British Sky Broadcasting Group

1. Introduction
1.1 Industry Overview

The broadcasting and cable TV industry is defined as the terrestrial, cable and satellite broadcasting of digital and analogue television programming ( Its market valuation is dependant upon the revenues generated by broadcasters through advertising, subscriptions, or public funds which involve TV licenses (BBC), general taxation and donations.

The research of the UK broadcasting market (Datamonitor 2009c) revealed that total revenue of £12.5bil was generated in the 2009. Supporting s also indicated that between 2004 and 2009 the market amounted to 4% compound annual growth rate. Furthermore, the TV subscriptions segment generated total revenue of £5.3bil which amounted to a 42.3% of the overall market value, thus making it the most profitable sector in 2009.

1.2 BSKYB Group Overview

The British Sky Broadcasting Group other wise known as BSKYB is currently one of the leading pay television broadcast, telephone and broadband service providers in the UK. The group uses its Sky brand channels across direct-to-home and cable operators as well as free to air platforms to market its programming. BSKYB broadcasts these Sky brand and third party channels to its DTH subscribers all over UK and Ireland. Furthermore, it also offers a range of its Sky channels to digital subscriber line (DSL) subscribers as well as offering the basic three free channels to the digital terrestrial television (DTT) platforms i.e. Freeview.

Although primarily, BSKYB is operating in the broadcast segment of the market, it drives the majority of its revenues from such areas as advertising, retail subscriptions, wholesale subscriptions, hardware and services, installation, Sky Bet, and many others. Each sector provides a percentage value to the company, for example, retail subscriptions are consisted of all the DTH subscribers which also include pay-per-view services, broadband service and Sky Talk. The wholesale subscription sector consists of a number of selected Sky Channels which are commissioned to other cable platforms such as Virgin Media Inc.Other premium channels such as Sky movies and Sky sport are also commissioned to certain cable operators on domestic and international scale.

The remaining revenue is obtained through at least 7 other division which consists of such sectors as online advertising, interactive services, text services, conditional access, and access control on the Sky digital platform as well as technical platform service, and electronic program guide.

1.3 BSKYB Group 2009 Financial Overview

By the end of the 2009FY, BSKYB group have reached revenues of £5,359mil, which was seen as an 8.2% increase since 2008FY. Whereas the operating profit over the same period had reached £813mil, which was 12.3% increase in the same period. More importantly however was the large rise in net profits which was recorded at £259mil in June 2009, when compared to a tremendous net loss in 2008 which equivalent to £127 mil.

1.4 Key Research Issues

Provided that the current economy in the UK is still suffering from the harsh reality of the recession, with inflation still at 3% whilst economic growth is capped at 2.5% and interest rates still dwindling at 5% since the beginning of the year (Pettinger 2009), the ability of BSKYB to maintain such high profit margins has been remarkable. Whereas Virgin Media (Neal 2009), recorded revenue loss of £55mil, with a further reduction in the number of new subscribers signing up to its services. Moreover, the firm has been pushed into a quarterly operating loss of £50.2 million. The overall net loss of the firm has amounted to £241.4 mil by 2009FY.

It seems that, stability is an inadequate concept to describe the remarkable performance at BSKYB this past year. As a mature business, the group has been able to gain its fastest annual rate of subscription growth in five years which has moved the total up to more than 9.4mil subscribers. The concept of oligolistic competition has allowed BSKYB to avoid direct price competition with its rivals by applying the strategic independence and better understanding the competition.

But how exactly can one firm differentiate itself so much from its competitors and how will its growth be affected in the long term? The report will provide an insight into the current success of BSKYB and provide evidence of its ability to compete in such a demanding market whilst maintaining high profit margins. Its growth and exploitation will also be examined to determine the direction and future of BSKYB.

2. Data Analysis

To analyse the performance of BSKYB, two other companies were chosen for comparison purposes. Currently the three companies which have consistently shown outstanding performance over the past five years are the British Broadcasting Corporation, BSKYB, and ITV Plc. For the purpose of this analysis, each company will be analysed for its performance over the 2005-2009 period.

