BT has agreed to spend a jaw-dropping £1.2 billion (US$1.5 billion) to see off competition from UK pay-TV rival Sky and secure rights for both the UEFA Champions League and UEFA Europa League soccer tournaments for another three years.
The latest three-year deal will cost the UK fixed-line incumbent £394 million ($483 million) annually and extend its rights to screen the popular sports events until the end of the 2020-2021 soccer season.
BT Group plc (NYSE: BT; London: BTA) has based its TV strategy on the lure of top-flight soccer in the UK market, but its willingness to challenge pay-TV giant Sky during the auctions for TV rights is proving costly.
The operator insists the strategy is paying off, pointing to the increase in subscriber numbers and revenues at its consumer business, and yet concern has grown about the level of spending on content.
The bill of £1.2 billion ($1.5 billion) is about 32% more than BT paid for three-year rights to screen the same competitions until the end of 2018.
Sky appears to have decided that amount was too much and given up the latest rights battle.
But the victory for BT comes at an awkward time for the operator following recent revelations of an accounting scandal in Italy and with conditions deteriorating in some of the operator's public sector and enterprise markets.
In January, BT told analysts that it no longer expected to see any sales growth this fiscal year (ending March 2017) or next and that profits would be lower than previously expected. (See Dodgy Italian Job Savages BT Earnings, Share Price Tanks.)
BT's share price fell by about 20% following that update; while it has since made a partial recovery, it is still trading about 13% lower than in late January.
In the meantime, BT is under mounting pressure to carry out a "legal separation" of its various business activities, putting its Openreach infrastructure business at much greater distance from its retail and other divisions. (See Only BT's Dismemberment Will Sate Rivals.)
Regulatory authority Ofcom has expressed dissatisfaction with BT's efforts on this legal separation so far, even threatening to break up the company if it does not show signs of progress.
Rivals including Sky have called for a more stringent "structural separation" of BT that would see Openreach spun off as an entirely different company.
They argue that structural separation would lead to an improvement in broadband competition, spur investment in infrastructure and prevent BT from using Openreach profits to subsidize its retail activities, including its spending on TV rights.
BT has insisted that Openreach already operates at arm's length from other parts of the company and says structural separation would hinder investment, not encourage it.
Another danger for BT is that consumers start to feel the pinch of Brexit: The pound fell sharply in the wake of the UK's decision to quit the European Union, driving up the cost of imports, and cash-strapped consumers may find it increasingly hard to justify spending lavish sums on entertainment services as economic conditions worsen. (See What Hard Brexit Means for Vodafone, BT.)
Paulo Pescatore, the vice president of multiplay and media at the CCS Insight analyst firm, said BT had little choice but to fend off the bidding challenge from Sky despite some of the risks it now faces.
"This was a must-win rights auction for BT and it means it is here to compete with Sky for the long haul," he said in an emailed comment. "Worryingly, for consumers, the escalating cost of premium content rights means that we will probably have to fork out more money [to watch the BT sports service] which may drive some to watch via illegal streams."
There may also be question marks over the sports-based content strategy that BT, Sky and other traditional pay-TV broadcasters are pursuing.
Much of the most popular TV content is now available through Amazon.com Inc. (Nasdaq: AMZN) and Netflix Inc. (Nasdaq: NFLX) and other web services, which cost just a few dollars per month and do not lock consumers into long-term contracts.
While sport has continued to hold plenty of appeal, some consumers may start to ask why they are paying such a hefty premium for BT or Sky simply to access a limited number of sports channels.
— Iain Morris, , News Editor, Light Reading