When James Murdoch takes the stage at the British Sky Broadcasting BSkyB annual meeting next month, he could be forgiven for experiencing a sense of déjà vu. Two years ago, when the UK satellite broadcaster chaired by Rupert Murdoch chose the media mogul’s younger son as chief executive, he arrived amid shareholder mutterings about News Corporation’s influence over the company and market concern about BSkyB’s ability to hold on to its exclusive rights to air Premier League football games. Last year, again, a proposed share buyback prompted a minor revolt from investors.
This week, as the increasingly bellicose rhetoric coming out of the European Commission has heightened concerns that Brussels will end force BSkyB to give up its rights to a substantial number of monopoly over Premiership rights, matches, one investor publicly voiced fears that BSkyB’s latest share buy-back proposal will allow News Corp to take “creeping control” by increasing its 37.2 per cent stake in BSkyB. News Corp has promised to cap its voting rights at the current level, even if its economic stake increases, but some shareholders investors are sceptical about such promises after it went back on an assurance that it would not extend “poison pill” protections without shareholder consent.
The reappearance of shareholder dissent about News Corp’s intentions towards Sky – – albeit from only one investor, Hermes – has made headlines, especially as it coincides with a lawsuit in the US over the parent company’s poison pill from 12 pension and investment funds, including Hermes.
But most of BSkyB’s shareholders are more concerned with the change in theincreased competitive threat to BSkyB than with the accusations of nepotism that preoccupied them two years ago. BSkyB’s shares , which dropped 19 per cent on the day when it unveiled a surprise rethink of its business model in August last year, are still below their level they stood at when Mr Murdoch became chief executive and trade at the same multiple to next year’s earnings as those of ITV, the 50-year old commercial terrestrial broadcaster.
On his appointment, Mr Murdoch said: “You are going to judge me in time on the results.” The headline results since then have been impressive. Profits after tax have risen from £184m ($321m) in 2003 to £425m for the year to June. Revenues are up 27 per cent in the period, earnings per share have more than doubled and the company, which had not paid a dividend for five years when Mr Murdoch arrived, is now offering shareholders a cash yield of almost 7 per cent.
But, as BSkyB’s share price indicates, judging his achievements and the prospects for Europe’s largest satellite broadcaster is more complicated than the results alone suggest. BSkyB’s marketplace has changed radically since Mr Murdoch took charge. Much of that change has been driven by BSkyB itself. It has signed up almost 1m more subscribers, bringing the total to 7.8m at June 30, and developed the Sky+ personal video recorder from a small experiment to into a service with almost 900,000 subscribers.
But its competitors are also changing fast. Last week, NTL announced a long-awaited takeover of its rival, Telewest, to create a single national UK cable operator with 3.3m television subscribers and the ability to offer customers the “triple play” bundle of television, broadband internet access and telephone calls; BT has announced plans to launch its broadband video-on-demand service towards the end of next year; and Freeview, the digital terrestrial service, has doubled its market share and is now in almost 5.2m homes.
The risks to BSkyB are that it could face more aggressive competition from the merged cable companies, a faster roll-out of BT’s service than expected and the prospect that customers will settle for opt for Freeview’s limited but low-cost digital offering rather than BSkyB’s broader but more expensive packages. of programming.
The last of those threats may have been exacerbated by the government’s decision to switch off the analogue broadcasting signal around the UK between 2008 and 2012. While BSkyB argues that the mandatory move to digital television will encourage households to consider its service, which otherwise might have stuck with the status quo, many industry executives who saw Mr Murdoch’s recent attack on digital switchover at a conference in Cambridge concluded that BSkyB now sees it as more of a threat than an opportunity.
Not for the first time, investors are debating whether BSkyB is still a growth stock or whether it is on the road to becoming a utility. Last August, it acknowledged the need to spend more money to retain and attract customers, and its marketing budget increased by 30 per cent in the following year.
BSkyB set a target last year of having 10m subscribers by 2010. , and has not veered from it since. But some analysts are now voicing doubts about whether that goal is feasible. Zenith Optimedia expects more homes to have Freeview than Sky by 2008, and expects Sky to have 9m paying customers by 2010, while Deutsche Bank analysts lowered their 2010 forecast for Sky last month to 9.4m households, on the grounds that Freeview is now attracting 70–80 per cent of the customers currently converting to digital. UBS estimates that there is room for 3m more pay-TV homes in the UK. That would suggest BSkyB would have to capture two-thirds of those homes to hit its 10m goal.
One way or another, Most analysts think BSkyB can hit its other goal of 8m subscribers by the end of this year, however, and Mr Murdoch appears unconcerned by the questions about 2010. “We’re pretty confident about our targets . . . When we set these targets we took into account what was happening in the wider marketplace,” he told the Financial Times yesterday.
Even those analysts who question BSkyB’s subscriber targets still believe it can offer attractive growth. “We do not think Sky will achieve 10m subs by 2010 – but so what?” Deutsche Bank analysts asked last month. BSkyB still had ample scope to reduce its cost base once growth in subscriber numbers inevitably slowed, they argued. , and should not necessarily be chasing new customers at any cost.
