With profits rising, BSkyB has the option of paying out dividends to shareholders or funding a spending spree in Europe with Canal Plus and Sogecable likely targets
Tony Ball is no stranger to hard decisions. In the four years he has been running British Sky Broadcasting Group's pay-television business, he has knocked out his terrestrial digital competitors, made mincemeat of his cable rivals and made most of his rivals around the world look like comedians.
Now he is running what increasingly looks like Europe's most powerful media business. On 12 August, it reported a fifth straight quarterly profit, making £157m ($245m) for the three months ending 30 June, a total that included a £121m tax credit.
The profit was a lot higher than most analysts had forecast and confirmed BSkyB's strategy of heavy investment in digital broadcasting.
It is now about to harvest the fruits of that investment and become one of the most formidable cash-generating machines on the Continent. In the current financial year alone, it generated net operating cashflow of £664m.
Yet at some point in the next few years, Ball is going to have to make a tough choice. He will need to decide whether he is working for all his shareholders or for his chairman Rupert Murdoch. The big question for BSkyB is what it will do with all that money.
Few companies have understood the pay-television industry better than BSkyB. Its formula is often derided as a brain-dead mix of football and movies, which is unfair. It now delivers a sophisticated range of channels, has technology that works and brilliant customer service. It is helped by the over-regulated nature of the British TV industry. For decades, that consisted of a massive state broadcaster, the BBC, with private-sector television restricted to a fragmented group of local monopolies. That left the field clear for a satellite player like BSkyB. BSkyB has made money, while most other pay-TV operators in Europe have failed to deliver substantial profits.
In Germany, the attempt by Leo Kirch's Kirch Holding GmbH to create the Premiere pay-TV business was such a spectacular failure it forced the whole company into bankruptcy. In France, Canal Plus, the pay-television division of Vivendi Universal SA, has been reporting annual operating losses since 1997 and may lose as many as 120,000 subscribers at its French channel this year.
In Italy, News Corp earlier this year bought the unprofitable Telepiu SpA business from Vivendi to merge it with its own money-losing Italian operation Stream. And in Spain, Sogecable SA, the country's largest pay television company, managed a meagre second-quarter profit of e9.9m, and even that was flattered by gains from selling assets and a successful court case against the Spanish government. It has just purchased its main rival, Via Digital SA.
That puts BSkyB in a position to dictate the way the European industry develops. It has achieved dominance of its market and is now throwing off cash. The rest are still restructuring, merging or retreating.
Why? Because pay-TV is a winner-takes-all business. The basic structure of the industry means that the biggest player in the market makes lots of money and everybody else makes nothing.
There are two things Ball can do with the money in which he is now wallowing. He can hand it back to shareholders or he can use it to expand across Europe.
BSkyB is 35% owned by Rupert Murdoch's News Corp and Murdoch is chairman of the company. There can be no doubt about what Murdoch will want to do. He is a businessman who believes only in expansion. Giving money back to shareholders has never featured on his agenda. He will want BSkyB to push abroad.
But where can it go? News Corp has already taken the Italian market. BSkyB has already been burned in Germany. That leaves France and Spain as the two most promising European markets. With a value of e2.4bn, Sogecable is quite affordable and there has been speculation that News Corp is interested in taking a stake in the business. But with 2.5 million subscribers, that would only be a bolt-on acquisition.
Canal Plus is a transforming deal. A combined BSkyB/Canal Plus would control the European pay-TV business. It could dictate terms to movie studios and football leagues. No other operator could touch it.
A sale must be a possibility and BSkyB would be the obvious buyer, without Murdoch as chairman. And with Murdoch? He has achieved the impossible before, so it would be wrong to rule it out, but it is hard to see the French agreeing.
Right now, Ball may be aggressively stalking Canal Plus. He could team up with Vodafone Group Plc and launch a joint hostile bid for Vivendi ' Vodafone is desperate to get its hands on the French company's Cegetel mobile unit.
But the chairman is the obstacle to paying out cash to shareholders and to expansion into Europe.
At some point, BSkyB will have to crawl out of the shadows of the Murdoch empire and start pursuing its own interests rather than those of News Corp. When it happens, it will be an almighty fight and, on past form, you would not count on Ball as the winner.
Bloomberg newsroom, Frankfurt
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