A report to be published tomorrow by JP Morgan says BSkyB is less well placed to profit from the estimated quadrupuling of the market by 2005 than other pay-TV companies such as Canal Plus.
The report forecasts annual growth of 20 per cent in the next eight years across Europe with 41 million households paying for TV channels, creating $26bn (pounds 16bn) in total revenue, up from 17 million households and $6bn in revenue now. The UK will be among the fastest growing markets.
Digital technology will cut the cost of broadcasting and create a tenfold increase in the number of pay-TV channels available.
"In the short term, we believe BSkyB's earnings prospects are significantly higher than those for Canal Plus, but in the medium to long term the relative merits of the two companies' strategic positions will start to reverse," said Nick Bertolotti, media analyst at JP Morgan.
BSkyB would seem to have a profit advantage as a result of selling rather than renting its set-top decoders. But this is not the case. As a result of leasing rather than selling its set top devices, Canal Plus is in a good position to raise its rates if demand for its programmes is strong.
Already there are signs Canal Plus is winning the programming war. While renting might be expected to increase the rate at which customers "churn" or try out the service then disconnect, BSkyB's churn is higher at 12 per cent than Canal Plus with 7.5 per cent, JP Morgan says.
BSkyB also operates only in Britain while Canal Plus is diversified across five European markets. BSkyB tried and failed to join pan-European pay-TV joint ventures in 1996 with Kirch, Bertelsmann and Canal Plus.
Mr Bertolotti estimates BSkyB will be forced to pay as much as pounds 1bn in 2001 to renew its contract to broadcast Premier League football, 50 per cent more than the pounds 670m it paid for the contract it signed last year.
All pay-TV broadcasters face increased regulatory scrutiny. The European Commisison said last week it won't allow BSkyB's digital service, British Interactive Broadcasting, to start broadcasting until the TV company has allayed its concerns over subsidies to equipment suppliers.
Five cable companies are to launch a pay-per-view movie service next month, the first to challenge BSkyB's stranglehold on pay-TV film premieres in the UK, writes Claire Atkinson. Telewest, NTL, Cable Tel, Diamond Cable and General Cable jointly own On Demand Management, set up to aquire film rights from Hollywood and package them as pay-per-view movie channels.
The service, named Front Row, is backed by US studios Sony, Warner, and Disney and will be available to half of the two million homes in this country recieving cable.
BSkyB launched its pay-per-view film service on 1 December last year.
Until recently, sport has been the most profitable pay-per-view category of programming broadcast by Sky, including the February 1997 boxing match between Mike Tyson and Evander Holyfield which attracted 400,000 subscribers.
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