#29 Future of Sky PLC after Ownership Change

October 3, 2018

After Comcast emerged triumphant in the long-running battle for the British pay-TV group Sky PLC by beating Rupert Murdoch’s Twenty-First Century Fox in a rare auction held two weekends ago, the U.S. cable company was tasked with gathering those shares of Sky at the auction-winning bid of £17.28 per piece. Having secured 38% over the very first days PLC in the open market, Comcast and Disney announced last Wednesday (9/26) that Disney, the ultimate owner through the $71.3bn deal to buy most of Fox’s film and TV assets, would also sell its own 39% stake at Comcast’s auction-winning bid price tag of £17.28 to its U.S. rival. Having secured majority control over Sky PLC, Comcast subsequently announced it would stop buying Sky’s shares in the open market. Current shareholders of the British pay-TV operator, however, have still until next Thursday (10/11) to sell its shares at £17.28 to Comcast. Shares closed at £17.285 on Wednesday (10/3) on the London Stock Exchange as investors don’t seem to expect any more major news coming. This is a follow-up blog to my previous piece covering the lead-up to the all-deciding auction: #28 Comcast-Fox Battle for Sky heads into Crunch Time: Financials, Subscriber Growth & Rights Strategy.

 

Howie Long-Short: Being able to sell its 39% stake in Sky at the auction-winning valuation of +/- $39.0bn is a great deal for The Walt Disney Company given that it valued control in Sky at £15.67 per share during the blind auction to settle the drawn-out takeover saga – being outbid by its rival by +/- $3.6bn. It could’ve been expected that the minority stake had to be valued at much less since Comcast did not necessarily need Disney to sell its stake to gain control over Sky. Nevertheless, not having Disney as rebellious minority shareholder is certainly the preferred outcome for Comcast.

For its part, Disney relinquishing any say into Sky’s future in exchange for +/- $15.6bn will greatly reduce their financial leverage needed to close the $71.3bn Fox acquisition. Combined with divesting the 22 RSNs (valued at +/- $15-22bn), net acquisition costs could decrease to +/- $35bn after all. Especially if Disney slices and dices the RSNs by selling them individually at the highest bid to interested parties, the anticipated sale of the sports networks could yield capital inflows at the upper end of the valuation range: Digital-only players with ambitions in live sports (e.g. Amazon, Facebook, Alphabet/YouTube), financial investors attracted by the strong, stable cash-flow of RSNs (e.g. private equity), or cable/satellite provider wanting to avoid costly carriage disputes with the popular RSNs (e.g. AT&T, Comcast, Sinclair) are expected to give Disney a call. A wholesale of the RSNs back to “New Fox” should also be considered since it would fit perfectly with the company’s new strategic focus on news and live sports (see: WWE SmackDown Live, Thursday Night Football, Premier Boxing) - being the only remaining “appointment television” to fight the decline of linear television. Michael Mulvihill (EVP Research, League Operations & Strategy @ Fox Sports) seems bullish on the company's future prospects once the deal with Disney is closed in 2019.

Significantly reducing the financial debt load would provide Disney with more flexibility for the upcoming renewals of the U.S. broadcasting rights to the NFL (2021, currently $1.9bn/year), MLB (2021, $700m), and NBA (2025, $1.3bn) as well as its transformation from its current legacy wholesale model of selling channels to multi-channel video programming distributors (e.g. Verizon's FiOS, AT&T's DirecTV, Comcast's Xfinity) to a direct-to-consumer (DTC) business model, often coined “Disneyflix.” Disney shareholder seemed to agree with exiting Sky PLC as the stock rose more than 2% during the day of the tender announcement (9/26), ultimately closing higher at $115.21 (+1.4%) on the day.

