Let me ask you a question. Is competition a good thing?
Erm, I hear you reply, of course it is. If you don’t have competition, then one company will dominate the market, set any price it wants, and it’s the customer that ultimately suffers. That’s why we have bodies like the Competition and Markets Authority, to prevent this sort of thing from happening.
Sounds fairly obvious, doesn’t it? Except dig a little deeper and you find that competition can, sometimes, actually be a bad thing.
Monopolies aren’t all bad
Take the pay-TV market. For the past 25 years Sky (LSE: SKY) has monopolised the sector. No other firm has managed to get anywhere near Sky, and the company has been the sole supplier of live Premier League football, cricket, golf and a range of other sports. It’s also been a key provider of movies from all the major Hollywood studios. It sounds like a recipe for rising prices and lowering standards. But actually, it means that we have in Britain the best pay-TV platform in the whole world.
By being sole supplier, Sky has built up a critical mass of customers, which means it has unrivalled buying power. And most people it seems, myself included, wouldn’t choose any other pay-TV platform. By being unencumbered by competition, it has been able to focus all its attention on providing a better service for customers.
Its recent move into Italy and Germany means there’s further scope for growth. That’s why, despite the share price rising so much already, I would still rate this firm a buy, both for its growth potential, and for its income. At a 2016 P/E ratio of 17.44, and a dividend yield of 3.24%, I think it’s fairly priced.
What about the competition?
I was a little irritated to find I could no longer watch Champions League football or several Premier League matches, because they had moved over to BT (LSE: BT.A). This telecoms giant is muscling into pay-TV in a big way. Yet this additional competition actually means that I now pay a higher TV subscription for less TV. So there you have it, this is a case of competition being not such a good thing.
Nonetheless, I understand BT’s motives, and I suspect it can make a success of it by providing a cut-price alternative to Sky. If you add pay-TV to BT’s booming services and broadband businesses, you can understand why this company’s share price has also been pushing higher. The acquisition of Everything Everywhere (EE) makes BT an even better proposition. That’s why I rate BT, just like Sky, as a buy for both growth and income. A P/E ratio of 15.94, with a dividend yield of 2.9%, makes the company very reasonable value.