BT Group plc, British Sky Broadcasting Group plc And The Pay-TV Boom

 The pay-TV market in the UK has frequently been depicted as a battle between BT (LSE: BT-A) and BSkyB (LSE: BSY) (NASDAQOTH: BSYBY.US). Sky has the lion’s share of the pay-TV market, with a premium brand that none of its competitors can match.

It has worked hard to build a wide and varied range of TV programming from dramas and documentaries to movies and sport. Plus it has also branched out into broadband and fixed-line telephony.

The worlds of broadcasting and telecoms are colliding

Its positive, proactive view of television — thinking way beyond the handful of terrestrial channels to build its own ecosystem of programmes and content — has meant it has grown its customer base, reaching and passing a critical mass to make it very profitable.

Whereas BSkyB began as a TV company, and then ventured into telecoms, BT is a telecoms company that is venturing into TV. As technological barriers to entry fall, the worlds of broadcasting and telecoms are colliding.

BT may not have the experience in pay-TV, but it certainly has the financial muscle to make its foray into television a success. It has already invested hundreds of millions in its sports offer.

By bundling its TV with its broadband and telephony, BT has already won millions of customers to its TV service.

But I heard some news last week that really caught my attention. You would have thought that the extra competition of BT, plus the fact that Sky had recently increased subscription charges, would have meant that it would lose customers.

Both companies can be winners

BSkyB’s latest results showed that it was actually gaining customers, both to its TV service and its broadband service, not to mention a growing customer base of Now TV subscribers. Revenues are steadily increasing, though profits edged down slightly, reflecting the increased costs of football rights.

Remarkably, Sky is still gaining broadband customers at a rapid pace, and more and more customers are watching its football matches.

Not surprisingly, BSkyB’s share price, which had been weighed down by the recent negative sentiment, rocketed outwards on the news. And if you check the BT share price, you will notice it has been increasing steadily over the past year — since June 2012, its share price has nearly doubled.

An explosion in content has coincided with new technology such as High Definition, hard-disk storage and digital compression, which has meant that pay-TV is suddenly worth the extra cost for many more people.

This means that we have a pay-TV boom. And there is room for more than one player — just as when Apple created the tablet boom, only to be followed by Samsung, Amazon and myriad other competitors.

That’s not to gloss over the fact that these companies are fearsome competitors. But with a long-term trend of increasing subscribers and pay-TV spend, I think both companies are buys.

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> Prabhat owns shares in none of the companies mentioned in this article. The Motley Fool has recommended shares in Sky and owns shares in Apple.