 

One thing, however, that Disney seemingly did not get was a “swap trade” for Comcast’s 30% stake in the streaming platform Hulu, the second largest pure-play SVOD player (i.e. no live sports) in the U.S. only behind Netflix. Owning 60% after the closing of its acquisition of major Fox assets, Disney will be asked to negotiate a separate deal for Comcast’s (30%) and AT&T’s (10%) stakes if it wants to have full ownership of the virtual MVPD operator. Migrating Hulu’s existing subscriber base (>20m subscribers) into Disney’s own direct-to-consumer efforts should sound quite appealing to the Burbank-based company since having Hulu and “Disneyflix” co-existing and, thereby, competing for the same discretionary income of the consumer looks rather sub-optimal.

Although it was widely expected among the financial community in London that Comcast what come in aggressively to the auction, some analysts and financial reporters voiced their surprise that Disney didn't follow through with a higher bid. The aforementioned implications of a lower debt load, more capital to invest in its direct-to-consumer product, and the general skepticism of the underlying rationale for acquiring Sky (e.g. acquiring more legacy media business, doubling-down on live sports in environment of skyrocketing rights fees) in the wake of the costly Fox acquisition seemingly prevailed among Disney’s executives, who essentially made the decision on behalf of 21st Century Fox.

Fan Marino: From the perspective of the U.S. soccer fan, an interesting subplot will be the coverage of English Premier League, which dominates the North American soccer television market together with the Mexican Liga MX, going forward: Someone should expect that it is a done deal that Comcast (via NBC), paying currently $1bn over a six-year period for the exclusive EPL broadcasting rights in the U.S., retains these rights beyond the 2021/22 season in the wake of acquiring Sky PLC. The British broadcaster will continue to be EPL's most important media partner when the new three-year domestic media rights deal in the U.K. (+/- £1.55bn per year through 2022) will kick in after the current season. As the primary rights holder (128 out 200 broadcasted games per season), Sky PLC will account for +/- 77% (£1.153bn per year) of the deal’s total value, which has Sky’s rival BT Sport (52x games) and Amazon (20x games) as complementary rights holders. Although NBC is likely to have to absorb higher rights fees to retain the EPL beyond the current six-year deal (2016-22), it should be their absolute priority as the EPL seems to be the only European soccer league with serious traction among U.S. consumers: The English league pretty much dominates the other European soccer leagues in terms of both revenues from media rights as well as TV viewership.

 

Whereas as I extensively covered the lack of momentum of the German Bundesliga in the U.S. in recent years (Hot-Take #1: DFL und Bundesliga mit mangelnden Erfolg auf dem US-Markt), the Spanish La Liga has sky-high ambitions as evidenced by its joint venture with Relevent Sports, which is called “La Liga North America,” to stage at least one game per season in the United States over the next 15 years. However, the Spanish league has to overcome a powerless media partner with beIN SPORTS whose broadcast distribution has dropped below 10 million households amidst its carriage dispute with multi-channel video programming distributors (so-called “MVPDs”) such as Comcast (22.1m potential subscribers) and DirecTV (25.5m potential subscribers).

 

The Italian Serie A, for its part, has at least avoided the issue of limited distribution by moving from beIN SPORTS over to ESPN, whose flagship channel is available in 86 million TV households, before the current season. However, it has generally lacked star power compared to the English and Spanish counterparts to draw attention in international markets. Even an aging Cristiano Ronaldo joining Juventus FC could certainly be a game changer, especially in international markets. 

 On the surface, the question which TV network (or OTT player) will carry the biggest soccer property (read: Premier League) beyond the 2021/22 season in the U.S. seems obvious: NBC. However, EPL have not seemed to care about any affiliation among its rights holders and has traditionally taken the highest offers: In Germany for example, Sky – despite paying £1.392bn per season for 126 out of 168 broadcasted games in the U.K. at the time – lost the EPL to totally unproven newcomer DAZN in 2016. As of today (10/3) that has probably changed as Sky Germany has just re-acquired the broadcasting rights for the upcoming three-years cycle (2019-22). That is a huge loss and the first major setback for DAZN (currently paying +/- €12-13m per season): Scooping up the Premier League from market leader Sky Germany (paid +/- €4-5m per season) had jump-started the OTT platform's launch back in 2016 and was an enormous subscription driver. On the other hand, the ties between Sky PLC and Premier League, not surprisingly given the aforementioned ramifications, are getting deeper again, a good sign for NBC's future. Considering the relatively early award of the broadcasting rights with just three days after the tender's deadline, it can be assumed that Sky PLC - with the financial backing of new owner Comcast - went aggressively after the EPL after having lost several media rights in Germany (e.g. Formula 1, UEFA Europa League) in the recent past.

