“Mr Watson, come here, I want to see you,” Alexander Graham Bell, March 10, 1876
The first words ever spoken down a telephone line might be laced with a menacing undertone were Sky’s chief executive, Jeremy Darroch, to pick up a handset today and repeat them, this time to his counterpart at BT Vision, Marc Watson.
BT Vision is a subsidiary of the British former monopoly telecoms provider, BT plc, and its activities have begun to present an existential threat to the satellite-sports-TV provider Sky Sports. Sky is not used to being challenged: for two decades it has enjoyed hegemony over the pay-TV football market it created in the UK. But the threat is becoming ever more apparent. This is a tale told by the share price of Sky’s stockmarket-listed parent, BSkyB, which suffered a 10% drop in value on Monday morning. Already the share chart paints a picture of the Sky falling in.
Figure 1: BSkyB share price, 3-day timeframe, 7-11 November 2013 (source: FT.com; http://markets.ft.com/research/Markets/Tearsheets/Summary?s=BSY:LSE)
What caused that collapse was Saturday’s out-of-hours announcement hitting the markets as they opened for trading: Watson’s firm had bid £897 million to acquire exclusive access to Champions League football rights from the 2015-16 season [as predicted here: http://www.insideworldfootball.com/matt-scott/13386-matt-scott-high-stakes-game-for-tv-rights-will-keep-uefa-s-club-giants-content]. These rights are some of Sky’s core football property. And so, 24 hours before Remembrance Day, a bitter war began to rage across foreign football fields between two FTSE100 companies.
BT’s latest big-money take-out was part of a long phoney war. They have been on opposite sides of the same courtrooms, with BT objecting to how Sky prices its wholesale access to its channels. Sky has even responded by refusing to carry BT Sport ads on its own Sky Sports channels.
Naturally, both of the losers in the rights auction, ITV and Sky, fired their own shots at the weekend. “We were not prepared to pay over the odds in the latest live rights round,” ITV’s statement read. Sky added in its statement: “We take a disciplined approach and there is always a level at which we will choose to focus on something else. If we thought it was worth more, we’d have paid more. It seems BT chose to pay far in excess of our valuation.”
The tone of the Sky release was withering but it did not mollify the stockmarket. As one senior equities analyst told Insideworldfootball: “[BT’s Champions League acquisition] is a bold statement. BT’s cash flow is 2.5 or 3 times as much as Sky’s, so they can afford to make these gambles.
“BT’s share price is up today and that would make me very nervous if I was a Sky investor. BT investors are obviously happy with this strategy.”
The strategy explicitly entails major investments in football-rights purchases to acquire new and retain old “triple-play” customers, in broadband, telephone and pay TV. Sky has been conducting a guerrilla assault on BT’s core activities in recent years by bundling in free broadband access to its pay-TV subscribers. BT, reliant on its legacy telecoms services, has responded in kind, by chucking in free TV football to its broadband-and-telephony customers.
Yet although Watson described the Champions League as “very valuable” and “the kind of rights that can really make a difference in the market” – a claim BT shareholders seem to agree with – I am afraid that as things stand I cannot concur. The Champions League is a fabulous competition, a commercial property that generates sufficient public interest to turn over €1.34 billion (and rising) for UEFA from sponsorship and media-rights sales. And BT has bought a lot of European football: 350 matches in fact. But it only takes place over 13 match weeks per year.
A 24/7 sports broadcaster that has access to premium football in the midweek only for 25 days of the year and at the weekend over only 38 Premier League games has an awful lot of dead time. (BT has done much to big up the value of its rugby-union presence and whatnot, but the fact is live football is all that matters to paying customers.)
Naturally Sky and ITV were defensive in defeat but do they in fact have a point in questioning whether BT has done its sums properly? According to a Citibank research note quoted by the Financial Times’ Lex column on Monday, BT’s investment in the Champions League equates effectively to 8p for every BT share in issue. If you consider that there are a maximum of 35 Champions League matches involving English clubs – and only if all four teams competing in the group stages progress to the semi-finals with two reaching the final – then BT has paid more than £8.5 million for each of those matches. (Sure there are a lot of other matches, and English fans will lap up Bayern Munich vs Barcelona in the quarter-final, but are they really interested in Atlético Madrid against Schalke when it clashes with Manchester United against Real Madrid in the second round? Not so much.)
