As an investment, BT Group (LSE: BT-A) (NYSE: BT.US) has performed superbly over the last four years. Anyone who purchased BT shares when the FTSE hit bottomed out in March 2009 will have seen their shares rise in value by more than 330%, compared to a ‘mere’ 81% for the FTSE 100.
However, I’m increasingly worried about BT’s big bet on pay television, which I think may prove to be an expensive mistake.
BT’s sporting gamble
BT has spent at least £890m acquiring sports broadcasting rights for its latest venture, BT Sport, with which it hopes to go head-to-head with industry leader British Sky Broadcasting. After adding in the cost of marketing and staffing this new venture, the total cost must be in excess of £1bn.
BT Sport is to be funded on a subscription model, but all BT broadband customers will get free access, so subscription income will initially be dependent on non-BT customers, who will pay £12 per month to get access via satellite (using a Sky box).
BT’s hope is that customers will switch their broadband accounts in order to get free access to BT Sport, but given the loyalty of Sky’s customers, and the way in which internet and television services are becoming integrated, I’m not sure this tactic will be successful.
Me vs. Michael Phelps
I’m a competent swimmer, but I recently found myself swimming alongside a local team at the pool, and their performance made me realise just how average a swimmer I really am.
I fear that something similar could happen to BT in its forthcoming battle with Sky, which currently has a 68% share of the UK’s pay TV market and has mastered the art of making money from paid content. BSkyB’s pay TV offerings are broader and more sophisticated than those of BT, which cannot even come close to matching Sky’s range of exclusive sport and drama.
Financially, it also looks likely to be a tough battle for BT. As a young company with no public service remit, and very little terrestrial infrastructure, BSkyB doesn’t have BT’s heavy capex commitments, its large workforce, or its pension deficit.
Indeed, BSkyB’s free cash flow per share has risen by 127% since 2008, and its dividend has almost doubled, whereas BT’s free cash flow per share has stagnated, and its 2013 dividend payout of 9.5p was just 60% of the 15.8p it paid in 2008.
An alternative to BT
If you’ve already taken the plunge and sold your BT shares, you may be looking for high-quality blue chip companies that currently look cheap.
Buying such companies has worked well for top UK fund manager Neil Woodford. If you’d invested £10,000 into Mr Woodford’s High Income fund in 1988, it would have been worth £193,000 at the end of 2012 — a 1,830% increase!
> Roland does not own shares in any of the companies mentioned in this article.