BT Sport: positive first year with the Champions League

Julian Aquilina BT Sport has seen a very clear positive impact from its first +44 207 851 0907 [email protected] year airing the Champions League, with viewing up 60% year-on-year to June. Remarkably, its reach is not too James Barford +44 207 851 0901 far off , though it still has some way to go in [email protected] terms of consistent viewership

16 September 2016 [2016-094]

Pay-TV audiences for the 2015/16 tournament were in line

with previous years – an impressive feat – but free-to-air disappointed. However, BT should not be too concerned –

it has established itself as a worthy pay-TV partner

While BT’s execution has thus beaten reasonable

expectations, BT Sport still carries a heavy net financial

cost for BT, with debatable benefits. Yet, whatever the benefits may be, more viewers watching more often must

surely help

The 2015/16 football season was the first in which BT provided coverage of the UEFA Champions League (CL) and this week the group stages kicked off again.

Now is an appropriate moment to reflect on what BT has achieved and what it can look forward to in the year ahead.

BT’s first foray into the sports broadcasting market was with (PL) football, yet it came as a surprise when it won the live UK pay and free-to-air (FTA) broadcasting rights to the CL and Europa League (EL) for £299 million per season,

more than double the c. £130m annual sum previously being paid by Sky and ITV. The CL is without doubt a major addition to BT’s sports armoury—live televised CL rights are the second most valued set of premium sports by UK viewers, only

behind the PL, according to surveys conducted by Ofcom. So, our first question is how much it has added to BT Sport in terms of growing its customer base and driving viewing to the channels. We then tackle things from the CL’s perspective –

comparing its viewership on BT with Sky and ITV in recent years.

BT Sport reach and viewing

When BT TV first launched there were three premium sports channels in its Related reports: portfolio, making up the BT Sport Pack, which at the time was free for BT

BT Sport – the Champions? [2015-055] Broadband subscribers:

BT's away game [2015-095] • BT Sport 1 – which continues to be the home of BT’s PL matches, and is still free for BT TV customers. It also broadcasts the Scottish Premiership and some FA BT Sport – not a game changer [2013-046] Cup matches, plus

• BT Sport 2 – initially aired some of ESPN’s programming (including foreign football leagues such as the German , the Italian and the French ), as well as Premiership Rugby, MotoGP, WTA tennis and the Ultimate Fighting Championship. Since last summer it has also taken on some CL matches and has become available on pay-TV • ESPN – acquired in mid-2013, it continued to air American football, basketball, baseball and NASCAR. Its football rights (including the FA Cup, the Scottish Premiership and the Bundesliga) were distributed amongst the other two BT channels. From 2015 it was rebranded as BT Sport ESPN and moved to pay-TV BT launched a further three channels last summer to coincide with its takeover of the CL rights: • BT Sport 3 – originally BT Sport Europe, it is the fourth premium channel, chiefly responsible for broadcasting European football (i.e. the CL, EL and some of the foreign football leagues), as well as the FA Cup and European rugby (European Champions and Challenge Cups) • BT Sport Showcase – available on Freeview, airing 12 of the main games from the CL, plus some EL and Premiership Rugby, but little other programming • BT Sport 4K UHD – originally BT Sport Ultra HD, it broadcasts roughly one Ultra HD event per week When it comes to assessing BT’s progress in growing its base and the contribution of the CL towards its growth, we must note that BT has rarely published figures about subscriber numbers across the different platforms. However, we can get some idea of its progress by examining BARB’s three month household reach figures for BT Sport’s pay channels, which we use as a rough proxy for the number of subscribers (see Figure 1). We exclude any free-access days and note that the figures could be slight overestimations due to churn and sampling factors.

