British Sky Broadcasting Group Plc - Company Profile, Information, Business Description, History, Background Information on British Sky Broadcasting Group Plc

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History of British Sky Broadcasting Group Plc

With nearly 6.5 million subscribers by mid-1997, world-leading satellite television provider British Sky Broadcasting Group Plc, better known as BSkyB, has captured the attention of England and Ireland's television-viewing audience. Beaming from leased transponders on the Astra satellites, BSkyB's mix of some 40 "channels"--many of which are not broadcast full-time but instead offer targeted program segments at specific times of the day or week--has helped the company gain a 10 percent share of the total British viewing audience. BSkyB's programming strength lies particularly in its sports and film offerings. In addition to exclusive live broadcasting rights for the English Premier Football League and the U.S.'s National Football League, the company also has exclusive first-time broadcast rights with many of the leading film producers, including the Top 50 box office performers, for a total offering of some 7,000 films per year. BSkyB also features many of sister company Fox Broadcasting's programs, including hits such as "The Simpsons," "The X-Files," and "90210," as well as broadcasting agreements with major subscription-based channels such as the Disney Channel, the Playboy Channel, the Discovery Channel, VH-1, and Nickelodeon U.K. Since 1996, the satellite service has also been broadcasting pay-per-view programming.

BSkyB plans as well to begin offering digital television broadcasting services in 1997--with an increase in channels to as many as 200 or more. In May 1997, BSkyB joined with partners British Telecom, Midland Bank, and Matsushita Electric to form British Interactive Broadcasting Ltd. (BIB), and independent company planning to bring digital interactive television services to the UK market in 1998. This follows the termination of BSkyB's digital television joint venture with Germany's Kirch Gruppe in March 1997.

The bulk of BSkyB's more than £1 billion in annual revenues comes from subscription fees--ranging up to £25 for the full array of premium services--from its 3.3 million satellite dish subscribers and 2.2 million cable subscribers (who receive BSkyB programming through third-party cable television providers). Only slightly more than £100 million of the company's revenues come from advertising, although that figure has been rising as BSkyB increases its penetration of the British television market. BSkyB is also solidly profitable, posting earnings of £257 million for the year ended June 1996, with expectations of more than £350 million in net earnings for the 1997 fiscal year. Led by Samuel H. Chisholm--the New Zealand-born architect of BSkyB's success and, with a compensation package worth some £9 million per year, one of the highest paid television executives in the world--BSkyB is 40 percent owned by Rupert Murdoch's News International Corp. Other principal shareholders include television programmer Granada (11 percent), and the French television company Chargeurs (17 percent). Twenty percent of BSkyB's shares are traded on the London Stock Exchange.

British Satellite Birth Pains in the 1980s

The 1990 merger of bitter satellite rivals SkyTV and British Satellite Broadcasting to form BSkyB caught the U.K. television industry by surprise, but the company's roots already reached back to the early 1980s. In 1983, Rupert Murdoch's News International set up Sky Channel, a European-based satellite-to-cable broadcaster providing a mix of English-language sports and entertainment programming to much of Europe's cable television systems. Sky Channel proved less than successful, however, generating under $20 million per year in advertising revenues, and by the mid-1980s, Murdoch was already looking to evolve the Sky concept toward the newly emerging direct satellite broadcasting technology and to focus the television subsidiary on the British market. Rather than paying for the rights to beam Sky's single-channel signal to cable providers, which in turn supplied the channel's programming to subscribers, direct satellite broadcasts presented the opportunity of providing multichannel programming directly to subscribers' homes via small satellite dish and decoder packages.

Satellite television represented a significant step in British television history. By law, broadcast television was restricted to just four channels--the two license-fee backed BBC channels, and two advertiser-supported channels, ITV and Channel 4. Cable television, meanwhile, was nonexistent in the United Kingdome (the country's cable infrastructure would be completed only toward the mid-1990s). If the Australian-born Murdoch, who had already become a dominant player in the British newspaper market, as well as a key figure in the U.S. newspaper and television market (taking on U.S. citizenship to satisfy FCC television network ownership requirements for the nascent Fox network), hoped to step into the British television market, satellite appeared his sole opportunity. But when regulators handed out the satellite broadcasting license, Murdoch's SkyTV concept, wholly owned by his News International Corp., was denied, due to British law that limited foreign ownership in television networks to 20 percent. Instead, the exclusive British satellite license was awarded to British Satellite Television, a consortium launched by media giants Reed, Pearson, Granada, and Chargeurs.

BSB, as it was known then, was established in 1988 and announced plans to begin broadcasting in mid-1989. Rather than making use of existing satellites, the company determined to build and launch its own satellites, dubbed Marco Polo, and to broadcast using a new technology, called D-MAC, to a Philips-designed receiver dish known as a "squarial." BSB proposed five channels, including a premium movie channel supplied through exclusive rights for more than 2,500 films from such major distributors as Paramount, MCA, MGM/UA, Columbia Pictures, and Orion Communications, purchased at premium flat-rate prices totaling £500 million. Technical problems with the system delayed BSB's launch for more than nine months, until April 1990; even after starting up, BSB was confronted with a shortage of squarials. And by then, BSB no longer had an exclusive on the British satellite market.

