BT's £1.2bn Champions League splurge is price of staying in Sky game

Mark Sweney
BT has beat arch-rival Sky to the Champions League rights – but it could still lose its shirt in the battle for the Premier League. Photograph: Gerard Julien/AFP/Getty

BT is banking on its £1.2bn Champions League rights victory putting its business back on track after a torrid 12 months. A boost is needed after the financial and reputational damage of an accounting scandal at its Italian operation and the protracted battle with the industry watchdog over the future of its broadband division.

On Monday BT renewed ownership of UK broadcast rights to Europe’s biggest football tournament but had to shoulder a hefty 32% price increase, or almost £100m extra per season, to fend off Sky and buy the games exclusively until 2021. But after suffering something of an annus horibilis Gavin Patterson, the BT chief executive, will consider that a price well worth paying.

In January, BT stunned investors by admitting that an accounting scandal at its Italian arm was much worse than first thought, triggering one of its biggest ever one-day share price falls and wiping £8bn off its shares. The Italian crisis, as well as the revelation of a significant slowdown in UK public sector work and orders from international companies, prompted BT’s first profit warning in almost a decade.

BT is also still at loggerheads with Ofcom, the communications industries regulator, over the watchdog’s demand for a legal separation of Openreach, the BT unit that controls the UK’s broadband infrastructure. Ofcom is threatening to call in European regulators after months of negotiations over a voluntary deal.

After three years in charge, Patterson’s reputation has taken a hit and he could ill-afford an own goal on the key driver of BT’s growth, its premium sport-fuelled TV strategy. So a knock-out Champions League bid was always likely.

“More than anything the Champions League deal is about getting one of the monkeys off their back,” said Sam McHugh, an analyst at stockbroker Exane. “They couldn’t afford to lose these rights. If BT had done so there would have been serious question marks about the sustainability of their content strategy.”

BT has spent£3.8bn on Champions League and Premier League football rights since 2012, a multibillion-pound attempt to reverse a haemorraghing of broadband customers to arch-rival Sky. Before acquiring the Champions League rights in 2013, BT did not have enough – bar a minority share of live Premier League games – to counter Sky’s stranglehold on the best sports rights.

Since then BT has seen broadband customer numbers grow from 6.3 million to 9.3 million and TV customers rise from about 700,000 to 1.75 million. Sky, meanwhile, has grown rapidly from one million customers in 2007 to more than 6 million now.

“The package of rights as a whole are doing what the company wanted to do,” says Simon Weeden, head of European telecoms research at investment bank Citi. “They have come off the back foot where they were losing customers to Sky and didn’t have an answer.”

Last week, Patterson vowed to improve customer service for BT’s millions of residential customers and telecoms companies that rely on its network, acknowledging the criticism he has received over the quality of the Openreach national broadband network.

Analysts have perceived this change in Patterson’s attitude to be a precursor to finally hammering out a deal over splitting off Openreach, although Ofcom has stopped short of demanding that BT sell off Openreach. Instead, the unit will have its own its own board, an independent chairman and its own brand while remaining under BT ownership.

“He climbed down off his high horse a bit, admitting he underestimated Ofcom and what they are trying to achieve,” said McHugh. “He was making conciliatory noises. It is fair to say that Gavin has not done quite so well managing the political and regulatory environment as his predecessor.”

If there is one adversary that Patterson is acutely aware of never underestimating, it is Sky. The two companies are set to go head to head over the crown jewel of sports rights, the Premier League, early next year.

Sources say that Sky, which is the subject of an £11.7bn takeover by Rupert Murdoch’s 21st Century Fox, did not look to submit a knockout Champions League bid because it was keeping its powder dry. Neither BT or Sky can afford to lose out in the next auction because the rights to the top tier of English football have become so umbilically linked to the success of their battle for TV, broadband, mobile and phone customers.

“Being in a three-year cycle of [deal] renewal is a prisoner’s dilemma of sorts,” says McHugh. “You have to keep paying more and more to keep customers and growth.”

Champions League rights inflation has started to cool a little, after more than doubling in price when BT struck its first exclusive deal to a 32% increase this time round.

However, the furious competition between BT and Sky over the last two auctions has seen the Premier League rights jump 70% in value each time. The last deal was worth an enormous £5.1bn to the Premier League with Sky taking the lion’s share.

BT will pay an average of £1.1m per game for the 343 Champions League (138) and Europa League games for which it has secured the rights.

By comparison, BT is paying £7.6m per game, and Sky £11m per game, under the current Premier League rights deal. Last week, Patterson said that rampant rights inflation has to come to an end, a day after submitting its £1.2bn Champions League bid which will see BT squeeze £100m more annually from its business.

The timing of his comments Patterson could well have been making a political signal to his rival that a Premier League status quo deal could be the best bet for rivals that have handsomely lined the pockets of clubs with inflated bids in recent years.

“We don’t need to be number one in the sports market, but we do need to be a viable number two,” said Patterson.

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