United Skies over Europe: assessing the BSkyB deal

News that BSkyB is to buy Sky Italia and Sky Deutschland for £4.9bn cash has changed the European TV landscape virtually overnight.

Those with long memories might like to pause and consider that it is 24 years – yes, nearly a quarter of a century – since Sky Television snapped up the ailing British Satellite Broadcasting and its malfunctioning squarial and formed the company we now know as BSkyB. In that time the company has gone on to become the most successful satellite broadcaster in the world, along the way bootstrapping the UK into being one of the most advanced consumers of said products and also changing the face of sports broadcasting.

The Murdoch family – Rupert at the helm, son James underneath – has spent a long time putting a titular Sky Europe together, with the creation of first BSkyB, followed by Sky Italia in 2003 and Sky Deutschland in 2008. The UK’s phone hacking scandal and subsequent disgrace of the newspaper arm of the business might have meant that it’s no longer all under direct family control – plans to buy the 61% of BSkyB owned by outsiders were put on indefinite hold in 2011 as a result – but make no mistake, this is Murdoch’s pan-European vision coming to fruition.

That this should all resemble Game of Thrones (no prizes for guessing who represents the Lannisters) is appropriate given that all the movement in the European market is a result of Murdoch’s Fox trying to raise the funds to buy HBO-owner Time Warner. A $80bn offer has been made there, with the thinking that the resulting super-giant would be able to build a Wall that would keep Apple, Google, Amazon and Netflix in the frozen North and away from the rich realm of the Seven Kingdoms

So, what are the implications of the deal?

Growth: BSkyB has a customer base of 11.5m, leaving parlous little room for growth in its home market. Skies Italia & Deutschland have nowhere near that penetration, all in all now giving a Sky Europe access to a market containing 97m households, 66m of which have no pay-TV.

Revenue: 20m subscribers across Europe helps generate a combined revenue of £11.2bn, £4.6bn of which is allocated to the onscreen budget. This gives it the largest programming budget of any European broadcaster.

Savings: apart from the usual economies of scale, the new entity is expected to shave £200m a year off costs by, for instance, sending a single production crew to anchor its coverage of Formula One.

Technology: to start with, it will now be able to offer a unified OTT offering based on the UK’s Now TV across all three countries. And it is highly likely now that any future STB upgrade — and rumours of a 4K-capable, cloud-based PVR due next year persist — would be rolled out across all three. In fact, this makes 4K introduction sooner rather than later all the more likely.

Rights: the jury is out over whether it will lead to inflationary pressure per se, with so many of the premium rights allocated on a per territory basis – at least so far (and CEO Jeremy Darroch did admit afterwards that the deal puts it in a good position when it comes to next year’s EPL auction). Where the new company is more likely to have an effect immediately is on lower tier sports rights, where a wider European distribution folded into any package would be an incentive for rightsholders, while there is also speculation that it could also increasingly position itself as a partner for rights holders, rather than a simple broadcaster.

Some of the analysis of the deal has got quite fevered – combining all the Murdoch sports TV entities, including the US’ Fox and India’s Star to buy Formula One, for instance – but it might be too early to speculate on any of it. Sky Deutschland’s second-largest shareholder, Odey Asset Management, which owns roughly 8% of the company, has rejected the offer made for Sky D as too low. (And, in another appropriate Game of Thrones twist, Odey is run by Murdoch’s ex son-in-law.)

Analysts have even speculated that the Murdochs could even sell their remaining 39% stake in the expanded BSkyB to raise yet more cash for a successful Time Warner bid. The original offer, about $85 a share, was considered too low, but something in the region of $100 is thought to be the magic number at which point things start happening and dragons appear over Westeros.