BSkyB

Business model

subscription, pay TV, satellite

Strategy: control content and control access. “buy it and grow it, or buy it and kill it”.

• Won rights to some of the best content, including soccer Premier League.

• Now, if fans wanted to watch soccer, they had to become subscribers of BSkyB

• Control of set top boxes is key

Strategy:

Strategy - International

Staying below the radar, and focusing on a niche market that more powerful global companies may be ignoring are good strategies to consider when competing against a stronger global leader. The book “Transnational management” focused on companies such as Dell, Cemex and Electrolux that successfully followed this strategy to international success. The key to this strategy is to focus just on one niche market, but to develop multiple layers of competitive advantages in that product or service. A company may start out as an OEM supplier to more powerful international companies, or they may focus on serving industries that established leaders consider insignificant. The goal is to develop strength and infrastructure. Then, when the company is ready, they should move quickly to expand with its own brand and challenge quickly. This was seen in the BSkyB case when Sky chose to enter the satellite TV market which BBC considered to be a peripheral market that it was not interested in. By staying under the radar, they were able to build on their strengths and eventually challenge BBC for mainstream viewers (and ad dollars)

Global companies have an advantage over local-only companies because they can cross subsidize. They can afford to take a loss, or minimal profits, in one market if they are making money in another. In BSkyB case, we saw how a successful media company could use profits in other part of world to launch a risky business in Europe, essentially using profits from one part of the world to compete in another. BSkyB had used its strength in other parts of the world to build its business in Britain. The multinational reach provided them the money they needed to competitively bid for content, where local competitors that just focused on satellite TV could not. In this aspect, the reach of being a multinational organization proved to be very beneficial for New Corp. As another example, British Air can lose money on domestic routes because it makes big profit on international ones. This strategy was used to keep prices low and to discourage local competition. In this way, competition is like global chess. Through this case, and the text, I came to understand that part of the reason that globalization is so controversial is exactly because of the fact that local companies are at a disadvantage to global (foreign) ones. It was clear that the benefits of scale and scope economies (and global learning) put local-only companies at a sever disadvantage. As local companies fail, there is sure to be frustration, which explains why there is so much hostility toward globalization in the world today.

company history

• Britain moved slowly to allocate channels

• BBC was offered from government, but declined, saying they didn’t have funds, market

• SATV started in 1981 by Brian Haynes. Rented space on European telecom satellite (not broadcasting), to cover most of Europe and England. His goal was to copy HBO and CNN in the model of using satellite to deliver content to cable companies that redistribute via cable to consumers. But he had trouble because cable was very small in Britain, and also because he lacked content. Without content, he couldn’t get advertising, and without advertising, he couldn’t get programs distributed. He constantly had to raise funds. One time, he turned to Rupert Murdoch of News Corp, who invested 10 million pounds. Later, he replaced Haynes and took control of the new entity. New management was good at producing content.

• 1983 – Murdoch purchased Satellite Television (SATV) and renamed it Sky, and broadcast to 20 European countries, via deals with local cable (not direct to homes).

• 1986 – Britain decided to auction satellite to broadcast direct to home. Sky Company tried to win rights, but lost in competition to new company called BSB (of Richard Branson’s Virgin Records + others). BSB had goal of becoming first direct to consumer satellite TV broadcaster. BSB planned to use new technology, with square receivers. Estimated start up of ½ billion dollars. Hired top industry executives to create content

• At same time, Sky launched quietly, and in a small fashion. They would use existing, old technology that was not compatible with HDTV. Inferior technology, using a second rate satellite company in Luxembourg (after being turned down in their bid for the high powered satellite in Britain). The Luxembourg satellite, however, had the advantage of being outside of Britain’s legal jurisdiction.

• Murdoch challenged authorities, and challenged status quo.

• Competition between BSB (high profile, deep pockets), and Sky (more modest business plan) began by competitive bidding for movie distribution rights of Hollywood films.