Murdoch had not abandoned his British satellite designs. Denied the British license, and rebuffed in an attempt to join the BSB consortium, Murdoch pushed ahead with his SkyTV concept. By renting space on the Luxembourg-based Astra satellites, Murdoch circumvented British ownership laws. Formed in 1988 and using the existing PAL broadcast technology, SkyTV began broadcasting four channels of programming in 1989, including an upgraded version of the original Sky Channel, called Sky One; Eurosport, a joint-venture between the European Broadcast Union and News International; Sky Movies, a fee-based all-film channel; and Sky News, a 24-hour news channel. Start-up costs reached £122 million; losses for its first year of operations were £95 million.

By the time BSB finally launched its service in April 1990, SkyTV had already placed 750,000 satellite dishes. Six months later, SkyTV had extended its reach into more than 1.5 million homes, against BSB claims of 750,000--figures that included cable-based subscribers. Actual sales of satellite dishes told a different story, with nearly one million SkyTV dishes sold compared to less than 120,000 of the BSB squarials. Both services were hurt, however, by consumer reluctance to commit to satellite dish purchases (of £650 per unit) before a standard was reached between the two competing--and incompatible--satellite receiver systems.

Meanwhile, engaged in a bitter rivalry for the home satellite market, both companies were hemorrhaging badly. Murdoch's investment in SkyTV already totaled some £400 million, while the satellite company was losing more than £2.2 million per week. Yet, with a break-even point of 3 million households expected to be reached in 1992, SkyTV still appeared in better shape than BSB. That service had already spent some £800 million by November 1990, with a break-even point projected for 1993, at the earliest. That point seemed more and more unlikely as the weeks went by, given that each week was costing the BSB partners more than £8 million. Nonetheless, it was early days in the British satellite market, with its television viewing potential of more than 20 million households. And despite SkyTV's early subscriber lead, BSB held the financial edge, with its powerful parent companies prepared to plow as much as £1.3 billion into the company--compared to Murdoch's growing struggles to meet the interest payments on News International's debts of more than £4.5 billion. In the end, Murdoch's financial problems determined the next phase of the British satellite television industry.

The two companies caught the British television industry by surprise when they announced their intention to merge in November 1990. Talks between the services had begun informally in July of that year, during a dinner meeting between Murdoch and Read CEO Peter Davis. Without reaching any agreement--Murdoch was uninterested in selling, given SkyTV's early lead and its good chances of reaching its break-even point--but the pair agreed to keep in touch. As pressure from Murdoch's banks mounted, however, the pair met again in October. This time, Davis and Murdoch sketched out a merger agreement, which was finalized after two weeks of intensive, secret meetings by the beginning of November.

The newly merged company, now known as British Sky Broadcasting, or BSkyB, represented a 50-50 ownership between Murdoch and the four BSB investors. The two sides agreed to put up £100 million in working capital, with the BSB side contributing £70 million and Murdoch adding the remainder. The agreement also included a scale of dividend payments: after reaching profitability, News International would receive 80 percent of the first £400 million in dividends, which would then be split 50-50 for 12 years until 2008, at which point BSB would receive 80 percent of the next £400 million. The merger was met with resistance from Britain's television regulators, an issue again subverted by plans to broadcast the new BSkyB from the Astra satellite group--and later mooted altogether by a redrafting of the British Broadcasting Act. The company would abandon the BSB D-Mac technology--and its two satellites--and convert its combined subscriber base of 2.3 million wholly to the SkyTV receiver system. The combined nine channels would be narrowed to just five, including two premium-fee movie channels, one each from BSB and SkyTV. Within the company itself, the former SkyTV staff quickly dominated the workforce, virtually replacing all of the former BSB managerial and other staff.

Reborn in the 1990s

Perhaps the most significant change for the newly merged company, however, was the appointment of Sam Chisholm as the broadcaster's CEO. Born to a well-to-do farming family in New Zealand, Chisholm started his career as a floor wax salesman. Moving to Australia at the age of 25, Chisholm joined that country's Channel 9, where, as a protégé of the station's founder, he worked his way up the ladder, finally becoming its CEO at the age of 35, making him the youngest chief executive in Australia's television history. Chisholm remained at Channel 9 for 15 years, building it into the country's largest and most profitable television station, while establishing a reputation as an aggressive, even abrasive personality, an uncompromising but effective leader, and a lavish spender. Recruited by Murdoch in September 1990, Chisholm was placed in charge of repairing the damages at the merged company--which posted a loss of £14 million in its first week of operations. These losses would continue for some six months, forcing Murdoch and partners to arrange a refinancing package, worth some £700 million, to keep the company afloat.

