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New Sky thinking - BT may now be BSkyB’s main rival but how might things look in a decade?

26/11/2013

Andrew Lyddon

Andrew Lyddon

Fund Manager, Equity Value

The surprise loss of the right to broadcast Champions League football matches from 2015 after being outbid by BT may have been a high-profile blow to BSkyB but was it really the terminal one a number of market commentators have portrayed it to be? The work BSkyB has done over the last five or so years to diversify its offering on three different levels would suggest otherwise.

While the Champions League is arguably BSkyB’s second most valuable property after the Premier League, the group has a much bigger pool of sports content than it used to. Furthermore, although BSkyB is clearly still dependant on sport, it has upped its focus on drama, comedy and other television content. Finally, at the highest level, it has diversified into areas such as broadband and telephony.

Here on The Value Perspective, therefore, we would argue the loss of the Champions League by no means breaks Sky’s business in the way some commentators are suggesting. For us, the more interesting aspect of this latest development is the way it illustrates how the frame of competition has changed for BSkyB over the little more than two decades the company has existed.

When BSkyB was founded in late 1990, it was competing very much with the UK’s established – that is to say, terrestrial – television operators, which pretty much meant the BBC and the predecessors of what is now Itv. yet, with the market developing so that television and telecoms are increasingly sold as a bundle, BSkyB is now competing not just with general television companies but telecoms providers as well.

Until recently, few people would seriously have thought that BT – a telecoms operator – would emerge as BSkyB’s main competitor for high-value television rights. Other, larger, telecoms operators such as Vodafone have yet seriously to enter the battle for ownership of TV rights, although that company’s chief executive Vittorio Colao recently said he would be “doing a lot of thinking in the next few months about the impact of telecoms companies owning content”. These are much more serious threats with far deeper pockets than BSkyB has hitherto been used to.

And of course the way the digital economy is evolving, with previously disparate elements apparently all converging on each other, means this could all change again over the coming years. so businesses in adjacent areas, such as Apple or Google, may also decide they want content – content being one of the most valuable parts of the chain because it is ultimately what people want to consume.

Sooner or later, therefore, it could turn out that BT and BSkyB, which are considered big fish in the UK pond, are competing on a global basis for the same content with real tech and telecoms giants, which can only increase again the financial firepower involved in an auction.

This line of reasoning has already led to some predictably astronomical projections about what future auctions of Premier League and Champions League rights might raise – and yet, if people could not have predicted 10 years ago how the market would look today, why are they so confident they know how things will shape up a decade from now?

To offer just one alternative scenario, could not the Premier League, say, decide to take BT, BSkyB and anyone else out of the equation and stream matches from the top flight of English football straight to consumers on a ‘pay-per-game’ or ‘season ticket’ basis, as the National Basketball Association and National Football League are already doing in the US?

Equity investors who choose to pay a high multiple for any business on the assumption positive factors currently in place will remain so for the very long term play a dangerous game in our view. The same goes for debt providers who provide long-term bonds at very low financing rates.

Macroeconomic conditions ebb and flow, competitive positions – both those that exist now and those that will exist even if we cannot currently imagine them – also expand and contract and investors need to be careful about extrapolating the present into the future. Times change, so be wary of investing on the basis that they won’t.

Author

Andrew Lyddon

Andrew Lyddon

Fund Manager, Equity Value

I joined Schroders as a graduate in 2005 and have spent most of my time in the business as part of the UK equities team. Between 2006 and 2010 I was a research analyst responsible for producing investment research on companies in the UK construction, business services and telecoms sectors. In mid 2010 I joined Kevin Murphy and Nick Kirrage on the UK value team.

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