FALSOS TECHOS

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 of-fering includes current feature fi lms, new series, children’s chan-nels, 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 profi le, 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 intro-duction 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 fi rst 3D channel, which broadcasts concerts, documenta-ries, 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 fi rst-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 house-holds in Germany and Austria. In addition to conventional broadcast-ing 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 2010. 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 televi-sion 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 fi lms 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 pos-sible at any time to record, store, pause, and replay programs.

With its comprehensive selection of sports, fi lms, 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, documenta-ries and science fi ction, 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 inter-national 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 custom-ers additionally have access free of charge to the impressive 3D content of Sky through the end of February 2011.

Upon subscribing to Sky Welt, customers can select premium packages according to their interests.

• Sky Welt Extra – available for satellite customers

Sky Welt Extra is available as an additional bonus package to satel-lite customers who choose at least one additional premium pack-age. 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 fi rst 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 includ-ing 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 cinema-like 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.

Sky makes use of the potential of digital television to give its custom-ers an optimal TV experience: all fi lms 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 fi lms in their original language.

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 fi lms, 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 applica-tions. 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 fi nancial and economic crisis was one of the outstand-ing events in 2010. In Germany, the gross domestic product, as an overall indicator of the total economic performance, increased in real terms by 3.6 percent in 2010. This was the highest yearly growth rate since the German reunifi cation (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. De-cember 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 entertain-ment segentertain-ment. The interest here in entertainentertain-ment electronics and in HD-compatible televisions was large, which is closely linked to the large interest in HD programs on German television. The cur-rent fi gures for the consumer electronics market index in Germany (CEMIX) of the German Association of Consumer and Communica-tions 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 fl at screens were sold in this period (source: CEMIX). At the end of 2010 9.7 million fl atscreens 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. Ac-cording to gfu 178,000 HD–3D-compatible television sets had been sold in Germany by the end of 2010. 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.

Source: Screen Digest (11/2010)

Advertising revenues, among other key fi gures, represent an impor-tant factor for the economic situation in the media market. In 2009, the media industry in Germany was confronted by an exception-ally weak advertising market. This situation improved in 2010. 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 €18.72 billion for the total year 2010. This would represent an increase of 1.9 percent compared to the prior year.

Competition

In the German television system, three business models are compet-ing 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 disproportion-ately. Compared to the European core markets, the pay-TV penetra-tion rate in Germany, in particular, lies below the average of all other Western European countries.

Source: Screen Digest; Sky‘s own calculations on the basis of data available on the market; State: Q3 2010

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 mar-ket penetration is estimated to be 12.0 percent in Germany. The Eu-ropean 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 Deut-schland (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 2010. 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 market-ing of advertismarket-ing times. The public channels ARD, ZDF and ORF, as well as the two largest private channel groups RTL and ProSie-benSat.1 offer competitive content in Germany and Austria such as fi lms, 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 innovation-driven 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 Number of HDTV-sets in Germany and Austria

(in millions)

2005 2006 2007 2008 2009 2010 (Prog)

12.0%

10.9%

56.0% 57.4%

41.9%

Germany Austria UK Italy France

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 fi les 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 fi nanced 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 fee-based 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 Inter-state Broadcasting Agreement) in the version of the 13th Rund-funkänderungsstaatsvertrag (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-West-phalia 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 provid-ers to determine the extent of programming that is appropriate for children and young people.

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 Com-mission with regard to the reconcilability of the fi nancing of public broadcasting in Germany with European fi nancial 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 per-spective of Sky it is especially relevant that the public broadcasting agencies may only offer attractive sports content, as well as high-lights 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

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 teleme-dia 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 broadcast-ing startbroadcast-ing with the next budgetary period and signed a respec-tive 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 €17.98 per month. Furthermore, the broadcasting treaty provides for an adver-tising 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 reconfi gured in favor of right holders in Germany. It is currently being discussed at the politi-cal 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.

Strategic planning and operational measures for the fi nancial 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 pur-chase of further channel rights, the extension of the HD service and the start of regular 3D broadcasts

• Customer satisfaction levels were signifi cantly increased by the ex-pansion 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+

• 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+