2.1 BSKYB Rival Details
2.1.1 British Broadcasting Corporation 2009 Performance Overview

The BBC is a leading broadcasting service operators in the UK with a number of freely available public TV channels, which include 24 hour news channel, digital channels, national and digital radio networks, and an online news service. The group operates domestically and internationally. Moreover, the BBC has a significant presence in the USA, Europe, Middle East, Asia Pacific and Africa.

The company receives revenue through five service groups which include future media and technology, vision, audio, music and journalism. In the end of the 2009FY BBC generated revenues of £4,182mil, which was a decrease of 13.1% compared to 2008 s. In 2009 the company had recorded total net income of £117.3mil - 67.5% rise compared to 2008 (

2.1.2 ITV Plc 2009 Performance Overview

In the UK, there are 5 main popular channels which were available on the original analogue broadcasting, one of which is ITV. The company itself focuses on producing revenues through advertising, hence being the largest advertising funded broadcaster in the UK. The market segments covered by the company include broadcasting, TV program production, advertising and online businesses.

2.2 Key Metric Analysis

From the research and the collected data (Datamonitor 2009d), summarised in 2.2.1, indicates that the UK broadcasting and cable market has suffered heavily year on year decline since 2008. BSKYB have shown consistent improvements as the revenue throughout 2009 rose by 7.8%. Despite poor performance of the advertising sector, BSKYB were able to uphold such a high organic annual growth rate whilst maintaining a further increase in operating profit which is up by 4% after tremendous investment in upfront costs of strong demand for HD. Moreover, by excluding the £130mil investment in HD services the overall operating profit rose by 21% between 2008 and 2009.

In comparison, the reported revenues of their rivals have been falling year on year, as the BBC maintains its downward slide of revenue of 27% and ITV Plc isn't far behind with revenue s falling 15% in 2009. As predicted, with ITV Plc, a company heavily dependant upon advertising as a source of revenue, has shown further drop in total revenue as it attempts to cut operating costs and improve performance by simplifying and filtering out their business operations.

Whereas the recent issues with miss-editing of certain programming and the repeat of misleading phone voting problems have introduced publicity mistrust and damaged the BBC brand. However, the wide product portfolio allows the BBC to optimize its product mix by offsetting losses from one set of products with the profits from other set.

Based on the data in 2.2.2, it becomes evident that although the total BSKYB revenue has been resilient to the recent economic crisis, the operating profits and net profits have had a substantial decrease since 2006 due to the high investments and costs associated with the introduction of new HD technologies. Nonetheless, there was a very strong response from customers to the new lower price of the Sky+ HD box. In fact, during 2009, the total number of HD customers increase to 1.3 million, thus causing the Sky+ HD subscriptions to double upon last years performance. As a result, BSKYB has experienced an increase of 12.3% in operating profit during the last 6 months. As a result, in 2009FY the net profit margins were 4.8%, compared to negative 2.6% in 2008FY. Improving operating performance would enhance the group's investors' confidence as well as allows it to invest in growth avenues as shown in 2.2.3.

The research has shown a strong underlying profitability for BSKYB throughout 2009FY, with significant potential for future growth. The investments made throughout the year will produce profitability in the medium-term, whilst the effective actions taken to reduce costs will ensure efficient growth in the long-term. An important factor of this success is based on the effective cost forecasting to cope with the demand, for example, the Sky+ HD service investment costs will be recovered by the middle of 2011. Due to high demand of this service for an affordable price, BSKYB invested around £130mil which was recovered before the end of 2009.

3 Microeconomic Overview

The broadcasting and cable TV market in the UK has shown moderately steady growth rate in the past few years which reached 1.3% last year. The market has shown most lucrative results in comparison to the German and French Markets. In the past five years, the compound annual growth rate in the UK has accrued to 4% which was represented by the 2009 total revenue s amounting to £12.5bil.