As a senior BBC sports-rights executive recently told me, the thing about winning the rights to a job lot of Premier League matches is that there is so much programming that can be done around each weekend – it is the backbone of a year’s programming every Sunday through to the following Saturday. This rationale has justified Sky and BT’s £6.55 million expenditure on each top-flight match from the current season. But with the intermittency of the Champions League, such blanket programming to support an entire sports channel is less possible.
This points to there being a highly inflationary rights auction for the Premier League when it goes out to tender in a little over two years. That would clearly be good for Wayne Rooney but would it be good for BT and Sky or the consumer?
According to its 2013 annual report, Sky’s revenue per user over the 12 months was £577, the bulk of it coming from pay-tv subscribers (the cheapest annual Sky Sports subscription is £522). But it has been coy on the number of new users signing up to its traditional satellite service. This may be a tacit admission it has failed to replace the subscribers it lost even before BT took out one of the most valuable packages of Premier League fixture picks. A new online offering, Now TV, has offset those losses but Sky still has a big revenue-protection challenge ahead.
After committing to pay £760 million a year for its life-giving Premier League rights for three seasons from the current one, up from £541 million on the previous three-year cycle, Sky has already bitten a chunk out of its free cash flow. For its part BT has told shareholders of an expectation to maintain free cash flow at £2.3 billion in 2013-14, to raise it to £2.6 billion in 2014-15 and for there to be “further growth” in 2015-16. This means that, given the £545 million it is already investing annually in premium football, it expects to generate at least £850 million+ more free cash flow than it currently does (a figure that does not account for future additional production costs, which could be substantial).
BT has already stripped out £5 billion of costs over the past four years so there is not likely to be much more fat to trim in its core activities to meet that commitment. Indeed, with a pension deficit of £6.7 billion declared in September – up from £5.2 billion three months previously – the free-cash-flow promise will not easily be kept. Gavin Patterson, the new kid on the block as BT’s chief executive, a position he took over five months ago, says of his 14-week-old channel: “We are the new kid on the block.”
The new kid is certainly muscular, with £18.3 billion of revenues compared to Sky’s £7.2 billion, but at the very least it means more revenue must be raised. Patterson hopes to do so by offering customers a discount on their minimum £43.50-a-month Sky subscription: “If you want access to all the games you will have to pay a little bit. Considerably less than you have to pay today. It is too early to say [how much], we’ve only just signed the deal, but it will be significantly less.”
At the moment the maths do not add up. Analysts say there are about 5 million households who take up Sky Sports, the premium service. For BT to ask for “considerably less” while still growing its earnings, it must add significant scale to its operation. That might require persuading 10 million new households to pay for TV football, albeit paying less than the 5 million diehards do now. Good luck with that.
So it seems likely that BT’s ultimate strategy is to grind Sky to dust and add its rival’s £1 billion of free cash flow to its own business by poaching its customers while adding twice as many more new ones. If it achieves this, the process will be expensive and perhaps as attritional as a Flanders campaign, as it would have to defeat a wounded tiger on territory it had made its own – Premier League rights auctions – a difficult trick to pull off while meeting the aforementioned cash-flow commitments to shareholders.
But Patterson and his team seem to have their eyes on a prize every bit as important to BT as the European Cup is to clubs: a 360-degree media giant with exclusive access to all English and European football and a consumer reach it has never had since being a nationalised utility. Its one-time rival, whose set-top boxes flash in living rooms and whose dishes bristle on the external walls of homes across the nation, might even go the way of other one-time consumer giants like Polaroid, General Motors or American Airlines.
Perhaps as it seeks to defend itself against so explosive a threat to its very existence, Darroch should pick up the phone to Watson after all. Then, rather than to remain entrenched over its differences such as wholesaling content and carrying ads, instead he might treat for peace.
Journalist and broadcaster Matt Scott wrote the Digger column for The Guardian newspaper for five years and is now a columnist for Insideworldfootball. Contact him firstname.lastname@example.org.