INSIGHTanalysis: BBC’s Exit From Carriage Deal Will Not Hurt Sky
The BBC’s decision to pull out of the conditional access satellite carriage agreement that it has held with BSkyB for the last five years (see BBC Ends £85m Conditional Access Contract With BSkyB) is unlikely to have any material effect on Sky, according to media analysts.
The Corporation said that by moving onto the Astra 2D satellite – which is more tightly focused – the signal will not spill into Europe and so it no longer needs to broadcast services in encryption. However, this assessment of the Astra 2D’s broadcast area seems to be debatable, with charts showing potential overlap in France and other countries.
ITV has applauded the BBC’s moves and is continuing to lobby the Government to restrict Sky’s conditional access charges.
ITV currently pays around £17 million per year for a service which it claims only costs ‘a few hundred thousand pounds’ to provide. Sky notes that ITV makes a further £39 million digital dividend from inclusion on the satellite platform and estimates that the Network also receives a further £40 million in advertising revenues.
Implications for BSkyB Analysts believe that these encryption fees are a minor issue for Sky and their loss will not materially hurt its business. Lehman Brothers estimates that Sky receives around £30 million per year from access fees, as compared to a total revenue of approximately £3 billion.
Merrill Lynch analyst figures put the carriage revenue from BBC, ITV, Channel 4 and Five at £25 million a year. It is possible that the other terrestrial channels will follow the BBC’s example and end their contracts, although ITV still needs the encryption to provide regional variations. It is therefore not necessarily a forgone conclusion that the other channels will move to ‘clear’ broadcasting.
Merrill also questions the BBC’s claimed £85 million five year saving (that is, £17 million per year). It estimates that, although undisclosed, the BBC’s access fee is closer to £5 million per year currently. Lehman Brothers also says the figure ‘could be construed as an exaggeration’ and assumes the real payment is around £7 million per year.
The BBC is also asking Sky to alter the software of its electronic programme guide (EPG) so that viewers can still receive their regional programming. The BBC says it has offered to pay Sky “a fair price, including a profit margin” for these changes. Sky has not yet agreed to this, but Merrill Lynch notes that this could be an opportunity for the group to ‘claw back’ some lost revenue from the BBC.
Will ITV follow suit? ITV is likely to look at the possibility of ending its conditional access with Sky in order to alleviate the £17 million per year cost, which it clearly does not believe is justified. However, there will be many more problems for ITV in terminating this arrangement.
Merrill Lynch says that ITV has more rights which are sold on a pan-European basis (Formula 1 and UEFA football, for example) and so any overlap of the Astra 2D satellite into continental Europe could be very problematic.
In addition, ITV’s advertising is sold on a regional basis, so giving viewers across the country the ability to choose which region they want to watch might undermine advertising segmentation strategies and make life difficult for media planners and buyers.
Given that ITV’s contract with Sky does not run out until autumn 2004, it is likely in the first instance to continue lobbying the Government for an amendment to the Communications Bill that will restrict what Sky can charge for the encrypted carriage.