Rupert's last ditch effort. He stands up to Pa Bill, Ma Cable, and John Malone..........................................
High noon for BSkyB The free digital box offer is born of desperation, says Emily Bell. Big US cable interests are about to leave satellite in the shade
The Observer
AS OF last week, Britain is the world capital of 'teleconvergence'. The widgets and digits besieging the British consumer and tapping the vast revenues attached to communication, entertainment and information are finally coming together.
Unfortunately, although it might provide a world of consumer harmony, it will inevitably entail corporate conflict: the first shot was fired with a resounding boom last Wednesday morning.
BSkyB picked the opportune moment of unveiling crushingly disappointing third-quarter results to ambush the market with an offer to give away its digital decoder boxes.
The pounds 300 million project will mean that, as of 1 June, digital dishes and decoder boxes will be free, except for a pounds 40 connection charge and an undertaking to buy a subscription to at least one of BSkyB's packages for 12 months.
Although the City, ever-optimistic about the audacious acts of BSkyB's largest single shareholder, Rupert Murdoch, immediately marked up BSkyB's share price by 10 per cent, elsewhere there was a feeling that this generosity was born out of weakness rather than strength.
Only a week previously the resignation of Mark Booth as chief executive of BSkyB rocked the company: the Amercian had barely completed 18 months in the hot seat.
The company boasted of having more than 500,000 customers for its digital service launched last November, but the bigger picture was less impressive.
First, in overall numbers, BSkyB has around 100,000 fewer customers taking the service direct from its dishes than it had a year ago - signalling that the number of people switching off their old fashioned analogue dishes is alarmingly high.
Second, the company suggested that it was making less money than expected from the cable operators who pay BSkyB to carry its programming. As cable is the fastest-growing part of pay-TV, this was very bad news indeed.
Third, BSkyB announced that the price of its programming to existing customers would rise by up to pounds 2 a month.
Subsidising its digital giveaway means BSkyB will write off pounds 300m over and above the original pounds 400m estimated start-up costs for digital. As a result, profits will plummet to only pounds 80m for the year and all dividends have been cancelled for the foreseeable future. By last Wednesday afternoon, more experienced analysts such as Neil Blackley of [ Merrill Lynch ] were ringing the warning bells by slashing profit forecasts and suggesting investors switch money out of BSkyB.
By any stretch of the imagination, the giveaway is a desperate move. Even if BSkyB successfully captures 4 or 5 million homes with its digital service, it will have to find yet more money to bid for Premier League football, further film rights and more compelling programming if it has as hope of keeping that customer-base.
'You have to look at what BSkyB actually owns,' says one UK television executive. 'All its sports rights are on short-term lease, it doesn't own a significant production base and it cannot have an exclusive hold over pay-per-view movies. Any stagnation in its subscribers is very serious. It didn't want to do this. It had to.'
Murdoch and BSkyB were last Thursday presented with a new and significant problem. The mega American telecoms merger between [ AT&T ]
and MediaOne threw up a new world order for cable that resulted in a complicated shuffle in the UK industry.
The net result was that Bill Gates's [ Microsoft ] bought MediaOne's 29 per cent stake in UK cable company Telewest. Alongside the 5 per cent Microsoft already owns in the UK's largest cable company, [ NTL ] , this was interpreted as the richest man in the world getting serious about cable in the UK.
The only significant cable company left in which Gates doesn't hold a share (not directly anyway) is C&WC. Conveniently, however, Telewest is currently negotiating to buy C&WC.
Given Microsoft's interest, and the teaming up of BSkyB and British Telecom in competition with cable, it is inevitable that all three cable companies will now merge, creating a new, highly powerful and extremely well resourced telephone and pay-TV operator.
'It's very early days to say what will happen exactly, but obviously things have moved on apace and all parties will be talking to each other about the outcome,' says Greg Clarke, chief executive of C&WC.
Clarke is also bullish about the cable industry finally getting itself into competitive shape after years of underperformance and poor customer service.
'I'm not intimidated by a few free set-top boxes. For years we have been talking about the PC and the TV converging, the ability to transfer data at high speed through phone lines, and on-demand pay television.
'The fact is that all these things are suddenly arriving at the same time and, yes, it's reasonable to think that in terms of corporate structures we are moving to the endgame,' says Clarke.
Microsoft's presence in any market always creates a buzz, but its timing in moving further into UK cable could not be more inflammatory. It was Microsoft that allegedly offered BSkyB's Booth a $25 million signing-on fee, and this was partially responsible for him being moved from the top slot at BSkyB to a Murdoch-backed Internet start-up company.
Microsoft is naturally nervous that some form of interactive TV will start to impinge on the computer market where Microsoft has made its billions. Gates is working at finding an operating system for interactive TV that will be as dominant as Windows is in the PC market.
So is the UK boiling down to a Bill vs Rupert showdown? Miranda Curtis, a director of Telewest, has the perspective from both sides of the fence. She who heads the international division of [ Liberty Media ] , which has a holding in Murdoch's [ News Corp ] , and says UK excitement over the cable vs satellite conflict is parochial.
'You have a US-driven strategy coming from the four most powerful men in the business; Rupert Murdoch, Bill Gates, Mike Armstrong, the head of AT&T, and John Malone {who controls Liberty Media and merged his TCI business with AT&T last year}. It's not so much an adversarial relationship, more these businesses carving up the world between them,' says Curtis.
It might be significant that of this impressive quartet, all are now placing their bets on high-speed cable - all except Murdoch, who, like a space-age Beau Geste, is left defending Fortress Satellite.
At NTL, John F Gregg, managing director for corporate development, is cagey about saying whether the final consolidation of cable into one mega corporation will take two turns of the wheel or just one. What he is certain of is that cable will soon no longer be an unimaginative, unattractive and expensive laggard in the teleconvergence universe.
'What BSkyB is doing at the moment is a last-ditch effort to hold onto their position. They had a significant lead in analogue, which they are seeking to protect, but cable has caught up and it will surpass them. The idea of a free box is very much a smoke-and-mirrors trick. Cable doesn't charge for equipment; the cellular industry doesn't charge consumers cost price for phones either. They are just doing what other service industries do.'
BSkyB's skill in spotting how to hype its offering to the public has been one of the key areas where it has trounced the cable industry. But the competitive environment has changed significantly.
'Ten years ago, Sky's only competition was BSB, a ship of fools from the cosseted television industry,' said a senior industry executive. 'Now the competition is seriously skilful, seriously rich American companies.'
A free box might not quite be enough this time round.
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