BSkyB: “4 more years”

The verdicts are in, the stock market pundits have exercised their confidence –  or otherwise – and the sports pages have had their say on whether BSkyB did the right thing by spending a spectacular £200 million a year more on primetime English Premier League action for the three upcoming soccer season from 2013.

Also just out is a detailed report on the situation from investment banker Morgan Stanley, which delivers what it describes as ‘ten reflections’ on the soccer rights auction.  The bank’s report gives us a detailed ball-by-ball account of the events, and explains how it sees BSkyB benefitting from the decision, and – most importantly – how it intends saving cash to pay the final bill, of some £760 million a year.

First up, the bank would have preferred Sky to have paid less (a sentiment common to all bankers) but loves the deal in terms of the clout it delivers to BSkyB. “116 games is as many as it was allowed to win, it has first choice of game in 20 of the 38 rounds, and it has the critical Saturday, Sunday and Monday evening slots.”

The report recognises that a high price was paid, and this could have other rights-holders (rugby, cricket and golf in particular) rubbing their hands at what this might mean down the line when their own rights come up for re-negotiation. Set against this is a cautionary note which states bluntly that Sky is now looking to save £70 million a year on other sports costs. The bank says: “ (i) We have seen Sky go down this road before of focusing on sports that it sees as critical to subscribers and dropping ‘nice to have’ sports. Sky has reduced its commitment in the recent past to the Guinness Premiership Rugby, the FA Cup and to boxing. In entertainment it ended its output deals such as that with Lions Gate and dropped the Sky Real Lives and Bravo channels. (ii) Sky should be able to drop such sports while ensuring the loyalty of fans given its comprehensive coverage of key sports and extension of rights in recent times in Grand Prix racing, the Masters Golf, the Ashes, The ICC World Cup, England away internationals, etc.”

Morgan Stanley say that setting aside sport, BSkyB has a total cost base of some £4.3 billion, and trimming £70 million from this is a tiny 1.6 per cent challenge. Moreover CFO Andrew Griffith has a strong record of doing exactly this and holding cost growth in check.

Part of this funding gap will start to be filled next month when Sky puts up its prices. Morgan Stanley expects this to be 2 percent, but points out that every 1 percent extra puts $43 million a year into Sky’s bank account. Moreover, the bank says it does not see this alarming viewers too much and forcing churn to increase. Sky has done much in the past year or two to add value for subscribers (Sky Atlantic, Anytime Plus, Sky Go, etc.).

Morgan Stanley’s report absolutely welcomes the security that 4 more years means for Sky, and consumers.  The report states that Sky will also be relieved that its rival (British Telecom) is a devil it knows, and not a deep-pocketed Al Jazeera Sports.

“We note that since the start of the 2010/11 season it has been possible for BT Vision customers to buy packages with Sky Sports 1 / Sky Sports 2 (under the must wholesale arrangements) and ESPN. Right now you can get Sky Sports 1&2 and ESPN for less than £20 per month (£18.20 for SkySports1& 2 plus ESPN for free on TV Unlimited) from BT Vision. Nevertheless take up, based on the Sky wholesale numbers, appears to have been low. New BT will still be able to supply Sky Sports 1&2 and will swap the ESPN football for its own channel – but we do not think this is a giant leap forward in increased competition from the Sky perspective,” says the bank.

“Which brings us to previous competitors,” says the bank “Sky’s first opponent for live football rights in the post Sky-BSB merger era was ITV Digital. Setanta then picked up the baton and at one time had 46 games per year (two packages) including Monday nights in the EPL. ITV Digital went bankrupt in 2002 while Setanta did the same in 2009. ESPN, a subsidiary of Walt Disney and a major global player in sports, has been the next major competitor in this area, but post this auction has no live EPL content remaining. BT has more powerful distribution and customer services infrastructure than any of these previous players but as a sports provider may be limited by a small TV base, an inferior EPL product and as yet very limited other sports content.”

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