 

Across the pond, the question for the U.K. consumer will be whether there will be any changes to Sky’s football coverage in wake of the ownership change. Granted, NBC is doing by far the best job covering soccer among any rights holders of a European soccer league in the US (e.g. ESPN/Serie A, FOX/Bundesliga, beIN SPORT/La Liga). But Sky knows how to do English football. Live broadcasts of the EPL have been carried exclusively by Sky from the EPL’s foundation in 1992 until the implementation of the “No-Single-Buyer” – Rule in the United Kingdom for the 2007/08 season. Sky has continued to be the league’s primary domestic rights holder while being complemented by Setanta (2007-10), ESPN (2010-13), BT Sport (2013-2022), and Amazon (2019-22) ever since. The growth of Sky can be greatly attributed to the boom of the Premier League after splitting breaking away from the English Football League in 1992 to take advantage of more lucrative broadcasting rights deal. (Read: The top clubs were no longer willing to share media revenue with the smaller teams of the four divisions across the entire EFL.) The exclusive draw of Fox’s “The Simpsons” and the Sky Box Office movie-on-demand portfolio were two other major growth drivers for the British pay-TV group.

 

Instead of dictating football coverage (e.g. ‘Americanization’ of sports coverage), the best thing for Comcast would probably be letting Sky autonomy on the European football market. Instead, leveraging the newly-created opportunities for international distribution of their other entertainment content (e.g. Universal Studios, Dreamworks) to compete with Netflix, Amazon etc. should be the priority for Comcast. In fact, getting broader distribution outside of North America was the fundamental investment rationale for both Comcast and defeated Disney: Sky PLC is a vertically integrated telecommunication service company that sells bundled TV/phone/broadband services (so-called ‘triple-play’) to 23 million European households – with sought-after live sports content being the primary subscription driver. As Sky PLC has recently expanded beyond its satellite pay-TV roots (e.g. OTT service in UK, Ireland, Germany, Austria, Italy, Spain, and Switzerland plus production of local original programming), Comcast should use that distribution infrastructure to effectively compete with Netflix (+/- 29m subscribers across Europe in 2017) outside of North America. Comcast now has a global footprint of around 53 million customers

 

Sky with Pivot to Premium Strategy in increasingly competitive Landscape? Having secured the position as the primary domestic rights holder of the EPL at least through the 2021/22 season does not only guarantees the company’s relevance in the U.K.’s broadcasting market, but is also beneficial for the Premier League – in addition to the fact of being the league’s largest source of revenue: Despite the increasing number of alternatives on the sports rights market, Sky’s reliable and comprehensive distribution infrastructure (e.g. 13m pay-TV customers in the U.K.), brand recognition as established sports broadcaster, and production as well as editorial expertise are competitive advantages in fields that are at least questionable with newcomers like Amazon and Eleven Sports. It probably also allows the league to take such bets like Amazon’s “20x games/season” – schedule starting next year. That statements by league executives during the recent domestic media rights tender that the league was pondering an in-house OTT offering as a serious alternative to commercializing media rights through third-party rights holder were purely aimed at driving up prices and competition was also obvious from the beginning. Same was true for La Liga and its president Javier Tebas who used similar tactics during this year’s media rights negotiations. In comparison to Premier League’s Richard Scudamore, Tebas at least avoided a decrease in domestic broadcasting revenues and ended up with an increase by 15% compared to the previous rights cycle (+/-  €1.14bn per season) by doing so. 

