When Sir Michael Rake joined BT as Chairman in September 2007, he never envisaged how challenging the next few years would be. The group was hit by the economic downturn some 13 months after his arrival, leading to cashflow issues for its global services division – a business that had grown rapidly following several acquisitions during the noughties, as BT pushed ahead with plans to deliver IT and communications around the world.
The division’s financial troubles led to a £2 billion loss in one quarter of 2008. To make matters worse, the group was giving shareholders close to 100% in dividend payouts and operating a generous share buyback programme. The financial strain on the company led to the share price plummeting 75 per cent in Q4 of 2009.
To revive the ailing telecoms group, Sir Michael and then CEO Ian Livingston set about cutting dividends and investing in the fibre infrastructure needed to develop and roll out superfast broadband. The company has since diversified into mobile phone services through BT Mobile – a business that will grow significantly if the group’s proposed £12.5 billion acquisition of mobile network provider EE is approved – and TV channels showing sports and entertainment.
The rise of BT Sport in particular shows how far the company has come since Sir Michael joined as chairman. He spoke to Professor Julian Birkinshaw from London Business School, at Navigating the changing business landscape, a London Alumni Club event that took place earlier this year, about diversifying into TV and taking on Sky for the rights to broadcast Premier League football.
When did you start the groundwork for diversifying into TV?
If you go back 10 years, regulation was introduced by the British Government where we had to give our competitors access to Openreach (the BT-owned infrastructure network for UK phone and broadband services) and provide the same pricing conditions to all comers. From there, we started to see triple-play – fix-line, broadband and TV – emerge at a time when Sky controlled 95 per cent of the pay TV market.
With this in mind, I had a few sleepless nights thinking about our broadband business. Sky was able to compete with us in a way we couldn’t compete with them; they wouldn’t allow us access to Premier League football rights because we were considered a threat, but they had access to our copper and fibre networks and could launch their own broadband. The playing field wasn’t level and we could not leave it to the regulators.
Ian Livingstone said to me one day, “Look Mike, we just have to be credible enough and strong enough so we can do things our way”. That meant we had to get our cash and cost position right and improve our share price, otherwise we risked being unable to compete.
Why spend billions of pounds competing with Sky for English football rights when ITV and Setanta had already failed?
We had to be careful when taking on Sky, because we knew others had failed. We’d done a lot of market analysis before the TV rights auction in 2012, which we kept extremely quiet. We wanted to make sure people didn’t know we were involved so we could secure as much as possible. I think it came as a big surprise to everyone that we did that and got some of the rights that we’d bid for.
At that point, we felt we’d parked our tank on the lawn but we still needed many things to compete with Sky; we had no capability to produce TV, so we bought Setanta and took over the TV studios that were used for London Olympics 2012.
We realised when bidding with Sky for rights to the Champions League that BT couldn’t blink – but the question was which of us would? We were pretty keen to get the rights, which we did (in 2013, the company paid £897 million for a three-year exclusive rights deal to broadcast every Champions League fixture, starting from 2015) and that proved we were serious players.
We were determined to take a disciplined approach and recognised the risks of escalating prices when the second round of bidding for Premier League football arrived. We managed to get a great deal; our costs increased 17 per cent while our competitors paid 80% for the same amount of coverage to what they secured in their last deal with the Premier League.
Companies such as Amazon and Netflix are creating their own content, so what will that industry look like in five years and where does BT fit in?
We are seeing greater fixed-mobile convergence (offering seamless connectivity between fixed and wireless telecoms networks) and more movement to triple play. There is massive demand for data, ever-increasing speeds and reliability with people wanting to connect to Wi-Fi hotspots at high speeds, so you need both fixed and mobile networks.
We spotted this a few years back and developed a strategy around providing mobile to our business customers who needed the flexibility to access fixed and mobile networks. That meant we needed a Mobile Virtual Network Operator (MVNO), which we arranged with EE, because it had the biggest 4G application. We secured many 4G licenses and we now have five million WIFI hotspots around the UK, allowing people to stay online for long periods without having to connect to a mobile phone network.
The UK is now the most competitive mobile network market in the world, with the highest coverage, excellent speeds and the lowest average costs. There is massive competition here and it will get stronger in the coming years, because super-fast broadband has moved from a luxury to a necessity to a utility. We can’t roll it out fast enough and there’s a huge demand. We want to be in a position to provide homes with super-fast broadband, TV and fixed-line – but we need to be a mobile operator as well as having a fixed-lined presence to do that.
With Amazon and Netflix producing their own content, are there plans for BT to follow suit?
Content is a big issue, although we’d rather purchase and share it rather than produce our own.
The question is whether the pay-TV market will remain local or become more global. We don’t know because there are political issues and regional purchasing rights to consider when it comes to broadcasting football.
There will be changes in the industry and we need to be in a strong position to deal with any issues that arise, which is what our proposed acquisition of EE will hopefully help us with. That deal should give us access to content that we can share with our customers. But as for producing our own content, we’re far from being able to do that.