our position as the leading HD broadcaster in Germany and Austria. But this was only the beginning of a large-scale innovation campaign, both on screen and through our products. Brian Sullivan CEO of Sky Deutschland AG 28 Sky Deutschland AG

29 Some of the highlights included: Sky+, our first fully integrated HD PVR, giving our customers full control of their viewing experience, and ensuring they never miss their favourite programmes again. Sky Multiroom, a new offering for families who want the convenience of watching two different programs, in two different rooms, at the same time. The Sky Sport App, the first live sports streaming service in the world for the ipad, bringing all the excitement of Sky Sport to our customers wherever they choose (including the 2010 World Cup!). Our own 24-hour channel dedicated exclusively to the FIFA Football World Cup in South Africa. We marked the return of Michael Schumacher to Formula 1 racing by launching a dedicated channel to follow his progress, the perfect way to provide added value to our loyal Sky F1 viewers. The continued enhancement of our new, innovative services, including HD and 3G support for our Sky Sport ipad App, the introduction of a Sky Sport App for the iphone and ipod Touch, the launch of our Sky/UEFA Champions League Match Tracker App and the Sky Bar Finder App (both for the iphone and the ipod Touch). The launch of Sky 3D, Germany and Austria s fi rst 3D events channel, showing sports (including the Bundesliga, UEFA Champions League and DFB Cup, amongst others), movies, the arts, and much more. The launch of three new, live, in-house productions focused on the top football and sports events of the week ( Samstag LIVE!, Sky90, Mein Stadion Die Sky Bundesliga Vorschau ). We have already come a long way, and the results can be measured in our performance, with the early signs of solid subscriber and revenue growth showing through. Besides the core improvements in net growth, churn rate and ARPU, we have seen a fundamental increase in viewer ratings across the Sky channels, rising value-for-money scores, record customer recommendations and the highest satisfaction levels in the company s 20 year history. The positive response both from long term subscribers and brand new customers - is very encouraging, especially in these challenging times, and strengthens our resolve to work even harder to deliver the experience they deserve. In 2011, we will continue this growth and innovation strategy, always focusing on our customers, and deliver on areas which will lead to major changes not only for Sky but for the entire media business. Our main task will be to accelerate the pace of change in the largest TV market in Western Europe. A strong pay-tv market is good for everyone. It is good for content makers and rights holders, as it opens new revenue opportunities for investment, growth and diversity. It s good for the media industry as a whole, as there is more than enough opportunity to enhance all businesses. And most importantly it is good for customers, who are the core of our business. The course for success is set: the key metrics for the last year are encouraging and are trending in the right direction. With these results in mind we look into the future optimistically and continue to work on the development of our company s success. I want to thank you also in the name of the Management Board and the entire Sky team for your trust, confidence, and support. While there is still much to do, we are excited for the opportunity, and look forward to the challenge ahead. Best regards Brian Sullivan Annual Report

30 Members of the Management Board Brian Sullivan born 1962 entered the company as Deputy CEO in January 2010 more than 20 years of pay TV experience in the US and Europe appointed CEO on 1 April 2010 Dr. Holger Enßlin born 1967 entered the company in October 2003 long-term experience as a lawyer and head of the company s legal department Chief Offi cer Legal, Regulatory & Distribution since 1 December 2008 Pietro Maranzana born 1972 entered the company in November 2008 experience with business consulting and business planning, particularly for Sky Italia Chief Financial Officer from 1 June 2009 till 31 January 2011, afterwards return to Sky Italia Steven Tomsic born 1969 entered the company in December 2010 as Deputy Chief Financial Officer comprehensive branch knowledge, particularly in fi nancing, and very good knowledge about the company as a former supervisory board member of Sky Deutschland AG appointed Chief Financial Officer as of 1 February 2011 Carsten Schmidt born 1963 entered the company in July 1999 comprehensive knowledge in the fields of sports media, sports programming and -production as well as the acquisition of sports rights Chief Offi cer Sports, Advertising Sales & Internet since March Sky Deutschland AG

