British Sky Broadcasting Group Plc Business Information, Profile, and History

Company Perspectives:

Our overall objective is to increase our revenues by growing our subscriber numbers. And to increase subscriber numbers, we strive to improve the service we deliver by enhancing the quality and diversity of our programming and ancillary services.

History of British Sky Broadcasting Group Plc

With nearly 17 million viewers, digital satellite television operator British Sky Broadcasting Group plc, better known as BSkyB, stands as the United Kingdom's top pay television provider. The company shuttered its analog service in 2001, making it the world's first digital-only service provider. Since its launch in 1998, Sky digital has flourished, growing from 225,000 customers to nearly seven million in 2003. BSkyB's cutting-edge service allows subscribers to access 400 channels related to sports, movies, entertainment, and news. Sky digital also enables viewers to perform a wide variety of interactive tasks ranging from sending email, shopping, betting, and banking. News Corporation--headed by Rupert Murdoch--owns approximately 36 percent of BSkyB.

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 Kingdom (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. However, when regulators handed out the satellite broadcasting license, Murdoch's SkyTV concept, wholly owned by his News International Corporation, was denied due to British law, which 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. By then, however, 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 fewer than 120,000 of the BSB squarials. Both services were hurt, however, by consumer reluctance to commit to satellite dish purchases (at £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. Nevertheless, with a break-even point of three 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 still the early days of the British satellite market, with its television viewing potential of more than 20 million households, and despite SkyTV's initial 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 by the beginning of November after two weeks of intensive, secret meetings.

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, sometimes 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--total 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 million 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--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 BSkyB from the flat-rate fee structure and instead linking fees to subscriber levels, thus 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 topping 3.5 million households by mid-1994. It was at this point that Chisholm--by then leading Asia's StarTV satellite network, 64 percent of which Murdoch had purchased for $525 million in 1993--prepared 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. Taking the company public also proved enormously profitable to Chisholm, who saw himself become one of the world's most highly paid television executives.

Going Digital in the Late 1990s and Beyond

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 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 CanalPlus 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.

Indeed, the launch of BSkyB's digital service in 1998 was enormously successful. Sky digital, the United Kingdom's first digital television service, easily carved out a leading position in the industry with its offering of 140 channels. In just 30 days, the company sold over 100,000 digiboxes and secured its position as the fastest-growing digital platform in the world. This growth continued at a rapid clip and was bolstered by the company's decision to give away free digiboxes, or set-top boxes, and minidishes. Within ten months of the promotion, Sky digital had gained 1.2 million new subscribers. In 1998, the company also launched several interactive services, including Sky Sports Extra--which allowed viewers access to instant replays, match statistics, and highlights--and Open, an interactive shopping channel.

The Economist explained the frenzy surrounding digital television in a May 2001 article, claiming that "digital brings many features, among them a clearer picture and the ability to squeeze more channels into the box. But the main reason why British pay-TV broadcasters, with their continental counterparts, are in breathless pursuit of this costly conversion is that digital TV promises interactivity: the ability of viewers to 'talk' to the telly. Interactive TV, it is said, will animate couch potatoes, tempting them to spend money ordering anything from pizzas to package holidays, all at the press of a remote-control button." According to the article, research group Jupiter Media Metrix claimed that by 2004 interactive commerce and research would rise to $8.1 billion in Europe, while climbing to $5 billion in the United States.

As such, BSkyB entered the new century ahead of the game in the U.K. digital arena. The company introduced the first interactive advertising campaigns in 2000 and rolled out Sky News Active, the world's first interactive television news service. It also launched Sky+, a fully-integrated personal video recorder. By 2001, the firm's digital subscriber base had surpassed five million. That year, BSkyB shuttered its analog signal, becoming the world's first nationwide provider to rely solely on digital service.

By 2002, Sky digital programming was broadcasted into a quarter of all British households. The company developed Freeview that year, offering customers three channels through digital terrestrial television (DTT). The firm defined DTT as television channels using digital signals delivered to homes through a conventional aerial and then converted through a digibox or set-top box. In 2003, BSkyB expanded into music television with the launch of three new channels. The company signed its seven millionth subscriber in October of that year.

Since his appointment in 1999, BSkyB CEO Tony Ball had overseen the company's successful foray into the digital television industry. Over a five-year period, the company had transformed itself into a digital powerhouse, garnering respect from its international peers as well as industry acclaim. Ball announced his intentions to leave his post in October 2003, causing many to speculate about the company's future leadership. In November, Murdoch appointed his 30-year-old son, James Murdoch, to the position. While the younger Murdoch had industry experience heading up News Corp.'s Asian satellite network, certain shareholders opposed the appointment based on the belief that he lacked the necessary experience to run BSkyB's burgeoning digital network.

Principal Competitors: British Broadcasting Corporation; NTL Europe Inc.; Telewest Communications plc.

Chronology

• Key Dates:
• 1983: Rupert Murdoch's News International sets up Sky Channel.
• 1988: A consortium of media giants establishes British Satellite Broadcasting (BSB); Murdoch creates SkyTV.
• 1989: SkyTV is launched with four channels of programming.
• 1990: BSkyB is formed out of the merger of SkyTV and BSB.
• 1993: Sky Multi-Channels, a fee-based multi-channel concept, is launched.
• 1995: BSkyB goes public.
• 1998: Sky digital, the United Kingdom's first digital television service, is established.
• 2001: The company shutters its analog service.