Indeed, the households which that have yet to adopt digital television are mostly older and poorer than those which that have done so, and Sky is still attracting the audiences which that matter most to advertisers, such as men in the ABC1 demographic group and 16–34-year-olds. “People underestimate our determination to adapt and set the pace at their peril,” Mr Murdoch said on Tuesday.
BSkyB’s history supports this statement. Its decision in 1999 to accelerate the transition from analogue to digital set-top boxes by giving the new equipment away for free was arguably the first and most important step in the demise of the rival ITV Digital service.
To compete with something which that is free, companies typically have two options – to cut their own prices or to offer a product which that is of such demonstrably greater value that customers will be willing to pay for it. BSkyB is pursuing a combination of these both. options. It is distinguishing its product by rolling out Sky+, announcing plans to launch for a high-definition television (HDTV) set-top box early next year, offering programming over mobile phones and developing new services such as online betting – an activity which that will make more money for the group next year than advertising. – and digital radio.
At the same time, It has also become more price competitive. Installation of its basic equipment is now free, it has created a wider range of channel packages priced at as little as £15 a month and it is offering the Sky+ box at below £100. Analysts at Numis Securities have argued that BSkyB should give away the Sky+ box for free, at a cost of £1bn over three years, to hit its subscriber targets. This is not thought to be an option BSkyB is actively actively considering, but the company ’s strong cashflows give it has deep enough pockets that it could to do so. in future years if it thought it would otherwise miss its targets.
The group’s strong balance sheet, which is expected to have net cash by 2007, also allows it to compete aggressively in auctions, such as the expected sale of the Flextech channels owned by Telewest, and for sporting rights.
The cash BSkyB throws off generates is also the reason why some investors may be right to think that News Corporation may want to tighten its hold on the company – although any radical move to take News Corps’ stake above 50 per cent Unless it can increase its holding to more than 50 per cent, News Corp cannot consolidate Sky’s cashflows. Doing so would take something more dramatic than a buy-back, however, such as buying Sky Italia from News Corp for shares. This would seem at odds with the care BSkyB has taken in recent months to avoid further upsets to its independent shareholders.
Guessing at Rupert Murdoch’s intentions is a sport which that preoccupies investors in all of the companies in and around the News Corporation empire, but one at which few have been reliable forecasters. The departure of his brother, Lachlan Murdoch from executive duties at News Corp this summer has revived questions about whether James might be summoned back to head office as a potential successor to his father.
James Murdoch’s achievement at BSkyB may best be measured by the fact that the majority of the investors who complained so loudly at his appointment would take it as a negative sign for the shares if he were to leave now.
Not just about sport but football remains a battleground
BSkyB’s marketing campaign this year featured frogs with red eyes and camels crossing the Sahara – part of the satellite group’s promotion of documentaries, entertainment and childrens’ programmes to try to change the idea that it is mainly focused on football, write Emiko Terazono and Matthew Garrahan.
The company has built its business on sport since it paid the Football Association Premier League £304m in 1992 for rights to broadcast 60 live English football matches each season for five seasons. “It was a big bet at the time, and it worked. But since then, Sky as a proposition has evolved enormously,” says a BSkyB executive.
The company argues that there is now more to BSkyB, and points to a consumer survey indicating that customers associate the service with “choice” rather than “sport”. Even in its sports programming it ranges widely, from more obscure pursuits such as badminton to the US professional golf tour. It spends £750m a year on sports rights, including £340m for live Premiership football games. “There are more than 150 disciplines and over 38,000 hours of sporting coverage,” says BSkyB.
The emphasis on diversifying out of sport and football comes as the European Commission is again challenging BSkyB’s monopoly of live broadcasts of Premiership football.
The Commission attempted to break BSkyB’s grip on live games packages in 2003, when the Premier League split its rights into four packages to give broadcasters the chance to buy at least some games. BSkyB bid for these packages separately and was awarded each of them, paying £1.02bn for a three-year contract to broadcast 138 live matches. The Commission considered legal action against the television group but was regarded as having lost the fight.
With BSkyB’s three-year contract due to end in 2007, the Premier League and the Commission are locked in a battle to establish the rules for rights to live games in 2007-2010. Broadcasters including cable groups and terrestrial television channels, and financial bidders including private equity companies, are understood to be lobbying for a 50 per cent cap on the number of games that a bidder can win. NTL, Telewest, Setanta and ITV are all interested in acquiring live football and see the next round of contract talks as an opportunity to take market share from BSkyB.
In an effort to appease Brussels, the Premier League has proposed splitting its live rights into six packages of 23 games, theoretically giving more media companies the chance to buy rights. BSkyB has already accepted that it will lose its exclusivity.
“Sky has had its run,” says one rival broadcaster. “Fifteen years ago the BBC was all powerful and then Sky took its mantle. But Sky risks losing it.” The next contract could potentially be an “absolute nightmare” for the company, he adds. “If it loses 50 per cent [of its live matches] how can Sky justify its prices?”
The loss of its monopoly is likely to prompt some BSkyB sports fans to cancel their subscriptions, although analysts at UBS forecast that revenues from retail subscribers will be largely unaffected. However it believes that BSkyB’s revenues from the many pubs and clubs that screen matches, estimated at £159m this year, could be hit if a rival broadcaster were showing live games.
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