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Mike Darcey, who was Sky’s COO for 14 years until departing in 2012 for a job on Murdoch’s newspaper division, has said he believes that both Sky and BT Sport will be considerably less aggressive when bidding for new sports rights.
In a blog post, Darcey explains that BT Sport now knows that simply adding unlimited sport to a channel’s portfolio can lead to “diminishing returns”, especially from top-flight football.
He says that well-developed strategies from would-be bidders do not always work to plan. “The simple model assumed that a bidder assesses the value of rights, bids accordingly and the sees that value accrue to their business. But in the real world this estimate of value could be well wide of the mark. The valuation challenge is usually greater for the entrant who lacks prior market experience of monetising the rights. If a cash-constrained entrant over-estimates the value of rights, wins, then finds that the real-world experience of the market does not live up to the optimism of the spreadsheet, this could lead to a rapid exit. But if the error is less egregious, or the entrant is cash-rich, then they might simply drop the rights next time round, or at least bid less.”
“Sky will certainly have been aware that BT, as an IPTV player, with TV closely linked to its broadband and telephony business, will think about value through a different lens,” argues Darcey. “Detailed business modelling can help, but it remains a considerable challenge to get inside BT’s head and understand how BT assesses value. Sky seemed annoyed and genuinely surprised when it discovered how much BT bid for UCL rights last time round. Does this mean it had failed to get inside BT’s head? This would be surprising given Sky’s experience and given the signals provided by BT’s aggressive EPL attack in 2012 and the fact that it secured less than it had hoped for. Nevertheless, if Sky did fail to get inside BT’s head last time, has it remedied that situation now?”
The focus now is on the upcoming Champions League rights. Equity analysts at Exane/BNP-Paribas agree that there are potential reasons why Sky might be less aggressive in its bidding. “Thus far the operational impact of the loss of the Champions League has been limited. Furthermore, their lack of flexibility to offset the expense of regaining the Champions League in the cost base (post a very expensive EPL bid) and the uncertainty that the 21st Century Fox bid creates for the Sky management may limit the appeal of aggression in the bidding process.”