31 Share information Development of share capital On 21 December 2009, Sky announced that the Management Board had agreed, with the consent of the Supervisory Board, to increase the share capital of Sky Deutschland AG by a direct placement of up to 49,014,714 new shares to News Adelaide Holdings B.V., an indirect 100% subsidiary of News Corporation, against cash. On 21 January 2010 the direct placement to News Adelaide Holdings B.V. was completed. This capital increase comprised 49,014,714 new shares at a subscription price of 2.25 per new share and generated gross proceeds of 110 million. Sky Deutschland AG s registered share capital increased from 490,147,144 or 490,147,144 issued shares to 539,161,858 or 539,161,858 issued shares. As a result, News Corporation s indirect stake in Sky Deutschland AG increased from percent to percent. On 12 September 2010, Sky announced that the Management Board had agreed, with the consent of the Supervisory Board, to increase the share capital of Sky Deutschland AG by a rights issue of up to 269,580,929 new shares. On 28 September 2010 the rights issue was completed. The capital increase comprised 168,937,926 new shares at a subscription price of 1.05 per new share and generated gross proceeds of million. As a result, Sky Deutschland AG s registered share capital increased from 539,161,858 or 539,161,858 issued shares to 708,099,784 or 708,099,784 issued shares. The capital increase was entered in the Commercial Register on 30 September News Corporation s indirect stake in Sky Deutschland AG increased from percent to percent. Key figures for the Sky share Sky share information 2009 Year-end closing price (in ) High (in ) Low (in ) Number of shares at 31 December 708,099, ,147,144 Market capitalisation at year-end (in million) 1,199 1,108 Earnings per share (in ) ISIN Stock category Stock segment Market segment DE000SKYD000 Ordinary registered shares Frankfurt, Official Market Prime Standard Annual Report

32 Share price development Jan 10 Feb 10 Mar 10 Apr 10 May 10 Jun 10 Jul 10 Aug 10 Sep 10 Oct 10 Nov 10 Dec 10 Sky Deutschland AG MDAX DAX Sky s share price 1 traded down from 2.26 at the end of December 2009 to 1.76 at 26 January After a short recovery at the beginning of February to 2.15 on 2 February 2010, the Sky stock declined in the following weeks and started rising again during March and finished the first quarter at 1.91 on 31 March In April and May Sky shares traded down continuously. In June, Sky shares went up to 1.62 on 15 June 2010 and finished at 1.34 on 30 June In July, Sky shares traded up to The decline of the Sky stock on 3 August 2010 was due to Sky s ad hoc announcement as of 2 August 2010 that it plans to initiate fi nancing measures to raise a minimum of 340 million from a rights offering, potentially combined with a convertible bond and / or a shareholder loan. During August and September Sky shares traded between 1.11 and 0.92 and closed the third quarter at 1.03 on 30 September In October, the Sky stock price traded down from 0.97 to the year low of 0.82 on 12 October In the second half of October, Sky shares traded up and closed at 1.17 on 29 October In November and December, the Sky stock increased continuously and ended the year at Sky Deutschland AG shares showed a performance of minus 25 percent over the course of 2010 versus an increase of 16 percent in the DAX and 35 percent in the MDAX during the year. In January 2011, the share price increased from 1.90 on 3 January 2011 to 2.41 after the announcement of the Q key metrics on 12 January Until the end of January 2011, the share price continuously rose and closed the month at Based on the closing price, Sky Deutschland AG s market capitalisation on 31 December 2010 was 1,199m with a free fl oat market capitalisation of 600m. The average daily trading volume for the full year 2010 was 2,698,971 shares. Inclusion in indices The Sky stock is part of the MDAX and was ranked 34th in terms of trading volume and 43rd in terms of market capitalisation on 31 December In addition to being represented in other indices of the DAX family such as DAXsector Media, Sky shares are also included in the MSCI Global Investable Market and the Dow Jones STOXX indices. 1 The stated share prices are based on the daily XETRA closing prices of the German Stock Exchange 32 Sky Deutschland AG