 

With Sky PLC remaining the league’s primary media partner for the foreseeable future, the question will be which content should complement the EPL on Sky’s platform: In my opinion, a company’s pivot to a premium strategy with regard to its rights portfolio against the background of rising acquisition costs and competition seems to be a viable option. As domestic markets for premium properties start to move towards saturation, long-tail content, in particular, has been experiencing serious value appreciation by being pursued by OTT newcomers. As a result, an obvious target for Sky PLC could be re-acquiring the UEFA Champions League starting with the 2021/22 season. Current rights holder BT Sport has already reduced its sports rights portfolio greatly with the UEFA Champions League (through 2020/21), UEFA Europa League (through 2020/21), and Premier League (through 2021/22) remaining the British telco’s main assets. Although the UEFA Champions League is perceived as far less prestigious in the U.K. compared to Spain (think: Real Madrid’s pursuit of “La Decima”) and Germany (think: FC Bayern’s “Finale Dahoam”), it is probably still one of the few sports properties that is able to drive subscriptions for Sky PLC and its telecommunication services. Thereby, it would be a tremendous complement to the Premier League (through 2021/22) and the increasingly popular English Football League (through 2023/24) on Sky's channels.

 

Cutting down on long-tail content, however, seems to not support Sky’s recent reorganization of channels from numbered to sports-branded outlets. The need for a large content library under such an approach would probably be not fully satisfied with a more streamlined rights portfolio, but might be the best decision from a business perspective. A similar rebranding has recently been undergone by Sky Italy (e.g. Sky Sports Football/Golf/F1/NBA/MotoGP/Serie A), but not in Germany. 

 

Implications of for Sky's new Ownership and Market Entries by Amazon, Eleven Sports & Co.

Losing UCL in 2021 would likely be the death-nail for the ambitions of the British telecommunication group on the sports rights market. I would not predict a complete shut-down of BT Sport right away in this case, but recently losing NBA (ultimately went to Sky UK), LaLiga and UFC to the pure OTT offering of newcomer Eleven Sports and the comprehensive distribution agreement with Sky PLC could imply that the company’s priorities have changed since entering the sports rights market with the news-making acquisition of EPL rights starting with the 2013/14 season. Instead of fiercely challenging market-leader Sky at all cost, cutting costs seems to have been made a priority. In times of skyrocketing rights fees, exclusive sports content has probably rather been a loss-making endeavor instead of an attractive customer acquisition channel for its telecommunication services. Other media companies such as Fox Sports in Italy have selectively shut-down its sports-carrying channels after losing their core rights this past summer. BT Sport would join the group of Setanta and ESPN that unsuccessfully tried to challenge / co-exist with Sky PLC in the U.K. after the implementation of the “No-Single-Buyer” – Rule in 2007. In related developments, something very similar is currently happening with Eurosport in Germany who became rights holder of the Bundesliga in wake of the implementation of such regulatory rule in 2017. The Pan-European pay-TV group indicated that short- to mid-term rights deals such as the four-year deal with the Bundesliga (paying +/- €70m per season) will not be considered anymore in the future. Instead, longer-term, cross-border partnerships are the name of the game at Discovery Inc. in the future (see: 12-year deal with PGA Tour for +/- €2.0bn and 6-year deal with IOC's Olympic Games for +/- €1.3bn).