• Result was that Sky had to change business model from advertising to subscription model to meet the demands of Hollywood. Distribution could not compete with local distributors in Europe.

• Sky failed to sell receivers at retail outlets, so was forced to go door-to-door with over a 1000 sales people selling receivers. Direct marketing organization. Offered big promotion of free movie channel, free installation and free maintenance. BSB, however, was slow to start due to technological problems.

• BSB spent way too much money, becoming the 2nd most expensive startup in British history (after only the Channel Tunnel). In order to keep raising money, they set sales targets for future tranche of capital.

• BSB attacked Sky on the regulatory front charging that they were using “technological wizardry” to avoid British regulations (by being based in Luxembourg). They also challenged the legality of a foreigner owning a TV news station in Britain.

• BSB ended up losing all regulatory attacks on Sky

• BSB was losing 8million pounds a week, and was falling short of subscriber levels necessary to raise future rounds of financing.

• In the end BSB and Sky merged to form BSkyB, with Rupert Murdoch and News Corp taking a majority of the shares, and control of the company. Sky had won.

• Pioneered British satellite broadcasting industry, defeating more powerful competitor.

• Thatcher’s government was in strong support of Murdoch. Said they had to chose between either BSkyB or no satellite because BSB failed. Perhaps the success of Murdoch can best be attributed to the political capital that he had built in the past.

• BSkyB strategy: control content and control access. “buy it and grow it, or buy it and kill it”.

• Won rights to some of the best content, including soccer Premier League.

• Now, if fans wanted to watch soccer, they had to become subscribers of BSkyB

• Aggressive bidding for rights to content.

• Control access through complex proprietary set top boxes. Managing the payment system and access system became the critical part of the business strategy.

• Formed subsidiary to manage encryption technology. Center to function kind of like a credit card processing center.

• Set top boxes have powerful microprocessor that must deliver exactly what the subscriber pays for instantly. Must be pirate proof.

• But once a subscriber has the set-top box, then switching to other competitor becomes unlikely.

• So, all would-be competitors decided to compliment BSkyB rather than compete directly.

• Won a series of regulatory challenges

• Threaten BBC, the national channel

• 1997 – most profitable broadcaster in UK

• But, then, rules began to shift.

• Broadcasting began to change

• Analogue being replaced by digital, cable, and internet.

• Three potential problems: (1) growing cable companies, (2) new digital transmission formats, (3) new regulations in Britain

• (1) Cable companies – in television, the cable companies were very slow to develop due to lack of programming, and a lack of competitive advantage. Sky set the prices for redistributed content and priced most cable companies out of profitability. “they are a brutal monopolist”. But then, they cable companies started differentiating based on service, and started offering telephone and internet over cable, all for one low rate. Satellite technology simply could not offer all these differentiated services.

• (2) Analog to Digital – sky was the only company in Britain that owned the rights to set top boxes (though News Datacom subsidiary). So, sky had programming, channel potential, and boxes. In the end, the threat to sky did not come from technology change. If anything, it left them even stronger. But due to that strength, and out of fear of monopoly, regulators began to shift their attitudes toward sky.

• (3). Regulators – the ITC, OFT, and OFTEL are the three main regulators that had an impact on Sky. Regulations were discussed to open up access to the set top boxes to allow for more competition. If sky controlled the boxes, then it had power over customers and competitors. Competitors wanted to use the “digital revolution” argument to get regulators to open up access to the boxes. In the beginning, sky won this debate and the commission agreed that it was unreasonable to force many smart cards and payments systems into one already complicated box. Many saw this as yet another political victory for Sky.

• Then, something unusual happened

• British regulators directly targeted Sky and asked European commission to investigate Sky, which ended up forcing Sky out of a deal it was trying to make with BDB.

• The stock tumbled, losing more than a billion dollar of market value.

• Soccer league indicated interest in cutting links with sky and broadcasting its own events.

