Bsb Versus Sky Tv Essay Example

Bsb Versus Sky Tv Essay Example Bsb Versus Sky Tv Paper Bsb Versus Sky Tv Paper Executive Summary British television viewing levels had stagnated in the 1980s due to already high levels of television viewership (3. 5 hours per day) and the rapid penetration of the VCR. This caused broadcast companies like BBC and ITV to look for new ways to spurn growth. The British government tried to allocate three of the five high powered digital satellite broadcast (DBS) channels first to the BBC and then to a joint venture between BBC and ITV. Both attempts failed due to high startup costs in building and launching dedicated satellites. The bidding for these channels was then moved to the private sector in April 1986. Additionally, the use of the untried D-MAC transmission standard that was viewed as a move towards HDTV was made mandatory. British Satellite Broadcasting (BSB) was to be the first mover and quickly acquired a 15 year franchise for the DBS channels. BSB planned to start broadcasting by the fall of 1989, investing $500 million and projecting to break-even 4 years later. Sky Television a subsidiary of Rupert Murdoch’s News Corporation unexpectedly announced its entry into the satellite broadcasting market. Murdoch known for his aggressiveness aimed to start broadcasting from Sky’ leased medium powered satellite by February 1989 becoming the real first mover in the market. This led to an intense battle between BSB and Sky as they fought to gain the upper hand. By October 1990, both BSB and Sky were making combined losses of $10 million per week. BSB’s inability to view the competitive landscape combined with Sky’s aggressive tactics to leverage first mover advantage lead to both companies losing focus on the underlying economics in the launch of what is regarded the second biggest business undertaking in Britain (second only to the Chunnel). BSB’s superior technology has the upper hand long term but, Sky’s overall superior economic model allows it to sustain losses for a longer period possibly outliving BSB’s investor’s faith in the DSB market in Britain. Industry Analysis The British broadcasting business was unable to grow due to a number of reasons, chief among them being the inability to move away from an obsolete revenue model that depended on license or advertising revenue. Pay television that utilized either cable or satellite media was expected to be the next vehicle for growth and with the restrictions imposed on access to cable (available only to remote areas), satellite television soon became the next practical choice. Economics of the DSB business Entering into the satellite broadcasting business was however an expensive proposition exacerbated by a long break-even period. Appendix A details BSB’s business plan assuming no competition (i. e. market share of 100%) in an attempt to determine the most aggressive break-even period. Building and deploying satellites combined with investing in the technology that would allow television sets decipher signals from satellites was estimated to be in the range of $300-$400 million. These numbers point to a ten year break-even given typical British consumer electronics adoption rates (initial BSB market penetration forecasts). An alternate approach at analyzing the economics of the satellite broadcasting business is to fix the break-even period to a reasonable number of years, say 4, (BSB’s initial business plan) and study the consequence on subscriber rates. Appendix B details this analysis in which we find that the typical consumer electronics adoption rate would have to be scaled up by a factor greater than 4. 75 to achieve this reasonable break-even target. BSB’s business plan prior to Sky’s market entry is compared against its’ revised business plan (incorporating effect of market share and increasing advertising and promoting budgets with a view to accelerate sales) in Appendix C and D. Only a well funded corporation that could sustain losses for a long period would be able to make it in this market. Entering the DSB Market In December 1986, BSB, a consortium of five financially sound companies, won a 15 year franchise to the DSB channels in Britain. They immediately set out to raise capital to fund the deployment of two satellites. With the enormous start-up costs and an economic model that expected a market entrant to stay the course of making losses for a minimum of 10 years it was easy to see why BSB refused to view Sky’s movement in the satellite broadcasting business as a serious threat. Sky Television was formed in June of 1988 out of Sky Channel by Rupert Murdoch, of News Corporation. Sky Channel had been using low powered satellite technology for broadcasting since 1983. Although a money loser, this project allowed Murdoch to see the potential for a wider acceptance of satellite technology for broadcasting in Europe. In 1986, News Corp under Murdoch launched Fox in the US and started using satellite technology. News Corp planned for a $150 million in start-up losses for Fox. This prior experience with Fox and Sky Channel definitely gave Sky the upper-hand in understanding the economic of satellite broadcasting and the business requirements. BSB should have expected to witness some activity from News Corp given Murdoch‘s recent success with Fox but when Sky Television was announced in 1988, BSB was actually taken off-guard. Alternative Scenarios for Market Entry BSB on announcing its entry into the DSB market, setout to obtain $222. 