BT, Sky and the Pre­mier League:

Tight bud­gets and wor­ried in­vestors pose key threats to the next Pre­mier League TV auc­tion, writes Christo­pher Wil­liams

The Sunday Telegraph - Money & Business - - Front page -

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.

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