Fitch: BT Sports Move Could Pressure Sky to Cut Prices

Fri May 10, 2013 11:35am EDT

(The following statement was released by the rating agency) LONDON, May 10 (Fitch) BT's decision to give away its football content free to broadband subscribers changes the pricing dynamics of the industry and could force British Sky Broadcasting to cut prices at a time when content costs are rising, Fitch Ratings says. BT is a more significant challenger to Sky's leading position in UK sport broadcasting than Setanta and ESPN, the last two companies that attempted to grab a share of the market. Setanta was highly leveraged and didn't have the cash to wait around long enough to gain a foothold, while ESPN's owners didn't see the expensive UK sports content market as a long-term strategic part of its business. BT, however, has defensive operational reasons: it is a UK company with an existing subscriber base to cross-sell as well as some cash reserves to mount a more sustained challenge. In our opinion, BT is subsidising its sports content in the short-term, with the aim of boosting its share of the broadband market and strengthening its TV customer base. The company is already spending GBP2.5bn rolling out a fibre network. A strong triple-play offer of telephone, TV and broadband services is important in the UK because of the intense level of competition. BT's TV offering is targeted at the 12 million UK homes with no pay-TV and the 2.6 million households that we estimate only have a basic package from Sky or Virgin. For Sky, TV customer growth has slowed and broadband has taken over as the main growth driver, along with services such as HD and multi-room upgrades. If BT's strategy proves successful in boosting broadband subscribers then Sky may feel it needs to respond with price cuts and new offers of its own. This competition may continue to push up content costs over the medium term, pressuring profitability. Sky's three-year deal for English Premier League football games from August 2013, for example, cost 40% more than the current deal. Our 'BBB+' rating on Sky already factors in slowing revenue and EBITDA growth over the coming years, partly due to increasing competition. The Stable Outlook reflects the group's low leverage and solid cash flow generation. BT's 'BBB' rating reflects the balance between competitive challenges and the resilience of its core cash flow from being the incumbent fixed-line operator. UK consumer business generates less than half of its EBITDA with the rest coming largely from wholesale and infrastructure operations. Contact: Damien Chew Senior Director Corporates +44 20 3530 1424 Fitch Ratings Limited 30 North Colonnade London E14 5GN Mike Dunning Managing Director Corporates +44 20 3530 1178 Simon Kennedy Director Fitch Wire +44 20 3530 1387 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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