BT’s sporting chance

First published on Industry Briefing, Economist Intelligence Unit, 21 May

In recent years it seemed the only way BT could generate investor excitement was to show what a fine job it was doing at cutting costs. Otherwise, the picture looked bleak. Declining market shares in the UK fixed-line voice and broadband markets, an ailing Global Services division and a mountainous pension fund deficit all cast long and persistent shadows.

Things are changing. After spending lavishly on TV rights for English Premier League football and other sporting events, the UK incumbent is limbering up to launch three BT Sport channels this August. And in an attempt to wrong-foot satellite broadcaster BSkyB – its main opponent in the pay-TV and broadband markets – BT Sports TV will initially come free with BT broadband. Another BT body swerve is to undercut BSkyB subscriptions for pubs and clubs, and reduce the price of its high-speed fibre broadband service.

The satellite broadcaster, for the time being at least, looks on the back foot. BSkyB even refused to run adverts for BT Sports TV on its own sports channels, prompting BT to file a complaint with regulator Ofcom. Yet BT has still got it all to prove. When it comes to producing and packaging content, BSkyB has an excellent track record. BT does not. BT Vision – BT’s TV service launched in 2006 – has struggled to attract subscribers, which number under one million. BSkyB has over ten million. True, some of BT Vision’s management team has BBC and Sky backgrounds, but it’s arguably easier for content players (such as BSkyB) to move into broadband and telephony – which have pretty much become commodity items – than it is for telecom companies to move into content.

Mobile boost

BT, however, is not solely competing in the so-called “triple-play” market, which is the bundling together of telephony, broadband and TV services. The fixed-line operator was a surprise participant in Ofcom’s auction of “4G” wireless frequencies this year, scooping up spectrum in the 2.5GHz frequency band. Capable of supporting high-speed mobile broadband, BT says it will use the newly-acquired spectrum to upgrade its public Wi-Fi network to provide 4G access.

BT has also invited tenders from operators to form a 4G partnership that would enable BT-branded mobile services to be delivered nationwide. It heralds a return to the mobile consumer market after BT spun-off Cellnet (now O2) in 2001. There is some speculation that Telefónica-owned O2 is the front-runner to enter into a BT partnership as it didn’t acquire any 2.5GHz spectrum in the auction. BT might then offer some of its 2.5GHz assets as part of an O2 deal.

A mobile return opens up the possibility of BT “quad-play” services, and there is growing evidence that packaging discounted mobile services with triple-play is becoming popular with consumers. It can also boost broadband take-up.

Telefónica, Spain’s incumbent, launched a quad-play service last September. Dubbed Movistar Fusion, it now has over 1.5 million subscribers. What’s more, Telefónica has seen a surge in broadband subscriptions during that time. In the three months ended December, net gains in fibre customers doubled to 66,000 compared with the previous quarter. Nearly all the broadband customers that Telefónica had lost since the start of 2011 were regained in those three months.

These are encouraging signs for BT, which is spending heavily on a nationwide fibre access network. By the end of March, BT said its superfast broadband network had passed more than 15 million UK premises and that more than 1.5 million homes and businesses had signed up to the service. The plan is to pass 90 per cent of premises with fibre within the next three to four years. A quad-play service may very well boost the rate of fibre take-up.

Bundling services together can also make customers think twice about going to a competitor. According to Bernstein Research, the so-called “churn” rate of mobile contract customers – the number of people leaving an operator – works out at an average of 16 per cent per year among European incumbents. The quad-play churn levels of Virgin Media in the UK, however, are under 8 per cent.

Not out of the woods

BT has still got problems. Sales at its troubled Global Services division continue to drop, not helped by tough trading conditions in Europe and a bruised financial services sector. The pension fund deficit, a hefty £4.5bn at the end of March, is up from £4.3bn three months earlier. A year ago, the deficit was a relatively small £1.9bn.

The good news for BT shareholders is that the company still manages to eke out greater cost efficiencies. Despite investment in new areas, such as sports content, fibre access and spectrum, operating costs and capital spending are falling. For its financial year ended March, BT has upped the total dividend by an impressive 14%.

And though BT has yet to prove it can handle content, BSkyB has reasons to be concerned. The satellite broadcaster has already felt BT’s impact. When the UK incumbent entered last summer’s bidding to broadcast Premier League matches, prices soared. In its current three-year deal, which expires August, BSkyB paid £1.6bn for 115 matches a season. Its new three-year deal, starting in the 2013-14 season, is £2.3bn. At £760m a year for 116 matches, that works out at an eye-watering £6.6m a game (up from £4.7m). BT, meanwhile, splashed out £738m for 38 games a season in a three-year deal.

If BT Vision’s sports channel proves successful, content bidding will no doubt intensify when deals come up for renewal. BT will want to keep in the game. It’s an unwelcome prospect for both BT and BSkyB, but BT shareholders will likely be happier than BSkyB’s if it turns out that way.

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