Whereas, German markets have indicated a much smaller CARG of 1.5% with total revenues in 2009 reaching a mere £10.1bil. With the rest of Europe contributing even less to the overall market value, the UK is able to maintain its dominance in the broadcasting market and benefit from the positive economic conditions.

Although the performance of the market is likely to decelerate, over the next five year period the CAGR is predicted at 0.8% and the market value is forecasted to fall to £13.5bil by the end of 2013. Nonetheless, this is considered a positive sign for the UK market as the French market is forecasted to decline further with a CARC of -0.3% whilst the German market is estimated to rise at a CAGR of 0.7%, over the same period, thus reaching overall values of £7bil and £10.5bil in 2013.

3.1 Market Segment Performance

Although the UK broadcasting and cable TV market experienced excellent economic growth by accounting for 23% of the European market, certain segments showed exceptional performance in 2009. For example, TV subscriptions segment which generated the total revenue of £5.3bil, and accumulated 42.3% of the market's overall value. The TV advertising sector also showed significant accomplishment in 2009 and showed a similar gross contribution to the market sector by amounting to over £4.4bil in revenue which is equivalent to 35.3% of the market's aggregate revenues. The final segment of TV licensing and public funds has also shown tremendous increase in revenue amounting to £2.8bil and accumulated to a total of 22.4% of the overall revenue.

There are a number of ways in which broadcasting firms can gain their revenues within the broadcasting market. For example, the BBC, biggest competitor of BSKYB in the UK, uses TV licensing (state enforced licensing fees) to gain revenue. Whilst other broadcasting companies such as ITV Plc and Virgin Media Inc gain their revenues through sale of advertising time and subscription fees for the use of their services. Other production companies such as Channel 4 (FILM 4) and ITV Plc commissions their own production of programming to the major broadcaster companies or purchase the broadcasting rights themselves for the programming. The major broadcaster use typical methods such as quality of the content and public response to determine the supplier power of the production.

3.1.4 shows the broadcasting and cable market five forces analysis using pubic broadcasting firms such as BBC, BSKYB, ITV Plc as data sources. The buyers are represented as individual consumers and advertisers, and the suppliers are represented by the production company s.

Currently in the UK there are two major broadcasters, BSKYB and the BBC. Both firms have used their popular brand images and high levels of capital expenditure in purchasing rights to provide their viewers with high quality programming. This dominant behaviour within the market drives the firms closer to monopolistic status, thus creating barriers to restrict the ability of potential rivals to enter the market.

However, rivalry for BSKYB firms expands beyond the broadcasting and cable industry into other forms of entertainment as the substitutes compete for viewing s which determine the advertising revenue rather than revenue from end-users. These markets have shown significant growth as the public adapts to the newest technological advances turns to other types of entertainment which includes film, PCs and video games. Such markets produce threats to the firms, nonetheless the rivalry is still considered fairly moderate. However, as companies form merger deals to broadcast programming through gaming consoles (Sky channels on Xbox 360), the competition becomes more severe.

4. Macroeconomic Overview

The macroeconomic data has shown significant indication that UK's economy is still in recession, and the high fiscal deficit will intensify the crisis further. Back in 2007, the country had sustained a high growth rate of 3%, however, since the economic deceleration began in 2008, the GDP growth rate fell to 0.7%, consequently, the UK's economy entered a recession. This problem was intensified as the s revealed that in the last quarter of 2008 the economy in the UK had shrunk by 1.6%. This decline has continued throughout 2009 with investment and demand consumption falling further. Moreover, the slowdown of the global economy had resulted in the external demand to become weaker and further decreasing the employment rates.






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4.1 Economic GDP Growth

The crisis has worsened throughout the year the huge fiscal deficit along side new borrowing programs. The deficit increased from 2.7% in 2007 to 5.6% of GDP in 2009, due to the government expenditure programs. Throughout the year, the government's finances have suffered due to lower tax revenue, increase in state spending, which included the bailing out of banks such as Northern Rock. Furthermore, the budget deficit has exceeded 10% in 2009, and created external debts at more than 400% of GDP.

