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Professor Nabil Al-Najjar and Professor Sandeep Baliga, Kellogg School of Management. This
document was prepared for use in class discussion in Competitive Strategy and Industrial Structure (MECN
441) sections at Kellogg. Cedric Pauly provided excellent research assistance. Do not copy this document
for any other use without our explicit permission.
The document draws on Pankaj Ghemawat, British Satellite Broadcasting versus Sky Television,
Harvard Business School 9-794-031 (August 1994), and Games Businesses Play, The MIT Press (1997).
In December 1986, the British government awarded a fifteen-year license to operate highpowered Direct Broadcast Satellite (DBS) to the British Satellite Broadcasting (BSB) consortium.
BSBs high-powered broadcast could be received by small, inexpensive individual dishes and
was the latest effort to develop satellite television. In addition, BSB had the obligation to use a
new transmission standard called D-MAC which was a building block for the high-definition
television (HDTV).
The players
BSB was a consortium of eleven companies led by the diversified Pearson group, who raised
222 million in its first round of financing. The other noticeable members include Granada and
Anglia (two ITV companies), Virgin (a music company), Bond Corporation (diversified
Australian group), Chargeurs (French textiles and transportation company), and Reed
International (largest UK publishing company). The first round of financing was principally
aimed at launching two high-powered satellites. The second round scheduled the start of the
operations in fall 1989 at an estimated cost of 500 million. Fixed costs (programs, satellite,
marketing, and overhead) represent 75% to 80% of the firm total costs. Due to the high fixed
costs, BSB must establish a large customer base to be successful. The revenue structure would
encompass a monthly subscription of 10, as well as advertising revenues. In addition, the 12
inches satellite dish would cost about 250. The operating break-even was targeted for year 1993.
BSB commercial forecasts were as follows: 400,000 dishes by fall 1990, 2 million by 1992, 6
million by 1995, and 10 million by 2001.
By 1987-1988, BSB management was very focused on solving their operational issues among
them the choice of ITT at the expense of Philips as the supplier of a key chip for deciphering DMAC satellite signals. But management was not very concerned about competitive threats until
Sky came along as Richard Brooke, BSBs treasurer, said.
Indeed, in June 1988, Rupert Murdoch caught BSB completely by surprise by announcing that
News Corporation would launch its own DBS service in the United Kingdom. News
Corporations 3 billion Empire had been created and developed by Rupert Murdoch. Its
operations started in Australia in newspapers and television, and expanded in the United
Kingdom with the acquisition of the Sun, Times, Sunday Times and Today newspapers. In 1985
News Corporation acquired the Twentieth Century Fox studio and in 1986 it launched the fourth
U.S. television network, Fox.
News Corporations DBS satellite venture was called Sky Television. It would broadcast through
a new medium-powered satellite, Astra, to be launched by the Societe Europeenne des Satellites
(SES) in November 1988. The selection of a medium powered satellite allowed Sky Television to
launch its satellite service ahead of BSB and to have a better cost structure as the company would
only need to rent one of the four satellite channels for 10 million a year. Another advantage for
Sky Television was that it was not required to use the D-MAC standard, and could therefore use
the prevailing field-proven PAL standard. However this cost and fast roll out advantage came at
the expense of a weaker signal, which required a larger satellite dish at the viewers home
(though it was a cheaper dish) and also of a lack of scrambling capacity in the PAL standard. As
the signal could not be scrambled, movies channels would have to be offered for free rather than
subject to subscription, and may as well be an issue in trying to program recent movies as Sky
Televisions programming would spill over to continental European countries with different
regulations.
Sky Television would consist of four channels: Sky Channel, Sky News, Sky Movies, and
Eurosport, which could be later expanded with new channels from the Astra satellite. It was
Rupert Murdochs promise of more public choice: My contention is that broadcasting in this
country has too long been the preserve of the old establishment []. The public wants more
choice. Advertisers want more choice.
Relative to BSB, Sky Television start-up costs were much lower, estimated at 100 million
versus 500 million for BSB with a break even scheduled for the end of 1991. The service
launch was scheduled for February 1989, a challenging nine month period, which was dependant
on the success of Astra satellite launch. If this schedule was to be met, Sky Television forecasted
the installation of 1 million satellite dishes by the end of 1989, and 5 to 6 million by the end of
1994.
infuse an additional 450 million. Such a deal was complicated by the demise of the Bond
Corporation, BSBs largest shareholder. Granada, Pearson, Reed, and Chargeurs subscribed to the
recapitalization plan, which made BSB the second costliest start-up venture in the UK, after the
Channel tunnel. The capital raised was used to fund the Operation Fastburn, a heavy marketing
and advertising campaign.
BSB finally started its operation in April 1990. However, despite the Operation Fastburn, BSB
initial sales were disappointing due to receiving equipment shortages, Sky Televisions
aggressive response, customer perplexity and the economic recession. Between April and October
1990, BSB only gained 175,000 subscribers, whereas Sky Television gained 946,000 subscribers.
The game was reversed from October to December 1990 as BSB gained 125,000 subscribers
compared to 56,000 for Sky Television. In October 1990, BSB had already lost a cumulative
800 million and was losing money at a weekly rate of 6-7 million, compared to Skys weekly
loses of 2 million.
BSBs CEO, however, remained optimistic before the 1990 Christmas season. He said: This is
the big game or no gameIts like drilling for North Sea oil. Money goes out. Murdoch will have
to carry the heat. His optimism was driven by the cash crunch faced by Sky Televisions parent
company, the News Corporation, and his belief that BSB had deeper pockets to survive the
competition. Indeed, in addition to Sky Televisions investment, News Corporation had since
mid-1988 invested $3 billion in TV Guide and Triangle Publications, and several hundred
millions pounds in the upgrade of its newspapers business operations. News Corporation had
since then been forced to renegotiate its multi-billion dollar debt while one of the covenants
imposed by banks was to stop the drain of cash at Sky Television.
Epilogue
On November 2, BSB and Sky Television announced their fifty-fifty merger into BSkyB. The
merger was presented as the combination of BSBs financial resources and Sky Televisions
commercial acumen. Though the control was equally split; it appeared as a less-than-equal
merger for BSB given its massive investment and the agreement that News Corporation would
receive its share of positive operating cash flows earlier than BSBs former investors. In addition
News Corporation had to provide less than half of BSkyBs immediate cash requirements, and its
executives rapidly took over the exclusive management control of BSkyB.