33 Shareholder structure Sky Deutschland AG s share capital currently amounts to 708,099,784 with 708,099,784 issued shares. Shareholder structure (in%) ( Simplified view as of 31/01/2010) 50.1% Free Float 49.9% News Corporation Free Float 50.1% News Corporation 49.9% All shares other than those held by News Corporation are included in the free float as defined by the standards of the German Stock Exchange. Shares held by News Corporation After the completion of direct placement to News Adelaide Holdings B.V. in January 2010, News Corporation s indirect stake in Sky Deutschland AG increased from percent to percent. After the completion of the capital raising in September 2010, News Corporation s indirect stake in Sky Deutschland AG increased from percent to percent. Shares held by institutional investors Institutional investors who exceed notifiable thresholds of voting rights in Sky Deutschland AG are Odey Asset Management LLP (press release by Odey on 5 November 2009, stake of percent) and Taube Hodson Stonex Partners LLP (notification of 6 October 2010, stake of 4.92 percent). Shares held by Management Dr. Holger Enßlin, Chief Offi cer Legal, Regulatory & Distribution, held 15,000 Sky shares on 31 December Pietro Maranzana, CFO of Sky Deutschland AG, held 5,000 shares in Sky Deutschland AG on 31 December Shares held by members of the Supervisory Board Dr. Stefan Jentzsch, member of the Supervisory Board of Sky Deutschland AG, exercised his subscription rights during the capital increase in September 2010 and therefore increased his holding in Sky Deutschland AG from 80,000 to 120,000 shares (Director s Dealings announcement as of 6 October 2010). Annual Report

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35 Rudi H. is using the Sky Sports App on his ipad.

36 More Spectators

37 When it comes to quality, Rudi is an expert. Of course the SAP quality management consultant also looks out for top quality products for his free-time activities. When it comes to TV, Sky is the perfect choice for him, his wife and his two daughters. Rudi does not want to miss a thing when he is away on business. That s why he uses the Sky Sports App on his ipad. I don t know why but every time I start the Sky Sports App on my ipad a colleague of mine is breathing down my neck to just have a quick look. Afterwards it goes like Wow, have you seen this? I want this, too! I can understand. Although I use the App regularly I am still fascinated by its functionality. If I imagine sitting in the hotel while a Bundesliga or Champions League match is on and I could not watch it this would be a catastrophe, really. The Sky Sports App offers me exactly what I expect: live broadcasts in outstanding Sky quality, up-to-date sports news, video clips, data centres, background information and much more. Thank you Sky! With the Sky App I am always up-to-date, even at the hotel. And my girls at home are free to enjoy the great Sky programmes as well. There is no lack of films and kids programmes with Sky anyway.

38 Combined Management Report Business and strategy Business operations Sky s core business is subscription pay-tv. The Company offers a wide range of programming in Germany and Austria and in addition can be received via the Teleclub in Switzerland. Sky s program offering includes current feature fi lms, new series, children s channels, documentaries and live sports, in particular the games of the German football league (Fußball Bundesliga), the DFB Cup, the UEFA Europa League and the UEFA Champions League. In order to further enhance its unique program profile, Sky expanded its own production in the area of sports, most recently with the introduction of Saturday LIVE! ( Samstag LIVE! ) every Saturday on prime time after the Game of the Week and in January 2011 with the introduction of My Stadium ( Mein Stadion ) the preview reporting on the Bundesliga. On 13 August 2010, Sky expanded its previous comprehensive offering of seven HD channels with three additional HD channels, and on 27 October 2010 with ESPN America further to a total of eleven channels. In addition, on 13 August 2010 Sky started the first 3D channel, which broadcasts concerts, documentaries, blockbusters and exclusive live sports in brilliant HD 3D quality. Sky believes it offers the most comprehensive true HD programming selection. The Company also offers its subscribers first-class movies, live sports programming and adult entertainment on a pay-per-view basis. Sky distributes its programs digitally, primarily via satellite and cable. It thereby reaches approximately 90 percent of all TV households in Germany and Austria. In addition to conventional broadcasting via satellite and cable, Sky has also offered some of its services via internet as well as various services on the ipad or the iphone since June The expansion of further offerings is planned for mobile devices for the distribution of programs. Products and Services At Sky, the interests and desires of customers are the focus of all business decisions. Day after day Sky offers its viewers special television moments. The Sky brand stands for entertainment, thrill and excitement with the largest selection of television entertainment in the German-speaking region, as well as for a high quality program that sets it apart from other TV broadcasters. Sky offers more live football than the competition Sky offers the most attractive live sports selection in Germany and Austria Sky offers the best range of films on German and Austrian television Sky offers a comprehensive selection of German and American series, many of which are aired for the fi rst time Sky offers the greatest program diversity in true HD Sky offers channels for every age group and every family member Sky, with Sky+, offers its customers an HD-PVR which makes it possible at any time to record, store, pause, and replay programs. With its comprehensive selection of sports, films, series and HD, Sky considers itself to be the leading pay-tv provider in Germany and Austria. Sky broadcasts its premium programming over 18 individual channels, 24 hours per day. In addition, Sky subscribers have access to 45 partner channels with a broadly-diversifi ed selection for every taste. This selection offers something for everyone in the family. In addition to sports and fi lms, Sky also offers programming that includes thrillers and adventure all the way to comedy, documentaries and science fiction, as well as German productions and the best children s programming. Sky delivers this outstanding television experience not only at home in the living room. Subscribers can also enjoy their favorite programs on an increasing number of mobile platforms all at great value. Sky customers can assemble the programming of their choice by selecting the following packages: Sky Welt the entertainment package with 25 national and international channels Sky Welt offers a diverse programming service for every taste and includes documentary channels, children s programs for all age groups as well as several high quality entertainment and four HD channels. In connection with a promotional campaign, all customers additionally have access free of charge to the impressive 3D content of Sky through the end of February Upon subscribing to Sky Welt, customers can select premium packages according to their interests. 38 Sky Deutschland AG