• Hollywood indicated an interest in selling movies through other distributors

• CEO quit to be replaced by Elizabeth Murdoch (daughter).

• Critics were claiming that Sky’s dominance was ending. The EU had broken the strangle hold on Britain’s pay TV market and that new technologies would slowing eliminate the competitive advantage that sky had enjoyed.

• Then Sky developed a new technology for the set-top box that would allow for interactive services to shop, bank, etc. (Response to Cables challenge of internet + phone). This new service BIB was expected to launch in the summer of 1998.

Strategy

History: By 1997, BSkyB had become one of the most powerful companies in Britain. The majority owner of BSkyB was Rupert Murdoch’s News Corp, and Australian newspaper industry that had entered the British pay television market years before by acquiring a little-known and struggling satellite operator in Luxembourg (re-named it “Sky”), and went to challenge the better-funded, and better-connected rivals in Britain such as BSB. By focusing on existing rather than new technologies, Sky took an early movers advantage over the slower BSB, and captured market share early. Sky also built up political capital with the government, which it used to defend against regulatory attacks from the more powerful BSB. By keeping their costs down, and moving faster to capture a larger market share, the smaller Sky was able to defeat the larger and better funded BSB. In the end, the two companies merged, with Rupert Murdoch controlling the new entity “BSkyB”. The company went on to capture a dominant position in Britain by creating content, and by competitively bidding on the exclusive rights to distribute others content such as soccer, sports, and Hollywood movies. They reinforced their dominant position by developing high technology set-top boxes that could control content and payment systems, which made BSkyB one of the most powerful (and feared) companies in Britain.

BSkyB was facing some serious challenges to its business model. Challenges were coming from three fronts. First of all, there were technological changes as the world was witnessing the “digital revolution”. As distribution shifted from analog to digital format, more content could be distributed through smaller “pipes”. This threatened the distribution control and made the issue of access to set-top boxes a key rallying cry for their competitors. Second, was the threat from Cable companies which were starting to differentiate their services by offering telephone and internet services (at one low price). The third challenge to BSkyB was coming from regulators. For the first time in Sky’s history, the regulatory environment had shifted and regulators were targeting Sky (a recent merger was blocked). This seemed to mark the beginning of the end of the monopoly position that BSkyB had enjoyed for so long.

Analysis: BSkyB had used its strength in other parts of the world to build its business in Britain. The multinational reach provided them the money they needed to competitively bid for content, where local competitors that just focused on satellite TV could not. In this aspect, the reach of being a multinational organization proved to be very beneficial for New Corp. They were clever in the way in which they entered the British television market, in that they didn’t attack BBC outright, but instead went after markets that BBC considered peripheral such as satellite pay-TV. By staying under the radar, they were able to build on their strengths and eventually challenge BBC for mainstream viewers (and ad dollars). But as time passed, BSkyB came to be seen in a different light, and the counter current of opinion opened the doorway for legislators to counter BSkyB position. In order to counter this regulatory backlash, my recommendation for BSkyB is that they need to transition to a “transnational” mindset. Rather than appearing to be an outsider organization from Australia (News Corp), they need to develop a more local feel. They can do this by developing a “center of excellence” in Britain, and by developing more of their content locally. By focusing more on content production in Britain, they could emulate the BBC model which has allowed them to be seen as a “national champion” and turned the company into a symbol of national pride.

In my opinion, the main threat to the BSkyB market dominance is going to come from the emergence of the cable companies. Product differentiation is a serious threat that they need to be aware of. If the cable companies are able to offer high-speed internet, telephone and cable Television all on one low bill, then BSkyB needs to find a way to match that offering. If not, then they may see customers migrating from satellite and toward cable. To defend against this position, I suggest that BSkyB should consider purchasing or merging with a local cable operator to vertically integrate the services that they offer. In addition, BSkyB should continue with their R&D efforts to try and discover an economical and practical way of offering those same services through their satellite system (a long shot, in my opinion).