Monday, September 20, 2004

From "EuroTelco morning spam" - Monday 20th September, 2004

Press reports at the weekend and again in this morning's Financial Times highlight an impending foray into video for BT Group, reportedly from mid-2005. BT will reportedly launch a PVR in association with Freeview (the free digital terrestrial service which we highlighted last Friday). Apparently this will pipe the Freeview progam platform (26 TV channels, 23 radio channels) to BT DSL subscribers, with the added advantage of allowing video-on-demand services as a differentiator.

It will be interesting to watch the reaction of BSkyB, with whom the FT reports BT is in early-stage discussions over a content/distribution partnership. Our reading of the BT TV-over-DSL plans is that they constitute a frontal assault on Sky's core business, seeking to tap into the fastest growing TV platform in the UK - Freeview. Sky may be just as likely to formulate a direct response to the BT move rather than negotiate a partnership, in our view. Sky Digital set-top boxes are already linked to the PSTN to allow interactive services, and we have been contemplating for some time the potential for Sky to exploit this installed line base better, perhaps through a push into broadband itself - which leads to the inevitable question about voice.

More fundamentally, as concerns the likely benefits to BT, we cited in our Global Telecom Monthly back in February that, of all the European pay TVmarkets, the UK is in our view the least appealing from the standpoint of anew entrant. The cable players have been very successful at pushing digital penetration compared to European peers, multiple service penetration is high, Sky is the largest and most influential satellite player of any in Europe, and Freeview (which grew subscribers 13% sequentially in Q2) is a wildcard of the sort not found elsewhere in Europe. BT's strategy may serve as a churn mitigation device at the margin, but we would be surprised if the service made any material contribution to earnings or cash flow in the foreseeable future.

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