British Sky Broadcasting (BSY) has done a great job of aggregating some of the best content available and then marketing its services. More than a decade ago, the firm began to enter exclusive deals to carry major sporting events in the United Kingdom. In addition, it acquires rights to many first-run movies and U.S.-produced series, which are becoming increasingly popular in the U.K. While it resells the majority of its purchased content to other television carriers, it also produces its own shows to distinguish its product.
This capability was enhanced by the completion of a new production facility in 2011. The new building has several studios, including one that is large enough to hold an audience and produce live shows, such as game or talk shows with a live audience. As a result, BSkyB has outperformed its competitors by consistently expanding its television subscriber base. In addition, it is selling additional services, such as high-definition television, DVRs, second set-top boxes, and video on demand. All of these services increase average revenue per user and increase profitability.
The firm also offers broadband and phone service. These businesses have grown rapidly and are now similar in size to Virgin Media and Talk Talk, though they are still smaller than those of BT Group, the incumbent telephone operator. While BT has been gaining more net new broadband subscribers in the U.K. since it began offering BT Sport for free to its broadband customers, BSkyB continues to grow its broadband subscriber base. While the firm doesn't have the scale in broadband and telephony that it has in pay TV services, the profitability in these operations is improving faster than we anticipated.
The competition in these segments is much more intense than in television, so BSkyB will never have the scale and moat in broadband and telephony that it does in television, but the incremental business is improving the firm's margins and free cash flow. The firm has agreed to acquire 21st Century Fox's stakes in Sky Italia and Sky Deutschland, which will increase its geographic scale, but these businesses aren't nearly as dominant as the existing business.
