Thumbs Up for Virgin/BT Sport deal

BT is supplying its BT Sports channel to Virgin Media’s cable customers via a wholesale agreement. The news has gone down well with the market. Investment banker Morgan Stanley, for example, described it as a “good deal” for BT, and Virgin.

“The agreement,” says the bank, “means that Virgin customers will no longer have to leave Virgin (either to BT for broadband or to Sky for TV) in order to access BT Sport. Virgin has said that they will offer BT’s Sports channels (SD and HD) free to their XL TV customers, whilst other Virgin customers can access the channels by paying an extra £15 per month. The wholesale agreement is for 3 years and the terms of the agreement have not been disclosed. This deal appears very similar to the way ESPN UK was distributed by Virgin.”

And the deal puts cash into BT’s revenue stream. Morgan Stanley says: “BT Sports’ costs are essentially fixed at £375 million per annum, and whilst BT may have initially hoped to see more customers leaving Virgin for BT, these customers are relatively ‘sticky’ as they are served with faster broadband and TiVo TV. Hence, the bull case of taking broadband share from Virgin looks less likely.

However, a wholesale agreement with Virgin is still profit accretive to BT. Virgin has 3.8 million TV customers and potentially one-third could be XL customers. We do not know the terms of the wholesale agreement. If the wholesale price to BT was £4-8 per month (say around 50 per cent less than the retail price for wholesale), this could imply £50-100 million in wholesale revenues for BT after VAT, or around £75 million at the mid point. At the mid point, this would amount to a 3 per cent FY15e net income uplift.”

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