Figure 1: BT Sport quarterly household reach by platform (m) 7 6.2 6 5.3 4.9 1.5 5 4.6 4.6 4.6 3.9 4.1 1.4 4 3.4 3.6 3.5 1.0 0.9 1.0 1.2 3.2 0.6 0.7 1.6 3 0.6 0.5 0.4 1.5 0.6 1.4 1.3 1.3 1.5 1.5 1.3 1.2 1.4 2 1.2 1.3 3.0 2.2 2.3 2.2 2.2 2.4 1 1.5 1.5 1.7 1.8 1.9 2.0 0 Q3 13 Q4 13 Q1 14 Q2 14 Q3 14 Q4 14 Q1 15 Q2 15 Q3 15 Q4 15 Q1 16 Q2 16 DSAT DCAB (exc. DSAT) DTT Only Note: Pay channels only. Includes BT Sport 1, 2, 3 and ESPN. Excludes free-access days. [Source: Enders Analysis, BARB/InfoSys+] We highlight the following: • BT Sport’s viewing base has doubled in size since launch • Growth has been fairly steady across the last three years, though with a marked uplift in Q2 2016, giving a quarterly reach of 6.2m homes

2 | 9 BT Sport: positive first year with the Champions League [2016-094] 16 September 2016

o This proxy figure appears a little on the high side in light of comments by Delia Bushell in BT’s June newsletter, stating that “well over 5m homes subscribe to the channels”1 • Customer figures appear to have at least held up well given the significant price increases instigated on the launch of the CL, and the growing reach suggests that more customers are watching regularly Especially notable when we examine these upward trends is the ascent of BT Sport 3 – formerly BT Sport Europe – which reached almost 5m homes in Q2 2016 (see Figure 2). This underlines the value of the international offerings, and above all the CL, in expanding BT Sport’s viewing base. But we also bear in mind that its gain, alongside the dips for both BT Sport 1 and 2, could be due to BT’s redistribution of programming. Figure 2: BT Sport quarterly household reach by pay channel (m) 7 6 6.2 5 4.7 4 3.2 3 2.9 2 1 1.2 0 Q3 13 Q4 13 Q1 14 Q2 14 Q3 14 Q4 14 Q1 15 Q2 15 Q3 15 Q4 15 Q1 16 Q2 16 Total BT Sport 1 BT Sport 2 BT Sport 3 BT Sport ESPN Note: Excludes free-access days [Source: BARB/InfoSys+] Most impressive of all perhaps is how by this measure BT Sport now falls little short of Sky Sports (see Figure 3), even if it commands relatively little viewing share (see Figure 4). In the 12 months to July 2016, which covers the first full year of its most recent channel launches, BT Sport captured 0.55% of all viewing, compared with 1.95% for Sky Sports. But BT is heading in the right direction— upwards—and how much further it can go will depend heavily on the rights it holds going forwards. Figure 3: Sky vs BT household reach by platform, Q2 2016 (m) 8 7.1 7 6.2 1.1 6 1.5 5 1.4 4 1.6 3 2 4.5 3.0 1 0 Sky BT DSAT DCAB (exc. DSAT) DTT Only Note: Excludes free-access days and Sky Sports News [Source: Enders Analysis, BARB/InfoSys+]

1 BT's quarterly newsletter for analysts and investors – Issue 40, June 2016

3 | 9 BT Sport: positive first year with the Champions League [2016-094] 16 September 2016

Figure 4: Viewing share, individuals 4+, Q1 2012-Q2 2016 (%) 2.5

2.0 2.03

1.5

1.0

0.5 0.58

0.0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2012 2013 2014 2015 2016 Sky Sports* BT Sport *Excludes Sky Sports News. [Source: Enders Analysis, BARB/InfoSys+] To put this viewing into context, in the last quarter the UK population watched a BT Sport channel for on average 35 minutes per month, compared to just over 2 hours on Sky Sports. However, a more relevant metric might be viewing time per subscriber, as this could give a better indication of the likely value that subscribers place on each service (see Figure 5). We estimate this based off reach amongst individuals across each quarter, anticipating the actual hours to be a little higher due to the reach overestimation. Over the last four quarters, BT subscribers have spent an average of between 2.7 and 4.4 hours per month watching BT Sport channels, while Sky Sports continues to see a decline, now at 8.4 hours per subscriber per month. In this respect, we see BT Sport as becoming increasingly important to its subscribers, who are on tuning in more and more, from which we may infer that customers will be less and less likely to give up their subscriptions.

