BSkyB Flexes Financial Muscles

By | July 17, 2002 | Feature

BSkyB continues to flex its muscles in all areas of the UK pay-TV market. Just in the last week, the satellite broadcaster has been able to cut a deal with leading set-top-box (STB) manufacturer Pace Micro Technology reducing the price BSkyB pays per box for its Sky+ Personal Video Recorder and standard digibox.

For Pace, the deal wasn’t so great. The STB maker said agreement would result in a GBP1.7 million ($2.6 million) reduction in its expected pre-tax profit for its most recent financial year.

BSkyB has also bought UK nationwide football league rights for the next four years for GBP95 million ($145 million). The acquisition of these rights, which also include rights to the Worthington and LDV trophies, gives BSkyB virtually complete coverage of live football in the United Kingdom.

To cap a busy week for the operator, it announced it would contribute three Sky channels to the new BBC/Crown Castle digital terrestrial television (DTT) platform after the British Independent Television Commission awarded the DTT licenses to them.

All the moves are positive for BSkyB. In terms of the football rights, while their acquisition is a bonus, it is unlikely to significantly boost BSkyB’s subscriber acquisition. Mark Harrington, a media equity analyst at JP Morgan, told Interspace: “On the football rights, this is an indication of the trend towards a lowering of the growth with respect to the costs of programming rights, particularly in regards to football. Our view, is not necessarily that you will continue to see cuts in the costs of football rights, but certainly a stabilisation of growth rates we have seen over the last three years. The football rights deal does not have any significant impact in terms of our forecasts. It simply helps the breadth of the BSkyB offering. In our view, it doesn’t give further opportunities to increase market share.”

The decision to team up with the BBC and Crown Castle to offer free-to-air (FTA) digital television services is an intriguing move. While BSkyB is likely to gain further advertising revenues for the three channels (Sky Sports News, Sky Travel, Sky News), ultimately the new FTA offering could become its biggest competitor. The move critically stops Granada and Carlton Communications gaining the licences where they hoped to launch free services as well as a pay-TV offering.

It is a shrewd move, according to Harrington. “It a hedge against the risk of their share being cannibalised by this new distribution outlet as opposed to damaging it from a market share perspective.” Aizaz Shaikh, a media equity analyst at Banque Paribas, told Interspace: “The ITV pay-TV offering failed. If anything, a viable, free-TV offering from the BBC is probably more of a threat to BSkyB than a weak pay-TV offering that may never get off the ground.”

The new FTA offering is unlikely to make the same mistakes as ITV Digital, which burned cash at an alarming rate. The consortium will not give away free set-top boxes. Customers will probably have to pay around GBP100 ($152) for a digital adapter. This will enable them to have access to 27 channels although no access to premium sports rights or movies.

As one of the few success stories in European pay-TV, BSkyB is continually finding itself in the box position in negotiations, whether it be for programming rights or set-top boxes. Harrington observed: “Recent events demonstrate the benefit of having that type of unavoidable position where the content providers, the providers of the technology to support the distribution system cannot avoid companies like BSkyB. To a certain extent, they have the incentive to provide relatively good terms on any contracts they enter into with a dominant player in a particular aspect of the value chain.” Shaikh says: “You can say they have had a string of decent company news. It goes along with the fact they are one of the few healthy media companies around. So, they can pick up assets relatively cheaply and benefiting from the weakness of competitors or suppliers.”

–Mark Holmes

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