BT Group plc Will Squash British Sky Broadcasting Group plc In The Pay-TV War

BT (LSE: BT-A) (NYSE: BT.US) and British Sky Broadcasting (LSE: BSY) have been fighting a brutal war for pay-tv customers over the past few years. Now, things are about to get nasty.

This is the last year that Sky will have the rights to broadcast both the Premier League and the Champions League. BT already has the rights to broadcast that Champions League, having won them last November in a surprise assault, now it needs to wrestle the Premier League rights off Sky. 

Better positioned 

BT is undoubtedly one of the UK’s largest integrated media providers, which gives the company an edge over Sky. That being said, Sky is dominant within the pay-tv market, so BT has got its work cut out if it wants to succeed in this arena. Specifically, BT only has around one million pay-tv subscribers at present compared to Sky’s 10.7m. 

Nevertheless, Sky’s dominance has not stopped BT in the, past and it is unlikely to slow the company down now.  BT has now won more broadband net adds than Sky for the last four quarters. The company has been able to use its income from broadband and fixed line telecommunications arms to fund spending on content for pay-tv customers.

According to City analysts, if the cost of acquiring broadcast rights jumped 50%, due to a war between Sky and BT, Sky’s costs would jump by around £3 per user, a rise the company would have to pass on to customers. Meanwhile, analysts believe that BT could easily absorb a 50% rise in costs without having to pass the cost onto customers.   

Changing market 

Nevertheless, the European integrated media market has recently seen a number of changes that are likely to have an effect on BT and Sky’s prospects going forward.

For example, Sky’s £7.4bn acquisition of its sister companies Sky Italia and Sky Deutschland, due to be compared during October will change the dynamic of the European market. The larger company will have more sway with content providers due to the size of its audience and economies of scale will push down costs.  After the deal, Sky will have the opportunity to target 97 million households across five countries.

But there are issues with this deal. Sky’s ratio of debt to core earnings will triple, the company’s share buyback has been halted and more shares will be issued to fund the deal.

Additionally, Sky Italia is losing customers rapidly and only 20% of Germans are willing to pay for tv. Still, it’s estimated that cost saving synergies of £200m will be driven from the deal. 

Branching out

While Sky has been consolidating, BT has been branching out and announced the roll-out of a mobile network service earlier this year. The service will be based on BT’s extensive network of Wi-Fi hotspots. Of course, this brings BT into direct competition with Vodafone: as a result, there has been speculation that BT and Vodafone are discussing a tie-up.