 

 

 Nonetheless, the next challengers for Sky PLC’s primacy on the world’s second largest sports rights market – valued at +/- $4.1bn by SportBusiness Group in 2016 – are seemingly ready to go: Eleven Sports (NBA, La Liga, Serie A, PGA Championship, UFC) and Amazon (Premier League, US Open, ATP World Tour) have aggressively acquired broadcasting rights from the market's incumbents. However, there is a reason why established media companies or new OTT players continue to target this fiercely competitive landscape: The world’s highest share by the sports rights market from the national GDP (0.15%) and the most money spend per capita on sports media rights underline the business opportunities and consumers’ willingness to pay for premium sports content. Therefore, it will probably be only a matter of time until other competitors (e.g. Facebook, YouTube) target the U.K. and with the recently-rebranded DAZN Group (formerly: Perform Group, now only includes the B2B services such as data provider OPTA and its broadcast production unit) being headquartered in London, it is hard to imagine that the VC-backed OTT platform will not enter the British market soon. 

 

Apart from coping with this increasingly more competitive sports rights market, the British pay-TV group will have to continue to expand beyond its core satellite TV business under its new ownership (e.g. OTT, production of local original programming) to ensure the long-term viability of its business by becoming a multi-platform operator: Wireless satellite distribution might have been revolutionary for ESPN in 1979 to facilitate the reception of live sports beyond local markets, but the alternatives (e.g. cable TV, IPTV, OTT) are plentiful nowadays and become more reliable by the day.

 

Speaking of new consumption platforms, the just-released “PwC’s Sports Survey 2018” takes an extremely bullish position on changing consumption habits from linear/long-form/TV to digital/short-form/mobile. Although I do not necessarily agree, the survey predicts that the now fourth-placed broadcaster’s OTT offerings (e.g. Sky GO) will be overtaken as the top channels for consuming sports content over the next 3-5 years by: 

  1. tech firms (e.g. Facebook, Amazon, Google),

  2. pure OTT offerings (e.g. DAZN, Netflix), and

  3. rights holders’ OTT offerings (e.g. LaLiga4Sports, NBA Game Pass).

 Two things, however, should be noted in this regard: First, traditional broadcast companies such as Sky, Comcast, and ESPN have become highly innovative companies themselves and the distinction between old and new media seems outdated. Second, PwC’s study refers to sports content in general and not just your full-length live broadcast, which will probably take more than the 3-5 years to move to a digital-only distribution, if ever. 

 

The consequences for Sky in wake of being taken over, by the way, have taken a backseat in the news coverage, but offers many open questions: How will the people at Sky react after having done things pretty much on their own way for all these years and now they will have to answer to Comcast? They really understood English football, will Comcast? At least, Comcast said the takeover would have a limited impact on Sky’s headcount, which makes some sense, in particular, in the short-term: Comcast’s investment rationale was rather to expand beyond its saturated domestic market using Sky’s infrastructure as a springboard instead of creating value by having a highly efficient organization, at least at the beginning.

 

Then there’s Jeremy Darroch, Sky’s chief executive, who is in line to receive £50m after the completion of the takeover by Comcast. He might stay for the transition period, but with millions in his back pocket, it is hard to see him hanging around for too long.

 

On a positive note for the EPL’s coverage in the future, there are plenty of opportunities for Comcast and Sky to learn from each other and exploring additional synergies. Tapping into the expertise of Sky’s football coverage (e.g. providing Sky live-commentary for NBC viewers in the U.S.) or NBC’s production skills (e.g. coverage of Olympic games and NFL) are potential scenarios. But both parties might hold off to go all-in on collaborating for the EPL coverage until NBC has secured broadcasting rights beyond its current deal that expires after the 2020/21 season.

 

Editor Note: This column was published in an edited, shortened version on JohnWallStreet.com, a daily newsletter covering the intersection of sports and finance. If professional teams & stadiums, television networks, and companies in the area of apparel/footwear, equipment, ticketing, or content trade on Wall Street, and have a sports angle, it’s in their wheel house. Get your daily dose of sports business with Howie Long-Short (financial analyst) and Fan Marino (sports fan) each providing their expert opinions on the day's top stories: Subscribe here to the JWS Newsletter. You can also follow me (@yannickramcke) and the friends over at JohnWallStreet (@JohnWallStreet) on Twitter.

 

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