The s from the National Statistics indicate a small rise in GDP by 0.2% in Q3 of 2009 which is an improvement from a fall of 0.3% in the Q2. Although the GDP still remains 5.1% lower than the third quarter of 2008. As a result, the fiscal health problems have introduced severe barriers towards economic recovery.

4.2 Inflation

As an internationally comparable measure of inflation, the CPI s provided by the National Statistics indicate that the UK inflation rate in October 2009 was above the initial for the EU, in fact the UK rate was 1.5% whereas the EU's as a whole was 0.5%.

During 2009 the CPI annual inflation rate has been deteriorating, however over the past few months there have been signs of improvement as the Government's target measure hit 1.9% in November, which was up from 1.5% in October.

Although currently the UK has high standards of living, the income inequality is still imbalanced. In fact the recent s the standard of living had exceeded the US. As the income inequality has increased, the government continues to fall short of its targets in 2009 to reduce poverty.

4.3 Balance Payments

The s provided by the National Statistics indicate a deficit of £4.7bil in the third quarter of 2009 as recorded in the current account. This indicates a deficit increase from £4.4bil recorded in Q2. However, the Q3 deficit is only equivalent to -1.3% of GDP, which remained unchanged from the previous period.

4.4 Interest rates

Throughout 2009, the interest rate has reduced to an all time low of 0.5% since March 2009 (National Statistics). Whilst the government introduce a new legislation to nationalise three leading banks and induce a rescue package equivalent to £37bil and aid the economic recovery.

5. Strategies

The BSKYB Group can be considered as one of fastest growing provider of broadband and home phone services. Statistics have shown that one in six customers are choosing to take Sky for TV, broadband and talk thus indicating opportunities for further growth. The next step for the group is to focus further on operational efficiency and cost reduction whilst maintaining a large investment in perceived customer value which includes HD-TV and other product innovations.

Strategically improving these factors will provide a potential to increase revenue by a further 12.3% and operating profit by a possible 20.1% (calculations Appendix 1, p2). The strategy is supported by the latest statistical s indicating and increase in dividend to 17.6p per share, thus a significant increase of almost double the share price in the past four years indicates a rise in investment opportunities. Nonetheless, the growth of the company is portrayed throughout the substantial opportunity to position the business in other market segments to build brand power by introducing more profitable and durable business for the long-term. Such potential is demonstrated in the Bigger Picture Program (

The importance for growth in the firm has provided more potential to expand beyond the UK and Ireland and focus on providing pay TV extensively throughout Europe. The main focus should be the provision of HD to set new standard for TV quality. Currently in the UK around 9 million homes have HD-ready sets. Accelerating take-up of Sky+HD internationally is an great opportunity for the business, especially providing that the UK has accounts for 23% of market value in Europe. The expediential growth will increase revenue and high returns in the long-term.

As the economy is verging upon recovery, it is vital for the group to maintain operational efficiency and cost reduction across the business to stay ahead of the competition. Lower costs in the supply chain, better call-centre management and lower overheads will allow them to reinvest in innovative products such as Sky+HD, high-quality content and front line customer service.

The s have indicated a strong customer growth in Q2 and Q3 this year as consumers responded to the quality and value of Sky's services signifying a strong performance in such a challenging environment. Additionally, the net customer increase for the quarter was 35% higher than 2008, which increased the total base to 9.442mil.

6. Conclusion

This report has provided evidence to support the strategies used to obtain such a large portion of the UK market. The BSKYB group are able to utilise and differentiate their wide service portfolio to optimize its product mix by offsetting losses from one set of products with the profits from other set through HD TV and telephony and broadband packages are clearly reflected in their revenue s. The service improvements and cost adjustments have prevented direct price wars with the competition and resulted in crucial opportunities for future investments in new technologies and improved services.

On a macroeconomic scale, BSKYB have been resilient to the significant downturn in the past two years. Furthermore, an increase of 21% in operation profits has demonstrated further the potential for future growth potential and business profitability for the group as a whole. The strategies outlined in Section 5 will allow the firm to increase profitability in the medium term and long.

7. References

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