British Satellite Broadcasting

Versus Sky Television

Siddhant Singh
2015IPM107 Section F
Siddhant Singh, 2015IPM107, Section F 1

Introduction

By October 1990, two new entrants suffered a combined investment of £1.25 billion and a
weekly £10 million loss and are waiting desperately the Christmas season to fall in better
hands. Rather than behave rationally and focus on profit maximization and a long run going
concern for the entire industry, the two companies engaged in a bloody war, that let the
industry suffer one of the major loss ever and led to the merger of the two companies.

This case outlines one of the most ferocious competitions of the satellite TV, and announces
a series of battles under other skies in the same industry.

Description of the situation:

We are faced with an extremely competitive market with two players. The situation could
be summarized in the hereunder points:
- High cost entrance
- High Operational Costs
- Existence of substitutes (BBC, ITV and Channel 4 terrestrial TV and VCR for movie
channels)
- High antagonism between the players
- Government intervention to regulate the industry (applicant –BSB- was “forced” to
use high cost risky transmission standards)
- Uncertainty about the technology used
- The two companies markets the same product (TV channels package, including a
movie channel)
- Two “monopolists” based behaviors who are confronted to a ferocious competition.
- Price was setup from the beginning in the initial application to IBA (could be
assimilated to a regulation)
- Each subscription is considered as an asset (power to retain its customers) because
of the high cost of switching from one provider to another.

The game started far before the going “on air”. It has officially started on 1986, when IBA
has granted a 15 years franchise for BSB to run its commercial service on three of its five
DBS channels.

For matter of simplicity, we will assume that BSB has three aired channels out of potential
five DBS channels. The two channels aired on the same frequency will be considered as one.

The terms of the license were that BSB pay for the construction and launch of two high
powered satellites . Yet the terms of the franchise were not listed in the case, we could
assume the following:
- IBA will allot the remaining two channels with the same terms

Porter’s 5 Forces Analysis of Soft Drinks/ Aerated Drinks Industry SM-I

Siddhant Singh, 2015IPM107, Section F 2

- Since the two DBS remaining channels could not be easily scrambled, intelligence or
military use would not be considered. Only commercial use would be useful.
- The second applicant will share the costs of high-powered satellite with BSB (or lease
the rights for 15 years)

Due to the high cost of entry and the High Price of operations (movies rights, programming
and Marketing) BSB did not expect any other competitor to enter the market using the two
left DBS channels. BSB management felt comfortable with this situation as a monopoly over
the British Satellite Broadcasting industry.

An aggressive, well experienced and fortunate entrant takes the red line path with an old,
cheap but proven technology.

On June 1988 Rupert Murdoch announced his intention to enter to the satellite
broadcasting game, through an old but cheap and proven technology. Furthermore, the
launch of the satellite package was scheduled 6 months before BSB’s launch, which clearly
cut the grass under BSB’s feet in term of first entrant in the market.

BSB management through their market intelligence did realize the big threat of Murdoch’s
announcement knowing:
- Murdoch’s intention to get to the business
- News Corp. Experience in British TV broadcasting (stakes in ITV)
- News Corp. agressivity and determination to have a critical mass
- The size of News Copr. (one of the top three biggest Media Groups and one third of
British newspaper)
- “Benediction” from Prime Minister Margaret Tatcher

BSB predicts that the satellite dishes penetration in the Briton’s households will be much
higher than the penetration of VCR, which regression has been primarily used to forecast
the satellite dishes penetration. They have applied a rate of approximately 2.3 times the
speed of VCR penetration within the same market. They are supported in their approach by
the fact that they signed up the rights for films and ensured access within 6 months of their
release on video instead of 12 months. They also have thought that a much diversified offer
could help cannibalize both VCR addicts and regular terrestrial TV watchers (BBC, ITV and
Channel 4). They, besides, have decided to launch a very aggressive Marketing and
promotional plan in order to speed up the adoption by the market for the satellite TV
broadcasting and their innovative and high quality (though very expensive) technology.

BSB’s management has a lot to gain from a higher satellite dishes penetration among
Britton’s households (even better than staying alone with the former assumption of market
growth). Thus a realistic decision should be in that case to increase the commitment and
“harder the game”.

The basis of the thinking of the BSB’s managers was healthy. Their assumptions were
valuable. They anticipated a booming change in the TV broadcasting and a rapid adoption of
the British market for the high quality satellite TV broadcasting.

Porter’s 5 Forces Analysis of Soft Drinks/ Aerated Drinks Industry SM-I

Siddhant Singh, 2015IPM107, Section F 3

Nevertheless, they eclipsed one relevant point which was that BSB and SKY offer rely on two
different standards and that the public could be skeptic and wait before investing in the
reception equipment . And this is what happened.

Furthermore, BSB costs were very high, and even their way of managing was extravagant
compared to a much more pragmatic way of its competitor. As an example BSB hired people
installed them in a luxury head quarter, had engaged £500 start-up costs while Sky TV had
leased their head quarter in an industrial suburb of London and paid only £100 million as
start-up costs.

One could not blame only BSB managers, IBA have a lot of responsibility in the failure of this
franchise. Indeed, by “forcing” them to use a costly, not proven, not sustainable and non
tested alternative (D-MAC) they implicitly pushed BSB to the highest cost alternative and by
not regulating the market to force off the air new entrants with lower quality broadcasting,
they have weaken BSB future wealth.

Conclusion
One can say Sky TV, who “merged” with BSB . Consumers and advertisers have profited by
this situation, with high quality programming and movies for the former and low advertising
fees for the latter. US movies groups have also profited by this situation as they have been
paid almost 3 times their rights.

Amstrad could be considered as the one how have won the game. He came out of the
doubtful deal of BSB and contracted a deal with Sky to sell the equipment. He is the unique
player who has not lost a penny in that game (Virgin having left the game and the industry).

Porter’s 5 Forces Analysis of Soft Drinks/ Aerated Drinks Industry SM-I