British Sky Broadcasting’s financial results continue to defy the recession that is biting so hard into rival commercial broadcasters such as ITV, Channel 4 and RTL’s Five.
In the first quarter of its financial year, BSkyB increased revenue 10 per cent to £1.4bn and operating profits 11 per cent to £198m.
But while the recession has failed to dent BSkyB’s growth, the regulators might succeed. Since its inception, BSkyB has built its customer proposition on being able to offer premium content such as football and films that is not available elsewhere.
However, after complaints from rivals such as Virgin Media, Ofcom is proposing that BSkyB should be forced to sell its premium content to other pay- TV operators at wholesale rates.
Writing in Friday’s FT, Sir Richard Branson, founder of the Virgin Group, said BSkyB resembled British Airways in 1990. “There’s a dominant incumbent with an iron grip on the supply of key content that uses all its muscle to prevent competitors coming into the market,” he said. Virgin holds a 6.5 per cent stake in Virgin Media, BSkyB’s main rival in the UK subscription TV market.
James Murdoch, BSkyB’s chairman, on Friday told shareholders at the company’s annual meeting that he would “resist any such attempt to control the market in this way”.
“Sky’s story over the last two decades is an example of the positive benefits that private enterprise can bring,” he said. “The current proposals by Ofcom to intervene in the pay television industry represent a threat to the climate for investment in this country.”
However, BSkyB has not been relying solely on its content to attract customers. The company has also been investing heavily in technology such as Sky+ digital recording devices, high definition TV and 3D TV, strengthening its lead over the competition.
Analysts say that is a strong argument against accusations of market abuse – and could insulate it from the threat of having to share its best programming.
“On [Sir Richard Branson’s] definition, if a monopolist is someone who tries to prevent innovation, Sky isn’t a monopoly,” said Nick Bell, analyst at Jefferies. “It’s an extraordinarily innovative company, from a consumer perspective.”
BSkyB’s technology has had a “halo effect”, helping to maintain customer numbers, said Toby Syfret of Enders Analysis. But its success highlights its ownership of the most enticing HD content, which could further alarm regulators, he said.
That proves technology and content “go together”, Mr Syfret added. “Both are important.”
But as market penetration rises, selling new technology – whether broadband subscriptions, mobile applications or access through devices such as Microsoft’s Xbox 360 – to existing subscribers has become vital to BSkyB’s growth.
“Four years ago we were entirely reliant on selling to new customers,” said Jeremy Darroch, chief executive. But in the last three years, average revenues per user have risen by £80 to £469 per year.
“We know that one of the reasons we are still successful and keep growing is we are constantly finding new things to do,” Mr Darroch said. Technology does not attract all TV viewers though, and BSkyB’s greatest competitor remains free- to-air television.
“One of the reasons Sky is successful in this country and has pricing that is not monopoly pricing is Freeview,” Carolyn Fairbairn, ITV’s director of strategy, said.
But although BSkyB and Freeview “keep each other honest”, she added, that could change if Freeview’s technical development fails to keep pace with Sky’s. Project Canvas, the ITV’s joint venture with the BBC, BT and Five to bring internet television to the living room, “extends that competitive environment into the on-demand age”.
BSkyB and Canvas will see the digital switchover as an opportunity to pick up new customers. BSkyB’s additional investment in marketing in regions such as the borders and west country has paid off with increased market share, analysts say, although these are small markets compared with Granada in the north-west, where the analogue signal will be turned off before Christmas.
Mr Syfret estimates that with 250,000 potential new subscribers each year, BSkyB could generate an extra £50m to £100m from the switchover.
But Mr Bell says the 3m remaining analogue TV viewers may not be keen on paying for TV at all. “Compared to the other platforms Sky will do well, but it’s a question of how many of those households are really interested in making the move [to pay-TV].”
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