MBA 5303

CORPORATE AND BUSINESS STRATEGY

CASE WRITE-UP – SPRING 2011

DUE: MONDAY, JANUARY 31 2011 18:45

“British Satellite Broadcasting versus Sky Television”

By:
Rohit Harikrishnan

Zach Branstetter

Preeti Murali

Keith Wicks
British Satellite Broadcasting (BSB) was a consortium originally formed by Pearson, Granada, Virgin,
Anglia and Amstrad in 1986 that was awarded a license to exclusively operate UK’s first DBS channels by
the Independent Broadcasting Authority (IBA). According to BSB’s early estimate, they planned to install
400,000 satellite dishes in the first year of broadcasting, 2 million by 1992, and 6 million in 1995.
However, the actual number of installed satellite dishes was far lower than expectations. BSB continued
losing £6-7 million per week by October, 1990. Although BSB’s delayed launch of satellites and shortage
of signal receivers accounted for this major setback, Sky’s surprising entry into the market was the
primary reason for BSB’s predicament. BSB’s failure to acknowledge the threat of new entrants was the
preponderant factor that led to their demise. News Corporation announced in 1988 that a new satellite
television venture, Sky Television shall broadcast in and around Britain. While BSB’s satellite failed to
launch as planned, Sky soon went on air in 1989 by using conventional technologies and renting satellite
channels thus gaining the advantage of being the first mover. Therefore, sky had a lengthy head start
and maybe a modicum of a better reputation. The market that was expected to be monopolistic actually
turned out to be an oligopoly.

With a combined investment of £1.25 billion and collective losses of £10 million per week, BSB and Sky,
the two major players in the British satellite television industry engaged in an intense price war to
ascertain themselves in a market which they perceived to be potentially monopolistic. The two major
problematic issues that need to be addressed in this case are:

1. Whether it was advisable to compete in this cut-throat market or whether exiting it would have
been a better choice.

2. Once the first issue is addressed, the next major issue is whether engaging in a price war was
the best way to tackle the situation.

In order to address the first issue, the best methodology that comes to mind is Game Theory, wherein
two players can assess the payoffs of either competing or exiting the game. Since the goal of each
rational player in a game is to maximize payoff, a simple 2x2 matrix (Appendix 1) can be used to analyze
this case. NPV can be employed as a metric to fathom the payoff. On analyzing this game, it is evident
that BSB loses money irrespective of whether it competes or exits the game. One of the major reasons
for this is the enormously high costs that are inherent in BSB’s economic model. However if Sky exits the
game, BSB will get a positive payoff. Sky on the other hand has a far more viable economic model that
enables them to leverage lower costs hence the payoffs for sky are much higher irrespective of whether
BSB competes or exits the game. Thus Sky should choose to fight regardless of BSB's decision.

From a financial perspective, BSB and Sky were both bleeding money as a result of their price war. BSB’s
superior technology had the upper hand in the long term but, Sky’s superior economic model allowed it
to sustain losses for a longer period. After Sky’s announcement that it would be able to scramble its PAL
signals, a bidding war broke out between BSB and Sky for the rights to broadcasting Hollywood films.
BSB tied up Paramount, Universal, Columbia, and MGM/United Artists in film licensing with an
investment of £400 million while Sky enjoyed exclusive access to Fox through cross-ownership. In
addition, Sky had committed £270 million in tying up Orion, Warner, Touchstone, Disney and other
independent studios. The intense competition between the two firms drove film prices up dramatically,
resulting in the prices BSB and Sky paid to Hollywood being two or three times that being paid by US
buyers. This intense price war resulted in both the firms resorting to desperate measures, Sky’s project X
for e.g. which envisaged door to door selling was actually a loss making proposition with an investment
of £70 million.

So the underlying question remains, was this price war warranted for, “Absolutely not”. Both BSB and
Sky could have collaborated and drawn a line somewhere so that they cohesively coexist in this multi-
billion Pound industry. Had the two organizations agreed on using similar technology initially (Sky’s PAL
technology) and maybe shifting to BSB’s D-MAC technology later, the two firms would have saved a lot
of money and could also have roped in those customers who were skeptical about which technology
they should opt for thus adding to their revenue. Besides paying 300% for film broadcasting rights
makes absolutely no sense. They could have again saved a lot of capital had this issue been tackled
amicably.

So the bottom line is that engaging in a price war has more disadvantages than benefits. On analyzing
the payoff matrix, it is evident that exiting the game is a better strategy for BSB while Sky still has a
profitable scenario irrespective of BSB’s actions. Our solution in this case would be that both these firms
Merge and sign a Memorandum of Understanding (MOU) such that each firm maintains a 50% share
[However it seems that since Sky holds the upper hand, they may tend to attain a controlling stake].
Such a decision will help both the firms avoid a price war altogether and would help them leverage their
strengths and create a monopoly in the market. Besides both the firms can lower their costs of
advertising and marketing in case a merger were to go through. Thus the pros of a merger clearly
outweigh the cons and hence it looks like the most attractive avenue for both the firms involved.

In case a merger is not a viable solution for both the parties involved, they could resort to forming an
alliance such as a union with a set of rules that have been laid down to mitigate the perils of a price war.
We propound that they could come to a consensus on which technology to use and also putting a cap on
the film broadcasting rights so that costs do not go out of hand.

Irrespective of which method they opt for, it is clearly evident that in this case working together and
focusing on the big picture would be a much better option that competing to gain control of the
monopoly.