39 Sky Welt Extra available for satellite customers Sky Welt Extra is available as an additional bonus package to satellite customers who choose at least one additional premium package. It offers a wider selection, even greater quality and expands the entertainment offering of Sky Welt. Film package the package for movie fans The Film package offers ten channels, including eight channels produced by Sky, showing 80 movies a day and approximately 25 premieres per month, aired for the first time on German-language TV. A wide selection of current movies is broadcast in 16:9, Dolby Digital-format and is also available in the original language. Sport package the most comprehensive sports package on German-language television The Sport package offers an exciting range of sports including football, Formula One and additional motor sports, as well as golf, ice hockey, tennis, wrestling and extreme sports, broadcast on three dedicated full-time sports channels. The Sport package offers football fans some special highlights: all games of the UEFA Champions League, all games played by the German and Austrian teams in the UEFA Europa League, the top games of the English Premier League, all games of the DFB Cup as well as all games of the Austrian Bundesliga. Fußball Bundesliga package Fußball Bundesliga around the clock, seven days a week Fußball Bundesliga is the package for Bundesliga fans. It offers all 612 Bundesliga and second division Bundesliga games live and in conference mode, and reports around the clock on the top two professional leagues seven days a week, 365 days a year. The live reporting is supplemented by programs such as My Stadium the Sky Bundesliga preview, Saturday LIVE! and Sky 90 with comprehensive preview and follow-up reporting relating to the Bundesliga. Sky HD the comprehensive true HD service in Germany and Austria Sky offers customers the most impressive selection of true HD content in Germany and Austria, with a current selection of twelve channels. With a picture quality up to fi ve times higher in HD, coupled with Dolby Digital sound, television now brings a cinemalike experience into the home. Four HD channels are included for all customers in the basic package Sky Welt. The remaining HD channels can be booked in line with the themes of the respective program packages. Since September 2010, HD customers can additionally receive the new 3D offering from Sky in connection with a promotional campaign through the end of February 2011, without additional cost. In addition, Sky offers TV innovations like the live football conference and Formula One racing that allows fi ve freely-selectable camera angles. Sky also offers its subscribers attractive films, live sports and adult entertainment through Sky Select, Sky Select+, Blue Movie and the internet on a pay-per-view basis or through various mobile applications. Sky offers special subscriptions for hotels, restaurants and sports bars and will expand this offer to other commercial clients in the future. General conditions and economic environment Economic environment The surprisingly quick recovery of the German economy after the worldwide financial and economic crisis was one of the outstanding events in In Germany, the gross domestic product, as an overall indicator of the total economic performance, increased in real terms by 3.6 percent in This was the highest yearly growth rate since the German reunification (source: Federal Statistics Offi ce 2011). This positive economic development also affects the recovery of the labor market. Employment and the number of employees paying social insurance contributions once again increased signifi - cantly. The number of unemployed was slightly more than 3 million in December 2010 with an unemployment rate of 7.2 percent (source: The labor and vocational training market in Germany. December and the year 2010, German Federal Employment Agency). These provided good support for growth in domestic demand and by extension the willingness to buy in the electronic and entertainment segment. The interest here in entertainment electronics and in HD-compatible televisions was large, which is closely linked to the large interest in HD programs on German television. The current figures for the consumer electronics market index in Germany (CEMIX) of the German Association of Consumer and Communications Electronics (gfu) show this clearly: Sales of digital set-top boxes increased by 27.1 percent in the fi rst three quarters; approximately 6.4 million flat screens were sold in this period (source: CEMIX). At the end of million flatscreens were sold (source: gfu). According to the market research organisation ScreenDigest, there were approximately 20 million HD-compatible television sets in Germany and Austria at the end of 2010, with the trend rising. According to gfu 178,000 HD 3D-compatible television sets had been sold in Germany by the end of The increased interest in new television technology and an improved television experience on the part of the consumer also corresponds to an increased demand for high-resolution television programs also for this reason HD has become an important success factor for the industry. Sky makes use of the potential of digital television to give its customers an optimal TV experience: all films can be enjoyed with the best digital image and audio quality, in 16:9 format, with Dolby digital sound or the option of viewing most films in their original language. Annual Report

