Virgin’s Deal In the UK To Become A Quadruple Player – Fixed Lines, Mobile, Broadband, and Television – Is A Forerunner of What Will Occur Elsewhere. And Suddenly BSkyB Has A Real Program Competitor On Its Hands -- Watch Those Sports Rights!

Philip M. Stone December 5, 2005

It’s the kind of deal that, when announced, seemed such a natural, and it propels Sir Richard Branson yet again into the limelight, this time as the biggest shareholder in a company that will deliver broadband to 2.5 million customers, that already has 4.3 million fixed-line accounts, more than five million mobile customers and 3.3 million cable TV subscribers.
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Combine the synergies of that access into our homes and our pockets via the mobile, and once the deal is completed the newly formed Virgin media group in one stroke becomes the UK’s leading entertainment business with more than nine million customers.

Until now it had seemed that Rupert Murdoch’s BSkyB had it all going its way. His satellite TV service, built mostly upon exclusive rights to British Premier League football (soccer) coverage and first run films, now has some 7.8 million customers and it has targeted to have 10 million by 2010.

And to get to those homes where satellite is difficult, and also to open up the Internet broadband market, Sky recently announced it was becoming a triple player by buying ISP Easynet for £211 million, that gives it access to fixed line and Internet broadband. But Easynet does not have a mobile arm.

And Sky was very smug recently when the European Union and the Premier League announced they had reached agreement on how future football rights would be sold in the UK. The EU objects to Sky’s current exclusive rights on all platforms. Under the new rules that the EU will announce next year the rights will be divided into six separate blocks with no one vendor allowed to take all six. But Sky was confident no one could match its financial muscle, and it would get those blocks it really wanted, anyway. 

But with Richard Branson’s new powerhouse on the scene, you can take it to the bank that he will actively be looking to get as much of that Premier League football as he can. Sky suddenly has a competitor on its hands that can play the same financial game that it does. Sky in the past has simply paid more than it knew its competitors could afford based on their terrestrial television based financial models.

But Branson’s financial muscle is something else. He will want football rights for the mobile market let alone for his broadband and cable business. And with his presence as Virgin’s leading shareholder the City banks should be welcoming the new company with open arms.

One thing that Sky has learned about its UK business is that its customers are not so loyal if there is a better deal elsewhere or if subscription costs get too high. Its churn rate is exceptionally high – 11.7% in the 3rd quarter — compared to a churn of less than 5% at its sister Sky Italia where football is important but actually takes second place in importance to first-run films.

If Sky loses some of its most important football coverage, or if a Sky subscriber is given the opportunity to get some football programming at a lower price elsewhere, then that sets the stage for Sky to have an even larger churn problem on its hands. It has recently been spending more than £200 in marketing costs for each new customer signed. There will come a point where something has to give if Branson gets the crème of the football programming.

The deal will come somewhat as a shock also to BT, the largest British telephone company. It is teaming with Philips and Microsoft, to turn itself also into a television company next year offering 30 digital terrestrial channels via aerial reception plus a video on demand library and a “catch-up” service covering the past seven days delivered via broadband. It has said in the past it was not interested in bidding for the Premier League rights.

The Branson deal is basically a reverse takeover worth anywhere from £4.5 billion to £7 billion. It sees Branson basically swapping his 72% holding in Virgin Mobile for a 14%-15% stake in the NTL cable operator. NTL, meanwhile, is in the midst of gobbling up Telewest Global, a competitive communications company, for some  £3.5.billion that will give NTL access to more than 50% of UK households.

That deal, subject to regulatory approvals, should close in Q1, 2006. Assuming it goes through – a prerequisite for the Virgin deal to go forward -- and then the Branson arrangement comes to fruition, the new company will be renamed with the Virgin brand. When all is said and done, Branson’s stake in the new company will be worth around £1 billion.

Branson started Virgin Mobile five years ago using the T-Mobile network. With his usual marketing touch he built the business to where it could be floated last year and since then its value has increased by 50% making the business worth around £800 million.  Branson’s Virgin Group holds 72% of the Virgin Mobile shares.

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Branson, 55, is the UK’s most famous student dropout, leaving school when he was 16 to start a magazine called Student.  By the time he was 20 he had launched Virgin Records as a mail-order service and then he opened his first Virgin record store on London’s main shopping artery.  Next was his own record label in the 1970s signing some of the biggest names of the time including the Rolling Stones.

In 1984, age 34, and already a multi-millionaire, Branson took a huge gamble by entering the international airline business, starting an immediate “war of words” with British Airways about service and ticket prices that lasted for many years. He sold his music business in 1992 to concentrate time and investments on the airline, and what had started as a one-plane service to New York has now grown to more than 25 destinations. The one Boeing 747 start-up, now 49% owned by Singapore Airlines, is worth more than £1.2 billion.

The Virgin brand, meanwhile, has extended to everything from cola soft drinks to UK train services, although with the latter the less said the better. Even so, Virgin is recognized as one of Europe’s most powerful brands.

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Sky Prepared To Spend £1 Billion to Renew Football Rights - December 7, 2005

BSkyB senior officials have given indications of Sky’s reaction to the Virgin/NTL deal.

In London, speaking before a House of Lords select committee, the Sky head of sports, Vic Wakeling, said the company was prepared next year to spend what it spent five years ago to secure Premier League Football matches – some £1.1 billion even if that amount actually bought fewer games because of a new system covering rights insisted upon by the European Commission.

And in New York, Jeremy Darroch, Sky’s chief financial officer, told an investor’s conference that Sky was satisfied for now to concentrate just on television, broadband and fixed-line phones and had no immediate plans to add mobile phones and become a quadruple player in competition to NTL/Virgin.

“I don’t think fundamentally this (NTL/Virgin merger) changes the competitive landscape,” Darroch said.