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BSkyB: they think it’s all over
A shake-up for the satellite broadcaster may end sport’s TV cash bonanza
Sky dominates the screening of top games featuring stars such as Steven Gerrard and Wayne Rooney
It was a grey February morning as the chief executives of all 20 Premier League football clubs assembled at the Marriott hotel on London’s Grosvenor Square. Football bosses have grown used to such luxury since the game became flush with cash.
The morning promised to be a typical catch-up on business affairs, where the conversation gave way to a spread of sandwiches and tea. It didn’t turn out that way.
Richard Scudamore, the league’s chief executive, warned that the party was, in all probability, over.
The source of top-flight football’s riches — BSkyB, the satellite broadcaster 39%-owned by News Corporation, parent company of The Sunday Times — was facing its biggest shake-up. A three-year investigation into the pay-TV market had put the money that sustained the teams under threat.
“There wasn’t much effing and blinding,” said one source at the meeting. “It was more of a stunned silence.”
In the next 10 days, Ofcom, the media regulator, is expected to order Sky to slash the price it charges rivals to carry its premium channels. It promises to tear at the heart of Sky’s success, built from years of investment.
News Corp’s Rupert Murdoch bet big in the early days of pay-TV on exclusive sport and first-run movies.
The greatest concern for club bosses was how competitive the auctions for the league’s media rights would be if every other potential bidder knew it could simply buy them wholesale from Sky?
The Premier League earns £600m a year from the media rights to live games in the UK. By partnering with Sky, the sport has helped to build a company that is now beamed into almost 10m homes. “They should be concerned,” said Mike Darcey, Sky’s chief operating officer. “The incentive for others to think about bidding for those sorts of rights will be materially reduced.”
The investigation was sparked by complaints from BT, Virgin Media and Top-Up TV — three rivals desperate to rebalance the pay-TV world. They claim Sky has too much power in the market for must-have programming, making it impossible to compete.
Despite Sky’s protestations that their rivals should run their operations more efficiently, Ofcom agreed.
A cut from the £13.48 it charges rivals to as low as a proposed £9.41 per subscriber would hit Sky’s annual wholesale income of £200m, although Ofcom predicts greater volumes would offset the margin cut. But it is in retail that Sky makes most of its money.
After expanding to offer broadband and home phone packages, Sky made pre-tax profits of £456m last year. BT is eyeing some of those riches and believes it needs football to revitalise BT Vision, its TV service that has attracted only 451,000 customers since its launch in 2007.
BT Vision has already let slip that it could use a £4 drop in the wholesale price to undercut Sky by £8 at the retail level — raising questions about why it needs to wait for Ofcom to wade in for it to act.
“We will price as keenly as we possibly can but it has to work for us economically,” said Marc Watson, head of BT’s TV services. He held out the hope that BT could enter the auction for sports rights with a bigger customer base. Rivals doubt it.
Simply having those matches available on any platform could hit Sky’s business. “I think we will have a much tougher time retaining and acquiring subscribers than we otherwise would have had,” Darcey admitted.
Instead of getting mad, Darcey is preparing to get even, with a legal appeal within 60 days of the ruling. This would block the Ofcom order until it can be challenged in the courts.
Ofcom began its investigation under the Enterprise Act but is finding fault with Sky under the terms of its broadcasting licence. “It is controversial to use the law in the way that it is being used here,” said Howard Cartlidge, head of competition at Olswang, the City law firm.
Doubt over the regulator’s future under a possible Conservative government has given it an extra spur to conclude its long-running investigation into pay-TV before the election.
Football isn’t the only sport to be concerned. Francis Baron, chief executive of the RFU, rugby’s governing body, said the Ofcom rulings “could result in a 30% to 40% reduction in the value of sports rights”. David Collier, his counterpart at the England and Wales Cricket Board, said that the watchdog’s proposals could have “a very damaging impact” on the sport.
Detractors say the fears are overblown. Competitive tension cannot drain out of the auctions because there wasn’t much in the first place. BT has never bid for live rights. Virgin, when it was still called NTL, won a package of pay-per-view rights in 2000, only to hand them back.
The City also doubts any new remedy will deal Sky a devastating blow. Its shares have rallied 31% since last June, when Ofcom made its last pronouncement on the issue.
“Although a new pricing structure will allow rival operators to provide a more competitive offering, we think the impact on market shares will, initially, be limited," said Nick Bell, an analyst at Jefferies.
Darcey at Sky believes life will change though, as Ofcom’s “well-meaning bureaucrats” have their way.
FOOTBALL CLUBS have come to depend on media income to help pay the huge wages commanded by their players. Lord Sugar famously dubbed this the “prune-juice economics” of the game, because all the money the clubs earned went straight out again in the form of salaries.
Debts make the issue an even bigger headache. Lord Triesman, chairman of the Football Association, estimated that English clubs have debts totalling some £3 billion, while Uefa claims clubs in the Premier League owe more money than those in the rest of Europe’s top divisions put together — no wonder the sport’s bosses are worried.
On average, income from broadcasters accounts for about 40% of the turnover of Premier League sides, but the actual figures vary wildly depending on the size and success of the club.
At Manchester United, for example, media income was 36% of its £278.5m sales last year. Conversely, the latest accounts for Hull City showed that 84% of the almost £40m increase in turnover it has enjoyed since promotion was from broadcast money.