BT (LSE: BT-A) is in the midst of a transitional period. Indeed, the formerly nationalised company is gradually moving from being a telecoms operator to a fully fledged media play. While this has excited investors at times, the company’s share price performance during 2014 reflects a more subdued attitude among investors, with shares in BT being down 1% year-to-date.
A key reason for this is concern surrounding the cost of taking on media rivals, such as Sky (LSE: BSY), as well as nagging doubts with regard to BT’s pension obligations. Despite both of these negatives, BT can overcome such challenges and, in the long run, beat what is now a key rival: Sky.
Customer Loyalty
BT’s advance as a media company has been well though through. Indeed, it has realised that customers are not necessarily loyal to the provider of media services, but rather to the services themselves. In other words, when it comes to TV, for example, BT has realised that most of Sky’s customers do not subscribe because of loyalty towards Sky. Rather, they seek the content that Sky has exclusive rights to.
This may sound like a very obvious statement to make, but is crucial for understanding how BT can overcome the threat from Sky on its road to becoming the leader of media services in the UK.
Financial Firepower
BT showed how committed it is to attracting new customers when it spent a record £900 million for the exclusive rights to screen Champions League football. It has also won the exclusive rights to a portion of Premier League football (which is due to be bid for again shortly), as well as other sports such as MotoGP and rugby union. In other words, it is attempting to beat Sky at its own game of being the only place to watch certain sports live.
In BT’s favour, though, is its financial standing. Certainly, the triennial pension review could force BT into making additional contributions to its pension scheme (which remains possibly the biggest challenge to the company’s future success). However, even if this occurs, BT has the resources to compete with Sky for the rights to a wide range of sports and Sky’s decision to merge with Sky Italia and Sky Deutschland shows that it may be concerned about its future capacity to outbid all rivals.
Looking Ahead
Certainly, BT seems to have clear long-term potential. While it is unlikely to become the UK’s top media player in the short term, over the medium to long term it could find that customers welcome an extra (and familiar) player in the pay-tv market. Until now, Sky has enjoyed near-monopoly status, but with a larger rival now in competition, its status as the only realistic choice to watch live football and other sports may be coming to an end.
In addition, with a price to earnings (P/E) ratio of just 12.8 and an earnings growth forecast of 7% next year, BT looks good value and could be worth buying for long term investors.
Furthermore, with the company reporting an increase in second quarter profits of 13% this week, BT’s new strategy seems to be performing well. Increased sales from superfast broadband and, perhaps more importantly, from BT Sport have enabled an increase in dividends per share of 15%. Additional rises could be on the cards as the transition from pure play telecoms provider to media company continues to take hold and as BT, quarter by quarter, eats away at Sky’s highly lucrative market share.
