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Department of Managerial Economics and Decision Sciences

WAR OF ATTRITION OVER THE SATELLITE TELEVISION


MARKET IN THE UNITED KINGDOM1

Satellite Television Market


Prior to December 1996, the television market in the United Kingdom was comprised of four
broadcasting channels: British Broadcasting Corporation 1 (BBC1), British Broadcasting
Corporation 2 (BBC2), Independent Television (ITV), and Channel 4.
BB1 and BBC2, whose viewing audiences in 1985 were 36% and 11% respectively, are public
companies, broadcasting high-quality, public-service programming, and are financed solely
through annual license fees paid by TV set owners. ITV, who captured 46% of the viewing
audience in 1985, consists of several regional broadcasting private companies, financed solely
through advertising revenues. Finally Channel 4 was launched in 1982 and is owned by the
Independent Broadcasting Authority (IBA).
In order to expand the choice of television viewers, industry experts believed that pay TV, such as
cable and satellite television, would be the solution. Both technologies were seen as
complements. And, the cable industry was still growing at a modest pace, but still lagged far
behind the cable development in the US.
Satellite television transmits signals from a station on the ground to a geostationary satellite (in
orbit at 22,000 miles above the earth) to the viewers receiving antennae. Such a system could be
implemented with low to high-powered satellites: the higher the transmission power, the lower
the size of the antenna required at the subscriber premises. In 1981, Satellite Television PLC
(SATV) had launched such a satellite television service, using spare capacity on a low-powered
satellite. Due to its low transmission power, the signal had to be broadcast to cable systems rather
than subscribers satellite dishes, which ultimately led to its commercial failure. News
Corporation, owned by Rupert Murdoch, purchased a majority stake in Satellite Television PLC
in 1983 for 10 million, renamed it Sky Channel, and revitalized its operations. Another satellite
television service called Super Channel was launched in 1986 by ITV companies, but it
encountered the same meager success and financial losses due to low penetration and lack of
advertiser interest.
1

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.

Competition is killing both players


In response to Sky Televisions launch, BSB revised its satellite dish installation upwards. It
increased its commitment to the satellite business. The BSB commercial forecasts grew to 5
million dishes by 1993, and 10 million by 2003. The advertising and promotion budgets were
increased as the planned launch date approached. Beside the marketing expenses, the war raged
as well in the films bidding for exclusive television rights in the UK. Hollywood films were
considered a key success factor in the satellite television business as they were the content that
would drive the subscription revenues. The bidding war was exacerbated after Sky Televisions
announcement in October 1988 that it would be able to scramble PAL signals. As a result, by the
end of 1988, BSB and Sky Television had committed to buy for 650 million of programming
from Hollywood studios, including 150 million of up-front payments. This amount was believed
to be twice as high as the initial estimations and two to three times as high as the fares paid by
U.S. cable companies; each party was blaming the other for this price escalation. BSBs mounting
costs required BSB to seek an additional 131 million of financing in January 1999. And, led
Virgin to sell its stake in the venture to Bond Corporation, already the largest investor, for a small
profit. The first merger talks between Sky Television and BSB were unsuccessfully initiated at
that time by Virgins chairman, Richard Branson.
Sky Television opened its commercial service in February 1989 as planned. However, the market
reaction was lukewarm and only 600,000 dishes were sold by the end of 1990, 40% less than
forecasted. Several reasons explained the slow sales ramp-up: a shortage of receiving equipment,
patchy programming, rising interest rates and nice weather. In addition BSB launched a 20
million advertising campaign to promote the D-MAC standard over Skys PAL standard, which
delayed their subscription decision and confused consumers because the Sky and BSB satellite
dishes and receiving equipment were not compatible. Sky Television tried in vain to launch a
direct door-to-door marketing campaign, but had to finally back off due to infuriated retailers.
BSB did not have an easy ride either. First it missed its launch date in September 1989 due to
delays in ITTs chip development for D-MAC receivers. However it was very reluctant to switch
to the PAL standard, as the D-MAC standard differentiated BSB from Sky Television. In
February 1990, BSB concluded a second round of financing: the banks would lend BSB 450
million, conditional on timely achievement of operational targets, and the equity investors would

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.