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Why BT Group plc Could Destroy Sky PLC In The Next 3 Years

Over the last few years, BT (LSE: BT-A) (NYSE: BT.US) has significantly shifted its strategy. While it was viewed as a somewhat steady telecoms company that offered investors a decent yield and moderate growth prospects, it is now embarking on major changes in strategy that could see it become the dominant player in the lucrative ‘quad play’ market, which combines landline, broadband, pay-tv and mobile into one neat package.

The cost of this dominance could be major challenges ahead for incumbents such as Sky (LSE: SKY) (NASDAQOTH: BSYBY.US). After itself being the major force in UK pay-tv for over two decades, its time may finally be up and the future could be relatively bleak for investors in Sky.

Product Differentiation

When it comes to the quad play offering, product differentiation will be key. Seeing as there are likely to be a number of companies offering all four services, unless you can differentiate you will be forced to compete on price, which will inevitably have a negative impact on margins.

On this front, BT is making excellent progress. Its charge into sports rights is quickly allowing it to differentiate its offering and, in essence, it is following Sky’s lead in doing so. In fact, having the rights to Premier League football, the Champions League and other major sporting events has kept Sky one step ahead of the competition in previous years, but with BT now seemingly having bigger pockets that Sky, there is currently a transition taking place that is likely to see BT replace Sky as the pre-eminent place to watch the most popular sports on TV.

And, with BT bidding for mobile operator, EE, it could differentiate its service even further by having the biggest 4G network in the country. This, plus the most widely available superfast broadband network and the aforementioned charge into the most lucrative sports rights, is quickly allowing BT to differentiate its service to a far greater extent than Sky or any other rivals.

One Step Ahead

In fact, when compared to BT, Sky appears to be somewhat behind in the quad play ‘race’. While it offers broadband, landline and pay-tv, Sky has no mobile offering at present and, while it is aiming to offer a ‘virtual’ cellular service to customers, this is unlikely to be on the same scale as EE and may not be viewed as a major network by consumers, thereby lessening its chances of making an impact on the quad play space.

Looking Ahead

Clearly, BT’s strategy is relatively high risk and will be costly in the short term. Therefore, it would be of little surprise for it to require a rights issue or increased debt in order to pay for its current spending spree. However, it seems to have adopted the right strategy and, following this period of investment, could reap the rewards over the medium to long term at the expense of incumbents such as Sky.

And, with BT trading on a price to earnings (P/E) ratio of 13.8 versus 16.2 for Sky, its shares could significantly outperform those of its rival moving forward. As such, now could be a good time to buy BT and invest for future growth.

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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has recommended Sky. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.