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Friday, February 23, 2007

More Sky and Virgin Media Fisticuffs

The God of Bloggers is looking down smiling on us, whilst we prepare our sacrifices for the gift of the Sky & Virgin Media War.

Muhammad Ali famously refused to respond whenever anyone called him Cassius Clay. In fact, when Ernie Terrell called him “Cassius Clay”, Ali responded by delivered 45 minutes of brutal punishment, whilst repeatedly shouting “"What's my name, Uncle Tom ... What's my name."

Pathetically, Virgin Media respond to the Sky taunts of referring to them as “NTL/Virgin” by serving a writ on them telling them to call them "Virgin Media" in the future.

Similarly today, when the breaking news is that 4 Sky channels (Sky One, Two, News and Sports News) will be pulled from the cable platform, Sir Richard Branson comes out crying like a little baby claiming Sky have picked up their ball and gone home. Instead I view it as Virgin Media is so obviously being outmaneuvered in the content stakes by Sky.

As far as I can see it, a couple of weeks ago Sky successfully negotiated a cut in Flextech rates (which has been rebranded Virgin Media Television) from just under 40p per subscriber a month for Living TV, Bravo, Challenge and Trouble, to under new agreements less than 10p per subscriber for carriage on the Sky satellite platform. 30p/subscriber/month for 8.4m Sky subscribers will be around £30m per year. This is a big cut that Virgin Media agreed to and there is no way this would have happened if the content had been attracting good viewing figures. I think it also puts the old Flextech division into a loss making position.

Sky on the other hand is trying to earn more money from Virgin Media for carrying their content on Virgin Media's cable network. Actually, throwing in Sky Arts and HD channels is actually a really good negotiating tactic – increase the size of bundle and therefore get a higher price. However, I do have a lot of sympathy to the Virgin Media opinion that Sky were never interested in doing a deal and wanted to pull content from the Virgin Media platform.

Ultimately, the easiest way to differentiate on a TV platform is through Content. Sky have historically also managed to differentiate themselves on the basis of coverage and customer support, but Virgin Media have plans to narrow the gap on customer support. Therefore to me given the relative size of wallets – I expect Sky to hammer home content differentiation as a selling point for the Satellite platform over the cable platform. I don’t believe this is a short term strategy and Virgin Media may be in for a few shocks in the future when other content deals are up for renewal. For instance, Sky own stakes in the following channels:
  • Nickelodeon UK - 40%
  • The History Channel (UK) - 50%
  • Paramount UK - 25%
  • MUTV Limited - 33.33%
  • National Geographic Channel - 50%
  • Attheraces Holdings Limited - 47.50%
  • Chelsea Digital Media Limited - 35%
I expect these channels to threaten to withdraw their content in the future. Sky could also try for exclusive deals with other non-owned channels. Of course, the only way for Virgin Media to compete going forward is through buying exclusive content. The price of content seems to be going only one way in the future and that is up!

The Guardian quotes analysts as saying the current Sky cable TV carriage deal costs Virgin Media £20-£30m per year. This is a drop in the ocean compared to the overall BSkyB revenues of £4.1bn per annum and if you take Sky ARPUs of £400pa, this equates to 50k – 75k subscribers. The Guardian adds in to this another £50m in potential lost ad revenues which equates to a more painful 125k subscribers. In other words, Virgin Media have 3.3m million customers and Sky will have to churn around 200k of them or 6% to break even. I seriously doubt given the content that is planned to be withdrawn that many will churn and think once again Sky is planning to take short term pain for the benefit of long term gain.

This is the problem that is raised time and time again whenever I speak to analysts about BSkyB as a stock. The market is continually worried about what is the next investment round the corner and know that Sky will always make sacrifices to short term earnings.

I believe that Steve Burch landed the most painful blow of the day when he called Sky a schoolyard bully. The Great British Public loves an underdog and despises a bully. Sky really needs to get its PR in order, because it cannot risk the bully moniker taking hold. One of the reasons that Muhammad Ali is held even today in such great esteem by the Great British Public is that he did take a punch or two and even lost a couple of fights. Sky could learn a little from the great man…