Mathew Horsman on the rise and rise of BSkyB
Tuesday 30 July 1996
Whatever you think about its powerful position in the marketplace, about which more later, this company has emerged as a serious money-maker. If you had bought shares for just over pounds 2.50 each in December 1994, just after the company floated, you'd have doubled your money by this week, when the shares hovered at an all-time high of nearly pounds 5. That's a return of 100 per cent over 18 months, or an annualised rate of 66 per cent. Compare Sky's record with the broadcasting and publishing index, which has grown just 24 per cent since December 1994.
You might say there is no great surprise in this, and that anybody whose business it is to follow media stocks would have picked BSkyB from the start of its life as a publicly quoted company. After all, here is the television service with the best sport, the best films and the most aggressive marketing team in the country. Of course it will outstrip the competition.
But no. Consider this selection of comments from the national press, taken at random from editions published just before the BSkyB flotation. "This is not a share for small investors." Or how about "this valuation is derived from a combination of a computer programme and a crystal ball." And my personal favourite, taken from the pages of the Independent, "this is not so much an investment, more a leap of faith."
Consider, too, the valuations of City analysts, some of whom thought the company was worth no more than pounds 3bn, tops. In the event, its value exceeded pounds 4bn from the very start of its life as a private company, and now tops pounds 8.2bn.
Speaking of which, 8.2 is a rather nice number - and happens to be the amount, in millions, that BSkyB chief executive Sam Chisholm could make out of "notional" shares awarded to him prior to the float. Add to that another pounds 1.2m from a bonus scheme and the better part of pounds 400,000 in salary, and you get the picture of a successful media mogul (even if he still works for someone else).
Right-on capitalists will be quick to point out that Chisholm has also made plenty of money for his shareholders. True. And he has the millions to prove it.
And it must be remembered, even if the Office of Fair Trading doesn't like to admit it, that the stellar rise of BSkyB was prompted in large part by its near-dominant position in the pay-TV market in the UK. The company has the only workable encryption system (which scrambles and unscrambles signals to ensure that only those who pay can watch), and has a stranglehold on the satellite transponders used to broadcast to homes and to cable heads. Through long-term deals with Hollywood studios and exclusive arrangements with sport organisations, Sky has the only programming people are willing to pay to see.
Just compare what is available from Sky with the kind of shows on offer elsewhere in the pay-TV environment. Who else gives you top Hollywood movies before they show on ITV or Channel 4? Who else gives you Premier League football matches? So maybe you have to put up with a few duds in the package (Sky Soap, or the improving but still lacklustre Sky News), but at least you can be sure of a good evening's entertainment.
And this is the key. All of this is only available from Sky. Sure, your local cable operator also shows movies and sport. But guess where the cable companies get it? Straight from BSkyB, of course.
Unbelievably, the OFT last week cleared BSkyB, barring a few modest changes to the terms under which it provides its channels to cable companies and to the pricing of its encryption system. On its dominant position in the market for satellite space, the OFT passed the buck to Europe, where the Commission is expected to review the situation. On the long-term arrangements with the Premier League, a cartel of top football teams, the OFT will pursue the matter in court.
That's it. No reference to the monopolies authorities to determine exactly how dominant the company is in what is now a pounds 1bn market. Chisholm must have been delighted.
So what about the future? The growth of the company has given it the heft to finance a brave new entry into continental Europe, through a joint venture with Leo Kirch, the Bavarian mogul. Next year, or maybe in 1998, BSkyB will launch a digital satellite service, at huge cost, to entice current subscribers off analogue services and onto new set-top boxes offering up to 200 channels. The big question is: will BSkyB dominate digital as it has clearly dominated analogue? Chisholm and his senior executives will certainly hope so, as they count up the bonuses to come.
All that remains to decide is whether the digital age will really be as profitable as everyone in the industry apparently believes, and whether the European Commission is going to be as compliant about BSkyB as the OFT and the present government (fearful of Mr Murdoch in an election year?) have been. Those are the risks that remain for BSkyB shareholders. The rewards? Well, just ask Chisholm and the boys at Isleworth headquarters, where the share price flashes daily on a thumping great electronic billboard, a constant reminder to them and lucky shareholder-employees of how quickly it can all mount up.
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