Subsidizing its personal video recorder offering could help BSkyB blunt a potential threat in the pay-TV market created by the merger of the United Kingdom’s two cable operators. NTL agreed to acquire Telewest for 3.4 billion pounds ($6 billion), creating a company with more than 3 million digital TV subscribers and 2.5 million broadband subscribers.

“You will have a player with much bigger scale, and scale is very important,” Angel Dobardziev, a telecommunications analyst at Ovum, said of the cable merger. “From that perspective, it certainly makes a stronger player. … They can pull resources and do it more efficiently. They can do nationwide marketing campaigns. They will have more resources to do things and move faster.”

While the new NTL would be a stronger competitor, BSkyB has multiple options to help maintain its position atop the pay-TV market, says Paul Richards, a media equity analyst at Numis Securities. “The most powerful weapon that BSkyB has in its armory is to fully subsidize Sky+,” the company’s personal video recorder (PVR) offering, Richards said.

In August, BSkyB announced it is closing in on its target of 8 million subscribers by the end of 2005, adding 83,000 subscribers in the second quarter to reach a total of 7.8 million. The Sky+ recorder can be found in about 890,000 households, representing 11 percent of BSkyB’s satellite TV subscribers, the company said.

“BSkyB’s churn rate is around 10 percent,” Richards said. “We certainly think Sky+ churn would be materially lower. If you have 8 million Sky+ homes, it is a much harder base for a combined NTL/Telewest to attack.”

Subsidizing the Sky+ offering would require a large capital expenditure, but Richards believes such a move could very quickly pay for itself. “A Sky+ subscriber that would not churn will generate more revenue,” he said. “A lot of Sky+ subscribers also take multiroom [subscriptions], so I think the payback on Sky+ subsidies could be pretty rapid. That is just on the upgrading existing subscribers to Sky+. If you could actually win new customers who are wondering what to do, Sky+ could be a clincher here.”

Robert Fraser, a spokesman for BSkyB, declined to comment on possible competition from the merged cable giant or BSkyB’s potential plans. “We already compete effectively against cable and will continue to do so,” he said.

Other Potential Impacts Of Cable Combination

The deal between NTL and Telewest, expected to close in early 2006, will allow the two companies to cut sales and marketing costs, and the free capital could help the new NTL boost its position in the triple-play market.

NTL also could become a bigger player in the battle for exclusive content rights, says Thomas Eagan, a media equity analyst at Oppenheimer. “We expect them therefore to get more involved in content,” he said. “… They are going to be increasing their investment in other parts of the content world in the [United Kingdom]. That would make them more strategically competitive.”

One of the early content targets for NTL likely would be rights to broadcast Premier League matches. BSkyB most recently won the exclusive rights to broadcast the league in 2003 for just over 1 billion pounds ($1.7 billion). The deal arguably has been the cornerstone of BSkyB’s success throughout the years, but the current deal expires in 2007, and the European Commission opposes the Premier League auction process where a single party can gain exclusive rights to all matches. EU Competition Commissioner Neelie Kroes has said rights “should be sold to more than one broadcaster,” and recent press reports indicate that the European Commission could file antitrust charges against the Premier League if it does not alter its process to include more broadcast rights winners.

“As a broadcaster, we only know what we can bid for when the Premier League publishes its tender documents,” Fraser said. “It is for the Premier League, based on a dialogue with the European Commission, to decide the structure on how the rights are sold. We are in the same position as every other broadcaster. Once the rights are made available, we will know what we can bid for, and make our offer accordingly.”

NTL CEO Simon Duffy already has indicated that the operator could bid for the Premier League when BSkyB’s deal expires. NTL previously made a play for matches in 2000, winning the pay- per-view rights but failing to agree on final terms with the league.

But one media equity analyst believes that gaining Premier League rights is not necessarily a good move for NTL. “If I was an investor in cable, I would be concerned that they said they are going to bid for football rights,” the analyst said. “We have been down this road before of operators overpaying for soccer and not getting a” return on investment.

Integration Process

BSkyB also can take advantage of the time it will take NTL and Telewest to merge their operations. “I think the only positive impact for BSkyB here could be that in the intervening several months, as they prepare the integration, both [NTL and Telewest] are a little distracted about the integration process and that could help BSkyB take video market share from cable operators,” Eagan said. “Longer term, it is going to be positive for the cable operators and negative for BSkyB.”

–Mark Holmes

(Robert Fraser, BSkyB, Robert.fraser@bskyb.com; Malcolm Padley, ntl, Malcolm.padley@ntl.com; Paul Richards, Numis Securities, P.Richards@numiscorp.com; Thomas Eagan, Oppenheimer, Thomas.Eagan@opco.com; Angel Dobardziev, Ovum, avd@ovum.com; Alexandra Legg, Telewest Broadband, Alexandra.Legg@telewest.co.uk)