40 Number of HDTV-sets in Germany and Austria (in millions) Austria Germany 17.7 Pay TV Penetration in Europe 56.0% 57.4% 41.9% % 10.9% Source: Screen Digest (11/2010) (Prog) Advertising revenues, among other key figures, represent an important factor for the economic situation in the media market. In 2009, the media industry in Germany was confronted by an exceptionally weak advertising market. This situation improved in The Central Association of the German Advertising Industry (ZAW) is forecasting a net increase (net = excluding discounts and agent s fees) in the amount of 0.35 billion to a total of billion for the total year This would represent an increase of 1.9 percent compared to the prior year. Competition In the German television system, three business models are competing with each other: The public television, which is primarily fi nanced through public broadcasting license fees; private television, which is mainly fi nanced by advertising; and pay-tv. According to a recent study by Booz & Company, the classic TV advertising market will stagnate in the coming years. The value creation of the media industry is accordingly shifting from classic TV advertising towards content one has to pay for, together with associated services. Pay-TV has the opportunity to benefi t from this opportunity disproportionately. Compared to the European core markets, the pay-tv penetration rate in Germany, in particular, lies below the average of all other Western European countries Germany Austria UK Italy France Source: Screen Digest; Sky s own calculations on the basis of data available on the market; State: Q According to Goldmedia (source: ALM Yearbook 2010), at the end of 2009 there were approximately 4.4 million pay-tv subscribers, a number that remained stable in a year of economic crisis. The market penetration is estimated to be 12.0 percent in Germany. The European comparison shows that there is still substantial potential for development here. Among the classic pay-tv platforms in Germany, Sky is the largest by a substantial margin, followed by Kabel Deutschland (1.1 million pay-tv customers; source: KD Q3, 2010), Unity Media (0.5 million pay-tv customers; source: ALM Yearbook 2010) and other smaller providers (Kabel BW, Tele Columbus, PrimaCom, KabelKiosk, arenasat, ASTRA/HD+). In addition to this, there is a certain number of IPTV customers (e.g. Deutsche Telekom, Alice) who can be considered as pay-tv customers. The pay-tv offering of arenasat was discontinued as of 30 September For 2010 the Private Radio and Telecommunications Federation [Verband Privater Rundfunk und Telemedien e.v. VPRT] forecasted a growth of 6 percent in the pay-tv market. As a provider of TV entertainment, Sky competes additionally with free-to-air television channels. Competition exists here especially for the acquisition of attractive program rights and also for the marketing of advertising times. The public channels ARD, ZDF and ORF, as well as the two largest private channel groups RTL and ProSiebenSat.1 offer competitive content in Germany and Austria such as films, series or live sports broadcasts. In order to set itself apart from the other television offerings on the market, Sky places emphasis on premium quality, on the added value of outstanding innovationdriven product experience and increasingly on own production. Parallel to linear television, a dynamic market is developing with the on-demand use of TV and video content over the internet. 1,275 Web-TV platforms are usable, over which approximately 151 million online videos are accessed per day (source: BLM Web-TV-Monitor 2010, Goldmedia). A large portion of this content is created by 40 Sky Deutschland AG

