Despite the difficulties faced by its majority shareholder News Corp, BSkyB continues to enjoy impressive growth. CFO Andrew Griffith talks to Rod James about driving innovation in a difficult economic climate and how analytics can be translated into operational improvements.
The year 2011 has been an annus horribilis for Rupert Murdoch's News Corp. The company's attempts to launch a complete takeover of BSkyB, of which it was already a majority shareholder, were beginning to bear fruit when a story broke at the start of July that could have long-lasting repercussions for the company and Britain's media as a whole.
It emerged that News Corp's flagship Sunday tabloid the News of the World had illegally hacked the phone of murdered teenager Milly Dowler, as well as those of numerous deceased soldiers. Although the scandal had been brewing for some time, with arrests made as far back as 2006, the lid had now been blown off.
A few days later on 7 July, amid a torrent of public outrage, it was announced that the next issue of the 168-year-old News of the World would be its last, causing BSkyB's share price to sink due to investor fears that any takeover attempt would be damaged by the hacking revelations. By 14 July the bid was in tatters, with News Corp chairman Chase Carey confirming that it had become 'too difficult to progress in this climate'.
Fast forward to October, and despite mounting legal and financial woes for News Corp, BSkyB's Q3 profits reveal an impressive 33% increase in pre-tax profit to £307 million. Although the total number of new subscribers dropped, a result of pervasively low consumer confidence, the company succeeded in cross-selling products such as broadband and talk packages to existing customers. Andrew Griffith, CFO of BSkyB, accepts that conditions are more difficult but believes there is still good growth potential for the company to exploit.
"We've seen since that business has become tougher," he says. "Consumers have been much more commitment-phobic and have been pushing hard for good deals. That said, there is a lot of headroom in this market and plenty of space to grow our customer base. Over a quarter of our customers currently take what we call the triple play of broadband, talk and TV, a figure we will try to increase. No company is immune to these conditions, but we can put our best foot forward."
A strong position
BSkyB's position in the UK and Ireland digital broadcasting market is extremely strong. Buoyed by its ownership of the rights to Premier League football, the company has more than ten million subscribers in the UK, which represents around 36% of UK households. According to Griffith, as consumers look to reduce costs, the value of BSkyB's offering in comparison to other forms of entertainment could help the company emerge in a stronger position.
"For many people, the option of Sky television compares very favourably with the alternatives," he says. "A football season ticket can cost a four-figure sum. A family trip to the cinema, by the time you've bought some food, can cost upwards of £50. For many people, buying Sky is a way of hunkering down and spending more time in the home. That's how we are trying to play out these tough conditions."
Although the company is clearly looking to consolidate its strengths, it has been boosted by a few brave investments. High-definition (HD) television caught on despite the additional cost, and Griffith is equally confident that 3D, the next big step forward, will do the same during 2012. He believes that companies whose driving force is technology must continue to invest, even in economically difficult times.
"Just after Lehman's went bankrupt, we had the very difficult decision as to whether to continue with the launch of HD television," he explains. "You'd never normally choose the depths of a recession to launch a brand new product, especially one that would cost your customers an extra £100 a year. Nevertheless, it's been very successful. A third of our customers are taking HD and it's opened up an additional way of growing our top-line revenues. We've looked to increase spending on programming and innovation by releasing resources elsewhere."
The resources in question come in the form of hundreds of small cost savings, which have allowed the company to keep its overheads flat for three successive years. Particular emphasis is placed on high-volume parts of the business, such as customer call centres and set-top boxes.
"Some companies just focus on continuing to spend and get caught short, while others just cost-cut, which will never allow you to achieve enduring success," Griffith says. "We are operating at such scale that the aggregation of marginal gains across a customer base of this size adds up very quickly. Improving the cost and reliability of things like our call centres allows us to make around £300 million a year in efficiency savings, which can be invested back into growth."
At the heart of BSkyB's efficiency drive is the finance department, which is embedded in the company's day-to-day operation. Finance gathers the relevant data, analyses it, and in conjunction with operational staff decides how it can be commercially applied.
"We drive a strong culture of commerciality in finance and believe in actionable insight," Griffiths explains. "In the case of set-top boxes, for example, we brought together manufacturing, design and repair. We accessed the data that was coming into the repair shop and found that 20% of those boxes had the same component at their heart. Then we went upstream to manufacturing and looked at what we can do differently with that component. Maybe we need two as a failsafe? Someone from finance sits down with the engineer and makes sense of what that data says."
With this in mind, it is little surprise that many make the move from finance to senior operational positions. In Griffith's view, a financial background is especially useful to running a business such as BSkyB, in which closely analysing customer behaviours and trends is vital.
"This is a business that rewards analytics," he explains. "Whether your discipline is marketing, finance or engineering, the business is very accountable and the data very transparent. It's never been more important to be close to the customer because they are your early warning. If customers are calling up because they are finding the economic environment difficult then we need to be ready to act. Finance is at the core of how we manage these risks."
The consumer economy is the most significant, but by no means the sole area of potential risk that BSkyB will have to contend with over the next year or two. With commodity prices high and likely to continue rising, cost savings and carefully targeted investment will remain paramount. Griffith sees room for opportunity as well, particularly outside the company's core television package.
"We will certainly push harder into broadband and talk," he explains. "These are products that everyone needs and we can offer transformationally good value. If you have a package that is better than, or at least as good as, the competition's but costs £200 a year less, it's a great asset at a time when customers are looking more closely at their bank statements."
The company will also continue to invest heavily in two core areas - content and technology. The successful launch in February of Sky Atlantic, which shows predominately US-made series, has been balanced out by a new proposal regarding British-made programmes, which should see their funding increase by more than 50% to £600 million a year over the next three years. The company will also continue to press into mobile technology, although Griffith views it for now as being only supplementary.
"Something like four out of the 20 most used smartphone apps in the UK were created by us and we've made headway in the tablet market as well," he says. "However, I don't think it will replace our core TV package. It will be an additive. The formula is simple: great content, more revenue, more customers and making sure all of that is well executed."
In early October, an event occurred that could have major implications for BSkyB and its ability to derive revenue from screening Premier League football. A pub landlady, fined for showing games using a foreign satellite decoder, in contravention of a deal signed between the Premier League and broadcasters Sky and ESPN, took her case to the European Court of Justice. The judge ruled in her favour, arguing that national laws prohibiting the import, sale or use of foreign decoder cards were contrary to a citizen's freedom to provide services.
Despite this setback, it would be shortsighted to overreact. The sheer scale of BSkyB's operations, the cost savings that this scope enables, and the amount of room for future growth in its core markets means the company as a whole is well placed to weather the economic storm.