BSkyB (NYSE: BSY) is facing a “perfect storm” of an on-coming recession, threats from changing technology and tighter regulation that threatens to demolish its core business model. That warning came from investment banking group broker Collins Stewart, which, in a lengthy note today, warns Sky risks missing its target of 10 million pay TV subscribers by 2010. BSkyB shares hit a 10-year low this morning of 350p, down from a 52-week high of 690p; Collins Stewart weighed in with its own “sell” rating on a target price of 275p. Here’s why…

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—Free wins out: Shares in BSkyB and Virgin both dropped sharply yesterday after a survey from Continental Research of 1,022 people found that seven percent of pay TV subscribers could quit their subscriptions while 12 percent were “likely to” get Freeview in the next year. Collins Stewart thinks things could be much worse for BSkyB and says that such a fall would “savage” the company’s profits. Couple that with concerns that Ofcom will rule next year that Sky’s one-platform, one-size-fits-all broadcasting model gives consumers a raw deal, and things don’t look too rosy.

—Broadband hits profits: BSkyB has failed to make significant profits from its broadband subscription service and invested a great deal. The company bought ISP Easynet for £211 million in 2005 and in 2006 predicted cumulative losses of £400 million for 2007-2009 – but according to Collins Stewart BSkyB lost £399 million on broadband in the last two years alone. So why all the internet losses? A healthy 18 percent of Sky TV subscribers also had internet deals as of June 2008 and that figure is on course to reach 30 percent by 2010. But as Collins Stewart put it: “In our conversations with Sky they have pointed to slower advertising revenues and delays in setting up the Sky portal. But the problem may be more fundamental, it’s ARPU related, revenues just aren’t what was hoped for”.

—VOD poses big threat: Collins Stewart says internet VOD is “not yet” having a serious impact on pay TV but, within three years, around 20 million homes could have broadband connections capable of supporting VOD – that’s likely to be twice Sky’s subscription base. The Continental survey said 13 percent of TV subscribers were likely to ditch paid-for extras like sport and movies. As Collins Stewart puts it, “as internet VOD services develop and faster broadband penetration grows it is difficult to see how Sky’s movies offering will be regarded as a key reason to subscribe to Sky”. Studios sell rights to films to internet VOD services on a non-exclusive basis – so it’s goodbye the old monopoly Sky has enjoyed: LoveFilm, the UK’s biggest VOD player already has 1,938 films on offer compared to Sky’s 800.