41 users (user generated content). This points to a dynamic change in the consumption of moving image content. According to ARD/ ZDF online study, in 2010 almost two-thirds of online users at least occasionally accessed video files in the internet, with the tendency strongly increasing. 45 percent of German online users have already visited the complementary offerings of TV broadcasters once or several times (source; ARD/ZDF online study 2010). The separation of television and internet is beginning to disappear. Internet-based offerings of classic TV content are to be found in the meantime for cinema movies, series, catch-up services for content already shown on linear television and live TV either financed by advertising or in the form of pay services. Web-TV offers services that are now being used intensively by young target groups. Sky is also present in this market with its Mediathek and the feebased offering Select Internet TV and plans to further expand this offering. With its extraordinary live-sport offering, Sky is already the largest German provider of sports video content in the internet in Germany and Austria. Political and legal environment As of 1 April 2010, the Rundfunkstaatsvertrag (German Interstate Broadcasting Agreement) in the version of the 13th Rundfunkänderungsstaatsvertrag (State Contract for Broadcasting Changes) came into effect. With this change, new general conditions for advertising and product placement in particular were initiated. Content which includes product placement must be recognisable as such. The changes to the Youth Media Protection Treaty planned for 1 January 2011 are invalid, after the state of North Rhine-Westphalia failed to ratify the amendment as the 14th State Contract for Broadcasting Changes. The core element of the amendment was the change in the legal framework for the uniform protection of children and young people against offerings in electronic information and communications media. In particular changes were planned in the area of non-linear call-up and online offerings. This was to make it easier for parents through the cooperation of so-called minor protection programs and from offerings designated by the providers to determine the extent of programming that is appropriate for children and young people. agency and have complied with the newly-implemented three-stage test within the scope of the 12th State Contract for Broadcasting Changes. On this basis, three-stage test procedures for the telemedia offerings of the public broadcasting agencies were carried out. The decisions can still be challenged within the judicial supervision. On 15 December 2010, the government heads of the states in connection with the State Premier Conference agreed to a budget appropriation as a means for the fi nancing of public broadcasting starting with the next budgetary period and signed a respective amendment (15th State Contract for Broadcasting Changes). Accordingly, starting in 2013 there is to be a broadcasting fee per household and business premise. The amount of the fee for private households is not to be in excess of the current fee of per month. Furthermore, the broadcasting treaty provides for an advertising prohibition after 8:00 pm as well on Sundays and nationwide holidays for ARD and ZDF. Excepted from this is sponsoring for the broadcasting of major events. Sky particularly advocates a further reduction of sponsoring in the area of sport broadcasts in public broadcasting. It is expected that in March the prime ministers of the states will again consider the new version of the Interstate Gambling Treaty, after the Interstate Gambling Treaty currently in effect expires at the end of 2011 and according to a judgment of the European Court of Justice (EuGH) must be rewritten. The central issue for the EuGH was the arrangement of the state gambling monopoly in Germany. The private broadcasters are committed to a liberalisation of the provisions, especially relating to the application of (sport) betting. Unlike in other European countries, the legal framework for the protection of copyright owners against copyright infringement on the internet (internet piracy) has not yet been reconfigured in favor of right holders in Germany. It is currently being discussed at the political level how the legal framework against piracy and, in particular, internet piracy can be strengthened. Sky is actively campaigning for strengthening the protection against piracy and internet piracy. Already in the version of the 12th State Contract for Broadcasting Changes, the scope of public broadcasting services was restricted, particularly with regard to the internet. The resolved clarifi cation of online content resulted from the enquiries of the European Commission with regard to the reconcilability of the fi nancing of public broadcasting in Germany with European financial aid provisions. According to the new rule, public broadcasting agencies may not supply their programs and accompanying information online seven days after the broadcast of the respective show on TV. From the perspective of Sky it is especially relevant that the public broadcasting agencies may only offer attractive sports content, as well as highlights broadcasts of the Bundesliga and second division Bundesliga games, for a maximum of 24 hours on the internet. Other offerings may only be available then in longer form on the internet if they are incorporated in a so-called telemedia concept of the broadcasting Annual Report

