The news that BT Sport had bid almost one billion pounds for a three-year deal to cover the Champions League and Europa League football, and creating yet another record for European pay-TV soccer coverage, shocked the industry. In the process, BT Sport has knocked BSkyB out of the game. By any measure this is a game-changing deal for UK sports coverage, and it isn’t good news – except for the clubs and players, of course. BSkyB’s share price fell 7.5 per cent in early trading on November 11 (BT was down 2 per cent).
The agreement, worth a total of £897 million (or £299 million per annum), works out at some £850,000 per live match and kicks in from the 2015-16 winter season, and easily ahead of the current agreement of £130 million a year. The analysts’ comments are out in force, and few of them are favourable to either bidder. Most agree, however, that BSkyB is the loser. Berenberg Bank’s media analyst Sarah Simon sums the situation up, saying: “While BSkyB stated publicly that it believed BT had paid more than the rights were worth, and that it was itself prepared to pay, this is scant consolation, and demonstrates why we are negative on the outlook for the profitability of the UK pay-TV industry and BSkyB in particular. Having a competitor who is prepared to pay more than you, particularly one as deep-pocketed as BT, cannot be a positive. Given BT’s strategy to use premium content to defend its position in broadband and telephony, the value of the rights may well be different for BT.”
Sky let it be known that the games do not figure that highly in terms of viewer ratings, with the games typically gaining only around three per cent of ratings.
Simon predicts more bad news ahead for Sky, not least when the vital Premier League rights come up for sale. But she adds: “For BT Sport, there is no point in taking Champions League only to lose
Premier League rights, so it must fight to defend its two packages of rights, which include half the top picks. For BSkyB, we see pressure to try and take some of those rights back, to prevent BT becoming incrementally stronger, and to improve its own weakened sports offer. Our current modelling assumption is for a 20% increase in the cost of the next Premier League renewal – this now looks optimistic, in our view.”
The bank’s report also says that BSkyB’s lucrative pub and sports bar revenues coming under threat. BT Sport says it has 13,000 such premium outlets already signed up posing a very real threat to BSkyB’s mid-week fans.
There’s another pair of threats to future BSkyB revenues. The first is in Sky’s regular annual price hike, not now due until next Autumn, but the bank wonders how aggressive Sky can be in raising prices by its usual margin. The second threat to BSkyB is in its wholesale revenues from the likes of Virgin Media. “We note that BT has highlighted increased wholesale revenue as an opportunity, suggesting that it will charge incrementally more to Virgin Media if it wants to continue to offer its customers Champions League. The question for Virgin Media is whether it will look to try and negotiate a discount with BSkyB for the loss of those rights,” says the bank’s report.
There’s more to come, says the bank. BSkyB will be under pressure to discount its own broadband packages potentially damaging its ARPU, and the loss of the games will impact BSkyB’s advertising revenues.
But BT Sport is far from home and clear. BT Sport will be paying a staggering £675 million a year for sport (from 2015-2016). It is a high price to pay. BSkyB must be hoping that BT viewer loyalty will not happen and that the challenges of tempting anything from 3-6 million fans to pay between £5-£10 per month for Champions League games will not be achieved.
“In short,” says the bank, “while bulls may say that numbers do not change for now, and may applaud BSkyB’s price discipline, we cannot see any upside from this latest development. A stronger and more aggressive BT cannot in any way be positive for BSkyB, in our view. It is true that nothing changes to numbers for the next two fiscal years, but we believe that valuation should reflect what is a further step change in the competitive landscape, and what could herald a very messy Premier League auction in 2014/15.”