Figure 5: Average monthly viewing per subscriber, Q1 2012-Q2 2016 (hours)

14 12 10 8 8.4 6 4 2.7 2 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2012 2013 2014 2015 2016 Sky Sports* BT Sport *Excludes Sky Sports News. [Source: Enders Analysis, BARB/InfoSys+]

4 | 9 BT Sport: positive first year with the Champions League [2016-094] 16 September 2016

Champions League viewing: BT vs Sky and ITV

When it comes to comparing BT’s success in the CL with its predecessors, a very different picture emerges depending on whether we examine the pay offering versus Sky or the FTA offering versus ITV. We investigate both below, but it should first be noted that a number of factors outside of the broadcasters’ control affect viewership from season to season—for example, the success of British teams (as observed by higher levels in 2010/11 when Manchester United reached the final and in 2011/12 when Chelsea emerged as champions), combined with the strength of their opposition and more generally size of their fanbases. The measure we have used – average number of viewers per match – is by no means perfect, but it still provides some form of comparison without being misleading.2 Pay-TV: BT vs Sky In its first year with the CL, BT amassed a similar number of pay-TV viewers to that of Sky in recent years (see Figure 6). These numbers were partly helped by Manchester City’s run to the semifinals, whereas the year before saw no UK clubs make it past the round of 16.

Figure 6: Average number of viewers per pay-TV CL match by season (000) 900 787 792 800 700 613 600 539 512 507 479 500 458 427 393 378 400 315 300 200 100 0 All pay-TV matches Involving a UK team Sky (2010/11 to 2014/15) BT (2015/16) Note: Includes qualifying rounds. [Source: Enders Analysis, BARB/InfoSys+] Of course, for any given match, the stage of the tournament is also critical. Figure 7 shows viewing for group stage matches only, thus eliminating any influence from the progression of UK clubs. Again, by this measure, BT is in the same ballpark as Sky – very clearly a positive result for a broadcaster taking on a new set of rights, particularly from such an established predecessor – and this bodes well for BT to

2 The average number of viewers per match may not fairly represent occasions when Sky or BT have aired multiple matches in the same timeslot, taking for example over a million viewers on one channel but just a few thousand on another. One alternative could be to compare the average number of viewers across all matches in a given evening, but as this produces very similar trends we think it reasonable to use either. Another caveat to this analysis is that the average number of viewers is not wholly reflective of the 90 minutes of match time; it is calculated across the total time that the programme is broadcast. These figures are thus depressed by the provision of additional coverage (i.e. pre-game build up and post-game analysis). Of the three broadcasters, this affects BT the most: its average broadcast length is 183 minutes compared to Sky’s 165 minutes and ITV’s 150 minutes, a difference of 11% and 22% respectively.

5 | 9 BT Sport: positive first year with the Champions League [2016-094] 16 September 2016

pit itself as a serious potential contender for premium sports rights in the coming years.

Figure 7: Av. no. of viewers per pay-TV CL group stage match by season (000)

700 633 600 505 500 470 414 422 431 413 384 400 371 351 324 279 300

200

100

0 All pay-TV group stage matches Involving a UK team Sky (2010/11 to 2014/15) BT (2015/16) [Source: Enders Analysis, BARB/InfoSys+] By way of further comparison, PL audiences in 2015/16 remained much the same as those for the previous season, with around 0.6m viewers per game on BT and 1.0m on Sky. Free-to-air: BT vs ITV However, the FTA audiences on BT have been very low, particularly evident when set against the numbers for ITV (see Figure 8). BT Sport Showcase averaged just 150k viewers per game for its 13 CL matches (including one qualifier). Figure 8: Average number of viewers per FTA Champions League match by season (000)

2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 ITV ITV ITV ITV ITV BT All matches 5,615 4,876 4,409 4,620 3,817 150 Matches involving a UK club 5,553 5,295 4,564 4,583 4,179 113

