Stop picking on Sky!

Last week assorted UK regulators delivered three heavyweight punches to BSkyB. I just wonder if it isn’t time to stop picking on Sky?

First, the broadcaster was ordered to sell down its stake in ITV. Then it emerged that BSkyB might have to fully dispose of what might then be a minority shareholding in ITV. Finally, and most important of all, and following a 21 month enquiry it was determined that Sky has “market power” in the industry, and might have to wholesale its expensively won premium channels to third party rivals.

Let’s be absolutely clear, Sky is without doubt a huge force in UK broadcasting, especially in terms of its Blue Riband sports coverage. By common acclaim the fortunes it has ploughed into English soccer – and other sports – has revolutionised their leagues and tournaments. Sky, of course, is not a charity: it has secured TV rights in order to close out other would-be operators, but it has maximized viewing enjoyment, covering events in a breathtaking fashion.

And in the process it has built its viewers to 9m subscribing homes, achieved over the past 18 or so years, and the largest number of DTH pay-subscribers in the world outside North America. Technically, its pioneering work in interactivity is praised and imitated around the world. Its move into HDTV (and some 30 channels by year-end) and MPEG4 leaves its other UK pay-TV rivals floundering in its wake.

Copying, or at best imitating, BSkyB’s test-bed pay-TV model goes on all over the world. Indeed, its alumni former staffers are frequently to be found running other pay-TV operations just about everywhere, such is their “best of breed” knowledge.

Who else can create this “best of breed” performance? The complaint about market domination came from the UK’s “Gang of Four”, Virgin Media, Setanta, British Telecom and minnow Top-Up TV.

Let’s take a look at them in turn. How about hapless Virgin Media? Virgin was a top loser last week on the Nasdaq, where its share price has tumbled from $16 to $6.84 over the past four months giving it a current Market Capitalisation of $2.2bn (a miserable £1.24bn) and still not achieving profits (it lost £333m in Q2 this year, or $588m, to June 30) as it “continues to lay a strong foundation for future growth,” in the words of CEO Neil Berkett in August. Not a bad statement for a company that in the form of NTL went belly-up in May 2002 with debts of $18bn (then the largest-ever debt default in US corporate history).

Indeed, Virgin Media has yet to make a profit of any substance. Its ARPU is down (now £41.63 compared with £42.16 a year ago, a significant fall, especially when you consider inflation rates over the past two years. Virgin Media has $10bn of long-term debt around its throat. Its senior managers must also be hugely relieved that its plan to take a large slice of ITV two years ago was thwarted by Sky (which has taken a £600m hit on its 17.9% stake to date).

Virgin Media, along with a few other rivals to BSkyB, wants to see Sky broken up, and one must ask who might pick up the pieces? Setanta Sports, the cheeky Irish consortium has been something of a thorn in Sky’s side this past two years. It has competed vigorously for soccer rights, sending core TV rights up in the process. Last week Setanta filed the accounts of its UK wholesale subsidiary, and reported that losses rose to £3.1m in 2007, a four-fold increase on 2006 losses and pushing accumulated losses to £4.6m. A spokesman for Setanta Sports said the UK entity, which is one of a number of subsidiaries operated by the Dublin-based broadcaster, wholesales Setanta's channels in the UK. This would include sales to cable TV operator Virgin Media, which carries some Setanta stations as part of its basic digital offering. Most of Setanta’s profits flow into its Irish (or perhaps now Luxembourg-based) parent company, as it tries to minimise tax losses.

But it’s been no great secret that Setanta has been trying to sell itself. Bankers Goldman Sachs were looking earlier this year – when times were better – for some cash-rich investor prepared to stump up $2bn for a non-profitable business. Possible buyers included British Telecom (which would have used it as a marketing tool for its BT Fusion broadband IPTV service) and Disney-ESPN. The talks seemingly came to nothing.

Top-Up TV is a small pay-TV player, founded by two very highly-regarded former BSkyB heavyweights, David Chance, deputy CEO, and Ian West MD of Sky Entertainment. Top-Up offered a theoretical 23 “channels” of content mostly drawn from people like Virgin Media, Disney and MTV Networks, and now played out as a “best of” service on the UK’s Freeview digital-terrestrial service. This multiplicity of programmes are all shoehorned into 4.5 channels of actual bandwidth. But it also offers Setanta Sports 1 amongst its bundle as well as NBC-U’s Picture Box movie service. Assorted ventures (Top-Up TV Pay as you Go, Xtraview) have been abandoned. In May 2006 it restructured itself, putting the old business in liquidation with reported losses of £7m.

Ofcom, thankfully, rejected these assorted calls for Sky to be broken up, and insiders seem not to be too fazed about having to sell its unique sports (and movies) packages to its rivals. Virgin, after all, covers only a small portion of the UK, while BT is hamstrung by the technical limitations of DSL. Meanwhile, Sky is already pushing its pre-Christmas “sign up for HDTV” offers, thereby guaranteeing that it keeps hold of the cream of the crop in terms of its core sports fanatics.

Currently BSkyB’s wholesale income is a mere four per cent of its revenues, says Goldman Sachs’ Laurie Davidson, who suggests that if Sky is forced to cut – say – 10% from its wholesale terms would impact BSkyB’s earnings per share by just three per cent. Unpleasant, but far from catastrophic.

The bigger question is whether Sky would then continue to pay top-dollar for exclusive sports rights. If its rivals knew they would gain access to Sky’s entire premium content then why would they even enter the bidding frame? In other words the people who might suffer here would not be BSkyB, or fans generally, but the actual sports leagues themselves.

So, my suggestion to Ofcom and the other meddlers in Sky’s business is to leave well alone. Encourage Sky to compete aggressively with its REAL rival, the BBC. Let’s have more investment in quality UK-created drama on Sky One, and in the process see Sky 1 emerge as Britain’s answer to HBO. Let’s also encourage Sky to continue investing in minority programming (like its excellent Arts strands). Let’s encourage Sky to use its profits wisely – and leave it alone in terms of further damaging regulation.