BSkyB May Face Rocky 2014 as U.K. TV Competition Heats Up

Satcasting giant sees soccer dominance erode but pushes new products and ad innovations

BSkyB faces competition from BT Sport

LONDON — Rupert Murdoch’s BSkyB, for more than two decades the U.K.’s dominant provider of pay TV, celebrates its 25th anniversary in 2014 but is only now facing serious competitive threats.

After seeing off such formidable rivals as Disney-owned sports net ESPN and the U.K. terrestrial broadcaster ITV, strategists at BSkyB are thinking hard about competition from British Telecom.

The once-staid telco continues to suffer from a reputation for poor customer service, but as Sky found out the hard way, the company possesses very deep pockets.

“The next 18 months will be crucial for Sky,” says Tim Westcott, principal TV analyst at IHS. “The growth in Sky’s core business is slowing down as the British pay TV market matures. In the past year, there’s been a real dropoff in the number of new TV subscribers, so Sky is attempting to expand by getting people to take its broadband service — and this is the area that BT is hoping to block off by bundling in broadband with BT Sport.”

BT Sport — which announced in October that it has 2 million subscribers — was launched last August, but already the upstart has had an impact on BSkyB’s profits, which were down 8%, the company reported in October, to $472 million.

That drop can be traced directly to BSkyB’s battle with BT over rights to the U.K.’s sporting jewel in the crown, Premier League soccer games, which ended up costing both bidders a combined $4.9 billion. BSkyB still holds on to the bulk of the games, but BT nabbed the rights to televise 38 matches over the current 2013-14 season and the 2015-16 season. BSkyB had to fork over an extra $358 million a year for the rights, making its total investment $1.25 billion.

But the real blow came in November, when the telco paid an enormous £900 million ($1.46 billion) for a three-year deal for premiere European soccer competition Champions League, more than double the value of current contract, which is shared by Sky and ITV.

It will be the first time a single U.K. broadcaster has owned all live rights to the flagship European event, in which top teams like Manchester United, Bayern Munich and Barcelona compete for Europe’s biggest soccer prize.

Still reeling from that pact, now Sky faces the even more alarming prospect of losing further ground to BT if the telco succeeds in outbidding it for the biggest prize of all — the majority of U.K. TV rights to the British Premier League soccer competition.

Negotiations for the next three-year Premier League contract are due to be completed in 2015, but already media commentators predict that BSkyB faces unprecedented competition.

“What BT paid for the Champions League suggests it is in the mood to bid very high indeed for the next Premier League contract,” observes Toby Syfret at Enders Analysis. “BT has a lot of cash at its disposal — some £2.5 billion ($4 billion) in free cash flow — plus growth opportunities in high-speed broadband.”

Yet despite the competition, BSkyB still looks strong. With revenues of £6 billion ($10 billion) a year and 10.5 million TV subscribers in the U.K. and Ireland, BSkyB remains far and away Blighty’s biggest pay TV provider.

Adding new TV subscribers, however, is increasingly difficult.

Disposable income remains tight in the U.K. as many families struggle to fight off the long impact of the 2008 global economic crash, while new competition from lower-priced services of the pay TV market continue to make headway.

In the three months to September, Sky added only 37,000 new subscribers, quite a drop for the service, which added 100,000 new subs in that same period in 2010, a healthy mark for comparison.

And it is not clear how many of these paid for a full subscription or instead were customers of the firm’s new budget online service, Now, which bowed last year to compete with Netflix.

“It is hard to gauge how Now is doing because BSkyB no longer publishes separate figures for direct-to-home satellite but adds them together with Now’s users,” explained Westcott.

All BSkyB will say is that despite the fact that the number of new TV subscribers is slowing down, there is still growth in the market.

The company adds that its other activities are buoyant as it puts greater emphasis on connected services and persuading subscribers to take as many services as possible such as HD, mobile offer Sky Go — and, of course, broadband.

Having launched Sky Broadband relatively late in the day in 2006, it is now the second biggest U.K. broadband provider after BT, with around 5 million customers. BT Broadband has 7 million.

Recent innovations like the budget Now TV box sold strongly in the pre-Christmas retail binge; priced at a mere £10 ($16), the box, which resembles an Apple TV box, bowed in the summer.

In 2014 Sky will roll out Adsmart, the targeted ad service that offers BSkyB the opportunity to harden its advertising rates.

Yet compared with the appeal of top-flight soccer, these innovations remain incremental to the core business.

It is estimated that around half of Sky’s 10.5 million TV subscribers buy Sky Sports, and the fear at BSkyB is that many would cancel those subscriptions if BT became the home of soccer in the U.K.

Sky has also turned to high-end original content to shore up sub numbers and has made much of its investment in the well-received bilingual collaboration with Canal Plus “The Tunnel.”

Next year a minimum of £600 million ($975 million) will be plowed into U.K. drama, comedy and factual shows; NBCUniversal and HBO are among Sky’s co-producers.

But in London there is a feeling that BSkyB, well known for controlling costs, is being more careful still about developing and commissioning content and acquiring programs.

“Sky’s business is being disrupted by BT,” says one U.K. TV chief. “There’s no question about it. If you talk to U.K. producers and U.S. studios, they all say that Sky is spending less than it was before BT forced up the price of football rights.”

So where will the cash — perhaps as much as £300 million ($488 million) a year — that BSkyB once earmarked for the Champions League be spent?

The official answer is that it is “too early to make a commitment,” according to a BSkyB spokesman. “The breadth of our business, across content, product and services, means we have lots of options about where to invest. Ultimately, we will make choices based on where we can create the most value for customers.”