BT, Sky and the Premier League:
Tight budgets and worried investors pose key threats to the next Premier League TV auction, writes Christopher Williams
As sport’s slickest hype machine turned at top speed last week to prepare the ground for the new Premier League season, senior Sky executives were more interested in the less glamorous end of professional football. Phone calls flew between upmarket London restaurants as they sealed a £120m-a-year deal to retain broadcast rights to the lower leagues.
The bill increased by a third. To most businesses such inflation in the cost of key supplies would be intolerable. For Sky, which at the last Premier League auction agreed to pay an 83pc higher price, it counted as a better than expected result.
With the Championship, League One and League Two secured, attention will now turn back to the big prize. The Premier League is readying its next auction of domestic broadcast rights in February, under heavy pressure to bring yet more cash into the game. Meanwhile its customers, Sky and BT, may have stretched their finances to the point that paying much more would be a damaging own goal.
“It has got to be a down round this time,” says one senior Sky executive. “There is no more money.”
Sky was built on football but its love affair with the beautiful game is now costing it dear. Its current £1.4bn-ayear Premier League deal has meant painful cost cuts. Ambitious international expansions have been delayed, customers have been pushed to serve themselves more online and budgets for secondary sports, such as golf, have been trimmed.
Sky was recently narrowly beaten in an auction of ATP tennis rights by Amazon. Even though the price was only around £10m, Sky took the view that the impending retirement of the big four players who have dominated the men’s game – Federer, Nadal, Djokovic and Murray – meant it was not worth paying more.
At the same time, Jeremy Darroch, the chief executive, has been gradually increasing spending on original dramas to satisfy the appetite for high-quality box-sets. As the Premier League sale looms, he has sought to emphasise that football is not the only reason Sky customers subscribe.
“The Premier League has remained fantastic, it’s important but it’s critically only one part of the mix,” Darroch said at Sky’s full-year results last month. “And that’s also true in some other sports; there are one or two other things you’ve seen us walk away from because we can just see a better way to deploy the capital.”
He also suggested that in some ways dramas are a better investment than football, because they build up a library of exclusive on-demand series. As Netflix and Amazon plough billions into their own catalogues, Sky is defending its subscription base.
“If I look at the range of Sky originals we’ll have next year, that’s significant,” said Darroch. “And we’re starting to see viewing numbers on some of these productions that are big. Of course, the difference they have relative to live sports is that they repeat for a long time so the tail of value, if you like, we get tends to be greater.”
Bidders talking down the value of the Premier League ahead of an auction is nothing Richard Scudamore, the organisation’s executive chairman, has not seen before. He also knows Sky has a big incentive to maintain the status quo. Its £11.7bn takeover by 21st Century Fox, which will still be under scrutiny during the auction, means a big shift in football broadcasting would carry even greater jeopardy than under normal circumstances.
Private concerns that Sky may have reached the limit of its ability to make a return on top-flight football are a recent factor in the mix, however.
As well as cutting costs, it has raised prices, but company sources say it will not squeeze more money from pay-tv this year, fearing subscribers will abandon it and not return. The company’s actions on football are beginning to match its words. That view is backed up by analysis by Vysyble, a consultancy that promotes “economic profit” as a better measure of value creation than traditional accounting. This is made up of net profit after tax, minus a business’s cost of capital. As rights costs have ballooned, Sky has swung from an economic profit of £734m in 2012 to a loss of £44m this year.
“Sky is clearly creaking under the strain of the latest domestic football TV deal and, for us, this is further evidence that the boom in TV revenues for clubs has reached, or is very close to reaching, its peak,” says John Purcell of Vysyble.
Under normal circumstances, BT, which currently pays £320m a year as the junior broadcaster, might open its cheque book and seek to usurp Sky. It faces serious financial pressures of its own, however, along with upheaval in the management of its sport strategy following the abrupt exit of consumer chief John Petter last month. Some BT shareholders already fear their dividends are under threat from bigger top-up payments to the company’s pension deficit and heavy investment in network upgrades. They have already suffered a downgrade in the wake of the Italian accounting scandal that wiped £500m off the company’s cash flow this year. Some managers believe BT should put more emphasis on its network and less on sports.
On the other hand, advocates of BT’S push into sport highlight its acquisition of the mobile operator EE, which offers opportunities to spread the cost of the Premier League across more customers. “Sport is still a huge point of differentiation for us,” says one BT executive. “Those customers are more willing to pay, more willing to stay and they buy more products.”
Shareholders will not tolerate steep inflation but are not calling for the company to give up on sport. “Anything heading towards 60pc again would clearly not be acceptable,” says one major investor in BT. “That said, I actually think the retail business has been one of the success stories for BT and we would not want to see the strategy change much. The content strategy has actually worked very well when you look.”
One possibility is that BT would focus its bidding on packages of matches that Sky is least likely to want. The Premier League is not allowed to sell all its rights to one broadcaster, so BT could hang back and play a sweeper role in the auction, minimising its costs while retaining some rights. Given the Premier League has benefited massively from BT and Sky’s head-to-head, a more defensive strategy would be a problem for Scudamore. According to football sources, such fears have prompted the first full review of the auction structure in several cycles, with a squad of consultants called up.
“Richard is acutely aware of the positions of BT and Sky,” says a Premier League insider. “He’s not daft. His job in the next few months is to talk to bidders and potential bidders and then come up with a structure which is exactly what people don’t quite want.
“That means they have to bid across more packages, and increases the competitive intensity. Any inflation of less than 20pc would be viewed as pretty flat by the clubs.”
The Premier League would love Amazon, Google or Facebook to bid, and could design the auction to tempt them. BT, Sky and independent sports rights sources remain sceptical that domestic football rights would make a sensible next step in the online giants’ push into television.
“These global players can clearly afford it,” says a BT source. “Cost is pretty much irrelevant. The question is does it make sense, could they spend the money better on other things?” Chelsea players after winning the Premier League last year: in future, even more matches will be broadcast. Below left, the league’s chairman, Richard Scudamore, ‘is acutely aware of the positions of BT and Sky… He’s not daft’ Sky questions whether the broadband infrastructure is yet capable of reliably live streaming a Manchester derby to millions. It has invested heavily in infrastructure to ensure customers of its own, relatively small, Now TV streaming brand are not frustrated.
Scudamore’s best bet for increased rights revenue is to sell more matches. The Premier League has promised Ofcom it will sell at least 190 games for live broadcast, compared with 168 under the current deal. Football sources said they expect more
‘Sky is clearly creaking under the strain of the latest domestic football television deal’
‘The Premier League has remained fantastic; it’s important but it’s critically only one part of the mix’
than 200 matches to go on the block this time.
That could allow all parties to claim victory. A flat or lower cost per game could still deliver more cash to clubs. More legitimate live matches would also help the Premier League tackle its piracy problem.
The pitch and complex tactics are still under development on all sides. Nevertheless, the Premier League knows that securing another steep increase in domestic TV money will be no walk in the park this time.