5 million in financing to fund the buying and launching of the satellites. It also started the recruiting process that took almost 6 months to find a Chairman and 10 months to find a CEO. The CEO who was lured away from a high profile advertising company was awarded a total compensation package close to $0. million without any link back to performance. A year and half later BSB had only grown to several dozen employees who occupied an office in the prestigious Kensington Park area. BSB did however, understand that making the chip technology work was crucial and obtained an exclusive contract with ITT. Assuming that BSB was aware of Sky’s intentions it should accelerated the ramp up of its operations. Recruiting should have started in full earnest and compensation packages should have been built based performance (e. . successful deployment of first satellite, etc. ) BSB should have contemplated hiring key personnel from News Corporation and other broadcasting companies in the US and Europe who had more direct experience with satellite broadcasting business so as to get a leg-up in the learning process. Given that it had a â€Å"money back† guarantee from Hughes who was delivering the satellites; it should have pursued similar contracts with ITT. Maintaining a low overhead expense would also allow it to stay in the fray longer. Relocating from the swanky Kensington Park area to a cheaper alternate would help in this regard. BSB, although well supported by its founding companies could have also looked at making its economic model more attractive by reducing future capital expenditures. Leasing the high powered satellites from Hughes would have allowed it reduce its cash outlay and stay more competitive with Sky. Lastly, BSB should have lobbied the British Government to block Sky’s anticipation market entry given the underlying economics of the DSB business. Customer Adoption Concerns The rate at which customers would sign up for satellite broadcasting service is based on the price of the dish, quality of programming, value of the investment (is the technology going to change soon? ) and other macroeconomic factors like interest rates etc. The faster customers adopt the satellite technology the shorter the timeframe wherein BSB /Sky would have to incur losses. Moreover, switching costs tend to be high (the cost of the dish) and interest rates in Britain were rising in the late 1980s. BSB’s plan to sell 12† dishes at $250 (which when adjusted to today’s US dollar equals 2,500USD), represents a significant investment from the customer on a technology that is new, un-tested and whose content is unknown. Further BSB’s advertising program that aimed to increase awareness on the technology advantages of D-MAC over PAL further confused customers and backfiring BSB. Most importantly however, was the fact the BSB was the second mover in the market giving Sky the first chance at seizing market share. Differentiation of satellite broadcasting through technology BSB and Sky although targeting the same market, approached the business very differently. On one hand BSB was forced to use the risky D-MAC standard for high powered satellite signals while Sky through its use of medium powered signals was able to stay with the tried and tested low technology PAL system. Given BSB’s use of the D-MAC protocol it had no alternative but, develop chip technology that could decode the satellite signals. This resulted in BSB inheriting additional risk due to the nature of the technology development that was necessary to support BSB’s launch plan. Sky’s use of PAL although not a technology issue from a transmission standpoint posed its own technical concern in that film studios were reluctant to sell film rights given that the PAL signals could not be easily scrambled. While Sky was able to work through the scrambling issue with PAL, BSB found that its project with ITT was behind schedule. This translated into the need for an additional round of financing and the loss of a key supporter, Virgin. Longer term (ten plus years), BSB’s technology advantage should sustain itself. But this is contingent upon them being able to ride out making loses for ten years at a minimum. Short term, Sky’s choice to use PAL makes better financial sense. It will be able to establish a market presence in Britain and experiment with programming and other content as it gears up for launching HDTV (the ultimate technology goal in broadcasting ten years ago)to the broader European market. Staying the course in the DSB market With the entry of Sky into the satellite broadcasting market, BSB was forced to pull ahead some of its marketing initiatives. This was an attempt to educate the consumer on BSB’s product offering and differentiate itself from Sky’s PAL standard. BSB also hoped that the additional marketing prior to the actual launch process would increase the number of future adopters of BSB and induce some Sky consumers to switch. BSB initiated second round financing to allow it to double its advertising and promotion programs as well. Sky experienced very low sales in the six months after launch. This was attributed to equipment unavailability, customer confusion and the acroeconomic climate that existed in Britain. Sky sensing that it had an opportunity to leverage its first mover advantage, setup Project X where dishes were sold through a door-to-door sales effort. They also reduced the price barrier that prevented most consumers from adopting the technology. By selling the dishes through a lease program they were able to win more subscribers (possibly at a loss) and protect market share. This strategy of aggressively seeking customers should pay off for Sky as it boosts programming content and quality. Subscription fees for both Sky and BSB are comparable. It is the initial cost of the dish that creates reluctance on the consumer to sign up. By taking away this issue, Sky will be able to grow market share until BSB mimics this strategy. Recommendations Given BSB’s technology advantage and well funded investors it is possible that BSB could sustain the upcoming losses for some time. However, with the cash flow calculations it is clear there will be mounting pressure to change their business model by reducing capital expenditures by leasing satellites instead of purchasing. BSB should also explore reducing the price of the dish unit or establishing contracts that entice consumers with free dishes but, penalize them for breaking the contract if they cancel or switch. On the other hand Sky with its first mover advantage should build on its market share by investing in programming and using its installed base to solicit additional advertising revenue. Sky should also be concerned about how long it can continue to make losses in its bid to outlast BSB. In an effort to change the game, Sky could use the power of its parent company