Game plans in focus ahead of football rights kick-off

On Friday two of Britain’s biggest companies will start the corporate equivalent of a gunfight.

BT and Sky will bid in an auction for Premier League football rights, which is expected to generate £3.5bn-£5bn and underlines the huge value that live sports has for broadcasters and telecoms groups worldwide.

How will they approach the process?

Winning the rights is simple. Sky pays £760m a year to broadcast 116 matches live in the UK, representing the lion’s share of the rights. BT, Discovery Communications and Al Jazeera — all confirmed or possible bidders — could potentially pay more.

But winning with a strategy that makes long-term financial sense is harder. Irish broadcaster Setanta won rights in the 2006 and 2009 auctions, but soon ran out of money.

The auction process “is a wonderful mixture of analysis and fear”, said Richard Brooke, a former executive at the Irish broadcaster. “There are an awful lot of factors, some of which are purely scientific and some of which are not.”

BT has fared better than Setanta: its share price has doubled since it won Premier League rights in 2012. Nonetheless, some analysts estimate that the former telecoms monopoly is spending more on rights than it is gaining in additional sales.

Bidding strategies

A tested auction strategy is “bid high, bid early”. In 2013, BT won the rights to broadcast Champions League football with a knockout bid of €1bn over three years. Its condition — accepted by the rights holder Uefa — was that the auction did not go to a second round.

That tactic will not work with the Premier League, which, under its chief executive Richard Scudamore, runs a highly-regulated process.

The rules of the auction are not public. According to people familiar with the process, there is no set number of rounds, but bidders are likely to be given a chance to make further offers. Bidders are not told whether they are in the lead after the first round, or whom they are bidding against — which can scare them into making higher pitches.

To ensure bidders declare their hands early, the League may award one of the seven packages of matches available in the first round.

Calculating value

Broadcasters have to balance the costs of football coverage — about £40 per UK household, before production and marketing — against the revenues that accrue from household and pub subscriptions, advertising, and sales of bundled products, such as entertainment channels and broadband.

Sky uses sports as a loss leader — sports subscribers also buy highly-profitable entertainment and movie channels. “The key to Sky is the ‘bundle’,” said Patrick Wellington, an analyst at Morgan Stanley.

Sky has to calculate how many of its estimated 4m sports subscribers would go elsewhere if the broadcaster lost Premier League rights. Analysts at Citi believe the answer is not many — so long as Sky still shows the popular Sunday kick-offs.

But a survey by Morgan Stanley found that one-third of Sky Sports subscribers would switch to BT if the latter won the rights to games that kick off at 4pm on Sunday. That would cut Sky’s earnings before interest, taxation and amortisation by between 15 per cent and 20 per cent, said Mr Wellington.

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For BT, there are more unknowns. It has committed more than £2bn to sports rights to attract more broadband customers.

How many broadband customers would go elsewhere if BT did not strengthen its content proposition? How many new customers will the group gain anyway, once its Champions League rights kick in next season?

Then there are subscriptions. BT has said it will charge customers an unspecified subscription to watch Champions League football from next season. How much could it raise?

If 1m households paid an extra £10 a month for sports coverage, that would generate more than £120m in annual revenues for the company. BT pays £246m a year to show 38 Premier League games.

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A third issue is mobile. BT is set to buy mobile operator EE, which has 24m customers in the UK. How would Premier League rights facilitate BT’s ability to cross-sell broadband to those customers?

While Sky could focus on quality — Sunday kick-offs — BT may want more quantity: at least one game a week during the season. But if a bidder focuses only on certain packages, it may allow its rival to buy the others for a bargain.

Discovery Communications and Al Jazeera have an even trickier proposition. Unlike Sky or BT, they cannot offset costs against sales of ancillary products. Instead their revenues would come from advertising and pay-TV platforms — Sky, Virgin and BT — paying to carry and retail their channels. Discovery and Al Jazeera stretch far beyond the UK — do their long-term strategic ambitions merit betting the farm on the Premier League?

Last-minute adjustments

During the auction, companies receive some new information: have certain packages been awarded to other bidders? Have their own first-round bids been successful? That can cause even the best-laid plans to melt.

In June 2012, Sky’s board held an emergency meeting after BT emerged as a surprise challenger. It revised its numbers, and ultimately maintained the best rights. As one former bidder puts it, “you go in thinking you’ve got your top number. And then you realise how far behind you are.”

How the auction works

● The Premier League is auctioning seven packages of games, including a new mixture of Monday and Friday night games.

● No single buyer can win more than five packages — 126 of the 168 matches available.

● There is no set number of rounds. Bidders are not told if they are in the lead after the first round.

● Bidders cannot withdraw a bid, or make an offer for one package of matches conditional on whether or not they win another package. That makes it difficult for bidders to ensure different combinations of rights.

● The Premier League will not discriminate unduly: if it awards one package after a certain round because of a gap between bidders, it will not continue bidding on other packages where there is a similar gap.

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