We looked last week at the possibilities of BT Sport moving its competition with Sky up a notch with the impending battle over rights to Champions League football.
For many analysts, the clever money was on BT looking to snap up just some of the rights that are currently held by Sky and ITV, although there was always the chance that – if it wanted them enough – the new kid on the block could win the whole kit and caboodle.
A few days after our analysis, it was announced that the latter scenario had become reality, and BT Sport will have exclusive rights to the competition – as well as the Europa League – starting the season after next.
The news was significant in many ways. Having already won the rights to show 38 Premier League games a year, it showed that BT has the muscle to give Sky a run for its money.
Sky has seen off rivals ITV Digital, Setanta Sports and ESPN over the past decade, but BT shows no sign of being another one easily pushed aside.
BT’s bid also addressed the issue of free-to-air coverage. At the moment, ITV shows one free-to-air game in each round of matches, with Sky subscribers getting everything else. Although BT Sport is a subscription service, it has pledged to show some games free – something Sky has never done.
But what was just as interesting, on a different note, was the market’s reaction to the news. The share prices of both Sky and ITV fell when trading opened on Monday morning but the former was the hardest hit, with an initial massive 10.9 per cent fall (although it has since started to recover somewhat). That wiped more than £1.5bn off the value of the company.
However, while there may have been initial panic amongst traders, many analysts had cooler heads and were relaxed about the situation.
In a briefing note, Allan Nichols, a senior stock analyst and international investing specialist at Morningstar, said: “While we were quite surprised to see BSkyB lose the rights, we are pleased to see the firm acting rationally from a finance perspective.
“We don’t see how BT can earn enough to justify the price it paid when even BSkyB, which has much greater scale, passed on the deal.”
In other words, the headlines might have labelled the news as a win for BT Sport, but Sky won plaudits for refusing to bid more than it felt the rights were worth.
Mr Nichols added that BT might have taken a gamble rather than basing its strategy purely on value.
“We wonder if BT’s objective was to try to force BSkyB to pay up for the rights to hurt it financially, and the firm called BT’s bluff,” he wrote.
“Another possibility is that this provides BT with greater leverage in negotiations regarding wholesale deals with BSkyB. Regardless, we continue to think BT’s shares are overvalued.”
Meanwhile, stockbrokers Westhouse Securities agreed that Sky and ITV deserved credit for not paying over the odds.
“Our over-arching reaction is relief that they have maintained their financial discipline and not been tempted to pay more than they have calculated that these rights are worth,” Westhouse said.
“In both cases, European football is a relatively small (if high-profile) element of their broadcast offer and by no means a must-have for many of their viewers.”
Sky and ITV were obviously not the most neutral of commentators when it came to looking at the new BT Sport deal, but both agreed with Mr Nichols that their rival had overpaid for the rights.
A spokesman for ITV said: “ITV is proud to have been the UK free-to-air broadcaster of the Champions League since it launched in 1992 and of the Europa League, but we were not prepared to pay over the odds in the latest live rights round.”
In a statement, Sky said: “We bid with a clear view of what the rights are worth to us. It seems BT chose to pay far in excess of our valuation.
“There are many ways in which we can invest in our service for customers. We take a disciplined approach and there is always a level at which we will choose to focus on something else. If we thought it was worth more, we’d have paid more.”
Unsurprisingly, BT said it believed its winning bid – worth just shy of £300m a season for three years, which is more than double the current arrangement – was worth it.
BT Consumer chief executive John Petter said: “I think [this deal] says that BT Sport is very much here to stay.
“The argument has been made that BT Sport is a marketing gimmick or a flash in the pan, and those things just aren’t true.
“These rights are going to run through until 2018, so it’s proof that BT Sport is here to stay and it’s changing the way sport is done in this country because this gives us more top-class football than Sky, and this makes BT the natural home of football.”
Mr Petter denied that his company had paid over the odds for the football rights, and added: “These were the crown jewels properties for Sky. I’m sure they’ll be kicking themselves today.
“I feel for them obviously, but they got it wrong.”
So we are left with a situation in which all the interested parties claim to be happy with the outcome. Clearly, despite their protestations, that can’t be the case – Sky in particular will be very disappointed that it will have to give up the rights to the Champions League and the Europa League in 18 months’ time.
However, Sky has other fish to fry and the immediate share-price slump might have been an over-reaction given the diversification that Sky has focused on in recent years.
“BSkyB has outperformed its competitors by consistently expanding its television subscriber base,” said Mr Nichols, at Morningstar.
“In addition, it is selling additional services, such as high-definition television, DVRs, second set-top boxes and video-on-demand.
All of these services increase average revenue per user and increase profitability.
“The firm also offers broadband and phone service. These businesses have grown rapidly and are now similar in size to Virgin Media and TalkTalk, though they are still smaller than those of BT Group, the incumbent telephone operator.
“In fact, BSkyB and BT have been gaining the majority of the net new broadband subscribers in the UK for the past several quarters. While the firm doesn’t have the scale in broadband and telephony that it has in pay-TV services, the profitability in these operations is improving faster than we anticipated.”
But while it’s not all bad for Sky, BT Sport is the real winner. When its boss insists it has not paid over the odds, that’s because the broadcaster is looking at the situation from a strategic point of view as well as a financial one. Sky did not need to make a statement of intent but BT did.
Steve Liechti, a media analyst at Investec, said the deal was a “hugely important showcase for BT’s long-term intent and the competitive threat to Sky”.
In other words, it showed that BT Sport is not another ITV Digital or Setanta Sports. It’s now part of our broadcasting fabric.