42 Strategic planning and operational measures for the financial year 2010 With the launch of the Sky services in July 2009, Sky began to implement a new business strategy. The purpose of this was to build a solid foundation for Sky to deliver sustainable acquisition and retention of customers and to increase the average revenue per user (ARPU). In this connection, management has made substantial progress through a series of measures in the following areas: Package attractiveness was increased, especially through the purchase of further channel rights, the extension of the HD service and the start of regular 3D broadcasts Customer satisfaction levels were significantly increased by the expansion of call center capacity, additional self-care services on the website along with the introduction of a new installation service User friendliness and the handling and ease of operation were increased through the optimisation of the electronic program guide (EPG) and the introduction of the new HD receiver Sky+ Marketing and multi-channel sales were signifi cantly intensified by investments in marketing and increasing numbers of sales outlets, along with new sales partnerships The purchase, as well as the buyback, of parts of the company led to a clearer concentration on the core business of the company and more efficient processes. The strategy was described in detail in the annual report 2009 and modified by Brian Sullivan in the first half of As a result, many encouraging improvements can be seen in the business development. Key metrics have improved in the course of the 2010 fi nancial year: After a positive development in the third quarter, all key metrics continued to improve signifi cantly in the fourth quarter: Sky is showing accelerating growth in the acquisition of new customers, decreasing churn rates and ARPU at a record level. While clearly and consistently differentiating itself from its competitors and with measures in the areas of content, innovation and services, Sky has generated the necessary momentum to offer the best possible TV experience to customers, to accelerate growth and to reach sustainable profi tability. Based on the revised strategy Sky is now concentrating its focus on the areas that make Sky special for its customers: 1. Differentiation through sharper HD, improved quality and exclusivity 2. Acceleration of net growth through the distribution of the harddisk receiver Sky+ 3. Differentiation and expansion through key innovations and product expansions 4. Expansion of distribution 5. Continuing the development of market-leading customer service 1. Differentiation through sharper HD, improved quality and exclusivity Management is convinced that the success of Sky is based on a very simple but convincing business model: Sky delivers a better television experience no matter when and where the viewer tunes in. Therefore, the Company concentrates on continuously delivering its customers better quality, groundbreaking innovation, better service and more added value. The progress made in quality is most clearly demonstrated in programming. Especially in the fi eld of HD, Sky provides the broadest and most convincing offering on the German TV market. Twelve HD channels (including Sky 3D) are currently being broadcast. On 13 August 2010, Sky extended the HD line-up by launching three new HD channels Sky Sport HD 2, Sky Action HD and Sky Cinema Hits HD which will further expand the marketleading position in the fi eld of high-quality true HD programming. On 27 October, Sky expanded its HD service once again to include another channel: With ESPN America HD, Sky customers can experience over 500 outstanding US sporting events live in HD all in the original English version. The channel was launched just in time for the start of the MLB World Series, exclusively available in Germany and Austria through Sky. Sky has also expanded the content offered in its existing HD service. Since the beginning of the new Bundesliga season in August 2010, Sky broadcasts the Bundesliga in conference mode for the fi rst time in true HD. Sky broadcasts the largest diversity of programming in true HD, unlike other providers which partially broadcast content that has been merely converted from standard resolution on their channels designated as HD. The share of HD customers to the total number of Sky customers, with 22.4 percent at the end of the fourth quarter 2010, doubled in comparison to the prior year. In order to provide an outstanding TV experience in true HD to largest possible number of customers, Sky decided to integrate four HD programs in the starter package Sky Welt, without additional cost to customers. Since 6 October 2010, all Sky customers with an HD compatible set-top box and an HD Ready or Full HD TV set automatically receive the programs Discovery HD, National Geographic HD, History HD as well as Eurosport HD without additional cost. As the next logical development in its HD service, and after the major success of the first live HD 3D football broadcast in Germany in March 2010, Sky launched the fi rst 3D service in true HD in Germany and Austria in October The new HD 3D channel encompasses highlights from the exclusive sports, fi lm, documentary and entertainment programming from Sky. On 3 October 2010, with its exclusive coverage of the Ryder Cup live and in HD 3D, Sky presented the first live sporting event in this broadcast technology. On 13 October 2010, Sky 3D, Germany s first 3D channel, began regular broadcasting. Here, all Sky HD subscribers in Germany and Austria who receive the program offering with a Sky-certified HD receiver via satellite or Kabel BW and additional local cable networks can witness the Bundesliga and additional sports highlights in 42 Sky Deutschland AG