For Broadcast June 11, 2009

£160m for Virgin Media TV may seem high, but it does make sense?

Was Sky serious when it reportedly bid a whopping £160m for Virgin Media’s stable of TV channels a few weeks ago? Will Sky really launch a pull VoD service in the next year? And will its recent deal with Microsoft Xbox open up a new set of potential subscribers? Yes, yes and yes, I would say. The pull VoD and the Xbox initiatives are both examples of Sky pushing the envelope of where and how its services are available, and leveraging its set-top boxes and technology.

In a maturing pay-TV market, Sky knows new services such as HD can generate growth. In the most recent quarter, it sold 243,000 HD boxes - a quarter of them to brand new customers - and chief executive Jeremy Darroch told an investor conference last week that he saw HD as a “long-term trend we can sell into”.

But will offering a 60% premium over the next highest bid for Virgin’s seven niche TV channels pay off? Isn’t that a bit old media? Who can name all the Virgin Media channels? Hint: Dave isn’t one of them.

The VM channels may not be worth £160m to most bidders, but I see Sky’s thinking as a kind of multitiered chess game. In offering a knockout bid for the channels - Living and Living 2, Bravo and Bravo 2, Challenge and Challenge Jackpot plus Virgin 1 - Sky is upping the bar for all other bidders, and making it tough for VM’s management to choose anyone other than its biggest retail rival. How would it look to VM’s banks if its management says: “We’re leaving £60m on the table because we don’t like Sky. OK?”

With nearly £6bn debt, VM can’t be eager to poke the bear that is its lending community.

Sky would get several advantages from the channels, not least their EPG positions and the ability to tap into more of the TV advertising market. Last year, Sky’s share of the TV market’s net advertising revenue was about 11%. The VMTV deal would take it close to 15%. Plus, as the channels’ new owner, Sky would also save the £30m a year it pays for them in carriage fees.

But the VMTV channels also have a strategic value beyond their brands. They would add to Sky’s stable of owned and part-owned channels, making the whole thing bigger. And they could be harvested for push or pull VoD. According to a Citigroup analyst, more channels means “more flexibility in scheduling rights across a larger stable”.

Perhaps a deal at £160m - which after all is just 2% of BSkyB’s market cap - isn’t so outlandish after all.