Chisholm pushed through an extensive series of cost-cutting procedures, which included firing most of the former BSB staff&mdashøtal staff dropped from 4,500 to just 1,000--and returning the BSB's fleet of luxury cars, managing to reduce the company's losses to just £1.6 per week by the summer of 1991. Chisholm next turned his attention to BSkyB's programming. His first step there was to renegotiate the expensive film rights contracts the company had inherited from BSB--and the rivalry between the two former companies had resulted in both companies bidding as much as £1 million for the rights to a single film--releasing the company from the flat-rate fee structure and instead linking fees to subscriber levels--effecting immediate savings of some £100 million per year. Next, Chisholm scored a programming coup when, with BBC backing, he offered £304 million, outbidding rival ITV, for the exclusive rights to broadcast the plum Premier League's live football (soccer) matches. With these broadcasts added to its sports lineup, Chisholm converted this channel to a premium, subscription-backed, scrambled broadcast--a gamble that quickly proved successful, generating more than one million subscribers within months after implementation, while also attracting new subscribers to the satellite service.

By March 1992, BSkyB was showing its first operating profits, of £100,000 per week, fully a year ahead of schedule. Subscription revenues reached £3.8 million weekly, while advertising revenues added another £1 million each week. The company continued to post operating profits through the year, and by the end of the company's 1993 fiscal year BSkyB was posting an operating profit of nearly £186 million. A large part of the company's rise in fortune was Chisholm's and Murdoch's decision to convert the company to an entirely fee-based, multichannel concept. Launched in September 1993, Sky Multi-Channels initially featured 14 channels (and would grow to 40 channels), including Sky One, Sky News, Bravo, Discovery, BBC-owned the Children's Channel and UK Gold, the Family Channel, U.K. Living, Nick at Nite, VH-1, and MTV, as well as the Viacom-BSkyB joint venture Nickelodeon U.K. and a BSkyB partnership with the QVC home shopping network.

As BSkyB expanded its multichannel offerings, often accompanied by subscription fee increases, the company's virtual monopoly on the British satellite television market continued to bring in new subscribers, passing the critical three million mark in 1993, and topped 3.5 million households by mid-1994, Chisholm--by then leading Asia's StarTV satellite network, 64 percent of which Murdoch had purchased for $525 million in 1993&mdash′epared to lead BSkyB into a public offering. Completed in January 1995, the offering of 20 percent of the BSkyB's shares valued the company at £4 billion. The stock flotation, which reduced Murdoch's holding to 40 percent, raised £825 million, cutting the company's debt in half. Bringing the company public also proved enormously profitable to Chisholm, who saw himself become one of the world's most highly paid television executives.

While BSkyB's fortunes continued to rise--with revenues topping £1 billion and pre-tax profits of £257 million by year-end 1996--the company has also hastened to join the next, and perhaps greatest, revolution in television history: digital broadcasting. With the capacity of offering as many as 500 channels, as well as interactive services such as video on demand, and telephony applications, the dawn of digital broadcast technology was quickly making BSkyB's analog equipment appear obsolete. BSkyB first announced its intention to join a consortium with European media giants Bertelsmann of Germany, and CanaPlus and Havas of France, to form a digital television alliance. When that fell through, BSkyB next attempted to form a joint-venture partnership with Germany's Kirch Gruppe. This deal, too, fell through. Finally, in May 1997, BSkyB announced the formation of British Interactive Broadcasting (BIB), an independent company owned by BSKyB and British Telecom (each with 32.5 percent), Midland Bank (20 percent), and Matsushita Electric (15 percent). With initial funding of £265 million, BIB promised to bring BSkyB--and the United Kingdom--firmly into the new era of interactive digital television and telephony services.

Additional Details

Further Reference

Clarke, Steve, "BSkyB: The Second Coming," Campaign, April 26, 1991, p. 24.Fallon, Ivan, "How They Kept the Secret of TV Deal," Sunday Times, November 4, 1990.Groves, Dan, "BSkyB Takes Sky-High Bamble with Pay TV," Daily Variety, September 6, 1992, p. 23.Lynn, Matthew, "BSkyB Partners Play Shrewd Flotation Game," Sunday Times, October 4, 1994.Reed, Stanley, "Murdoch's British Sky Is Looking Brighter," Business Week, February 24, 1997, p. 16.Snoddy, Richard, "Sky Bruiser Who Relishes the Fray," Financial Times, September 11, 1995, p. 10.------, "Day of the Dish for BSkyB," Financial Times, August 22, 1996, p. 17.Thomson, Richard, "Thunder Behind the Blue Sky," The Independent, November 20, 1994, p. 8.Thynne, Jane, "Murdoch Aims for the Sky and His Press Rivals," Daily Telegraph, September 2, 1993, p. 4.

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