[Source: Enders Analysis, BARB/InfoSys+] Looking at the quality of the matches made available for free, we question whether BT ever intended to chase viewership. Figure 9 outlines the opponents for each UK club throughout the competition, in each case highlighting the matchup that was selected for FTA viewing – typically the least attractive clash. And in contrast to ITV, who used to do plenty of marketing for its matches, BT adopted a half-hearted approach which lacked promotion to the public, according to the Telegraph.3

3 The Telegraph, Uefa concerned by BT Sport's dismal Champions League viewing figures, 12 February 2016

6 | 9 BT Sport: positive first year with the Champions League [2016-094] 16 September 2016

Figure 9: Champions League opponents for each UK club, 2015/16

Arsenal Chelsea Manchester City Manchester United Qualifying Club Brugge (A) Bayern Munich Dynamo Kiev (H) Mönchengladbach (A) CSKA Moscow Group stage Dinamo Zagreb (H) Maccabi Tel-Aviv Juventus PSV Eindhoven Olympiacos Porto Sevilla Wolfsburg Round of 16 Barcelona Paris Saint-Germain Dynamo Kiev Quarterfinals Paris Saint-Germain Semifinals Real Madrid Note: FTA matches in bold. (H) = UK club at home. (A) = UK club away. [Source: Enders Analysis] For the final, there were an additional 1.8m views on digital platforms4 – bt.com, the BT Sport app, and a free stream on YouTube – but even if we add these in the average is only brought up to 268k. For context, in each of the previous five seasons there were 16 matches available for free on ITV, averaging over 4.6m viewers each. True, it is an unfair comparison for a variety of reasons – namely, ITV’s prominence on the EPG, as well as many years of accumulated brand association with the CL – but the fact remains that overall viewing levels among FTA audiences have diminished greatly. We have previously raised concerns about the difficulty that BT would face in drumming up interest for the CL, mainly reflecting on the modest levels of popularity surrounding European football compared with the PL (see BT Sport – the Champions? [2015-055]). Sky’s audiences for the group stages were in steady decline from 2011/12 to 2014/15 (see Figure 7 above), but viewing to ITV’s Wednesday night highlights program does not suggest that interest is being eroded overall. Indeed, highlights for the 2015/16 group stage matches averaged over 1.6m viewers, around twice as many as for the previous season. We assume the increase is largely due to fans missing the matches on BT, but ITV’s movement of the timeslot forward one hour to 10pm will have also contributed. Evidently there is interest nonetheless. Does weak viewing on FTA matter to BT? We think not. Though BT’s motto when it first broke onto the scene with the PL was to “bring sport back to the people”, it made it clear that the CL would be monetised from the outset. One last consideration for CL viewing is UEFA’s assessment. Speculators suggest that UEFA’s disappointment with FTA viewership may lead to a shake-up in how the rights are sold at the next auction, expected at the end of this year, which could see the likes of ITV return to the action to generate mass-market FTA audiences.

4 BT's quarterly newsletter for analysts and investors – Issue 40, June 2016

7 | 9 BT Sport: positive first year with the Champions League [2016-094] 16 September 2016

Conclusion

The CL has done well in widening the household reach of BT Sport’s pay channels to not far off Sky’s. There has been a clear, discernible impact on BT Sport’s audiences, with viewing up 60% year-on-year to the end of June, and on average each subscriber is spending more and more time watching BT’s channels. In the CL itself, viewing levels on BT held up remarkably well compared to previous years under Sky, given its relatively recent entry into broadcasting versus the long history of the pay-TV giant. Although FTA viewing suffered compared to ITV, BT could never have been expected to do well against prime time viewing on the UK’s second largest channel, and in any case it has not marketed this side aggressively. Being a strong pay partner is all it could be expected to be, and it has achieved this. For the wider BT Group, the CL success does not radically change our overall view of BT Sport – our estimate of the direct losses is still in the range of £400-500 million a year, albeit at the lower end, and this is still a very high cost for the very debatable benefits to its broadband and pay-TV base. However, it is executing well versus reasonable expectations, and whatever the benefits might be the more their customers watch the channels the greater they must be.

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9 | 9 BT Sport: positive first year with the Champions League [2016-094] 16 September 2016