BSBvsSkYnumber1

Introduction:
ByOctober1990,twonewentrantssufferedacombined
investmentof1.25billionandaweekly10millionlossandare
waitingdesperatelytheChristmasseasontofallinbetterhands.
Ratherthanbehaverationallyandfocusonprofitmaximization
andalongrungoingconcernfortheentireindustry,thetwo
companiesengagedinabloodywar,thatlettheindustrysufferone
ofthemajorlosseverandledtothemergerofthetwocompanies.
Thiscaseoutlinesoneofthemostferociouscompetitionsofthe
satelliteTV,andannouncesaseriesofbattlesunderotherskiesin
thesameindustry.
ThesituationdescribedinthecaseismuchtobeclosetoaWar
Gamethatendsupwithatakeoverofoneontheother.
Todaysviewonthatsituationcouldbebiasedduetotheresultof
suchgame,butwewilltrytobeasfairaspossiblewithBSB
managementtojustifytheirintentioninthattime.
Thetaskwouldnotbeeasyduetothedrasticchangesinthat
industryduringthe90s.Thetwocompaniesbetalltheirfundsand
basedalltheirfuturewealthontwodifferentalternatives.
Nevertheless,thesetwoalternativeswereanaloguebased
technologiesthathavebeenreplacedrapidlyin1996bythemost
cheapandhigherqualitydigitalsatellitebroadcastingwithits
standardknownasDVB.Thelattertechnologyallowsscrambling
ofthesignals,stereosoundsandwidescreensupport.Alotof
scramblingsystemhasappearedduringthisperiod.Themost
secureoneremainstheVideoguardNDSsystemdevelopedbyan

IsraelifirmforBSkyB.
Descriptionofthesituation:
Wearefacedwithanextremelycompetitivemarketwithtwo
players.Thesituationcouldbesummarizedinthehereunder
points:
Highcostentrance
HighOperationalCosts
Existenceofsubstitutes(BBC,ITVandChannel4terrestrialTV
andVCRformoviechannels)
Highantagonismbetweentheplayers
Governmentinterventiontoregulatetheindustry(applicant
BSBwasforcedtousehighcostriskytransmissionstandards)
Uncertaintyaboutthetechnologyused
Thetwocompaniesmarketsthesameproduct(TVchannels
package,includingamoviechannel)
Twomonopolistsbasedbehaviorswhoareconfrontedtoa
ferociouscompetition.
Pricewassetupfromthebeginningintheinitialapplicationto
IBA(couldbeassimilatedtoaregulation)
Eachsubscriptionisconsideredasanasset(powertoretainits
customers)becauseofthehighcostofswitchingfromoneprovider
toanother.
TheInitialGame:
Thegamestartedfarbeforethegoingonair.Ithasofficially
startedon1986,whenIBAhasgranteda15yearsfranchisefor
BSBtorunitscommercialserviceonthreeofitsfiveDBS
channels.
Formatterofsimplicity,wewillassumethatBSBhasthreeaired

channelsoutofpotentialfiveDBSchannels.Thetwochannels
airedonthesamefrequencywillbeconsideredasone.
ThetermsofthelicensewerethatBSBpayfortheconstruction
andlaunchoftwohighpoweredsatellites.Yetthetermsofthe
franchisewerenotlistedinthecase,wecouldassumethe
following:
IBAwillallottheremainingtwochannelswiththesameterms
SincethetwoDBSremainingchannelscouldnotbeeasily
scrambled,intelligenceormilitaryusewouldnotbeconsidered.
Onlycommercialusewouldbeuseful.
Thesecondapplicantwillsharethecostsofhighpowered
satellitewithBSB(orleasetherightsfor15years)
Thusthegamecouldbefiguredoutasfollow(sequentially):
Figure1
*Assumptionsconcerningthecalculation:forthisindustrythe
costsarenotvariables.Upto80%ofthecostsarefixedandare
directlylinkedtooperationstogoonair.Thusandbecauseoflack
ofinformationconcerningoverheadswewillassumeinour
calculationsthatthecostspresentedinExhibit6&7ofthecase
areneededtorunthebusinesslessthedepreciationofsatelliteor
equipmentthatareexplicitlyshowninthecase.
DuetothehighcostofentryandtheHighPriceofoperations
(moviesrights,programmingandMarketing)BSBdidnotexpect
anyothercompetitortoenterthemarketusingthetwoleftDBS
channels.BSBmanagementfeltcomfortablewiththissituationas
amonopolyovertheBritishSatelliteBroadcastingindustry.
Figue2:Matrixpresentation*

*Comp.AcouldnotanticipatethatBSBwillexitfromthemarket
(notrationaledecision),thusanyentrantwillbeintheleftupper
boxloosingmoney.
**484milisthecumulativelossesfor1989&1990assuming
thatComp.Awillenterduringfall1990andBSBExitinearly
1991
Buttheunexpectedoccurs.Anaggressive,wellexperiencedand
fortunateentranttakestheredlinepathwithanold,cheapbut
proventechnology.
OnJune1988RupertMurdochannouncedhisintentiontoenterto
thesatellitebroadcastinggame,throughanoldbutcheapand
proventechnology.Furthermore,thelaunchofthesatellite
packagewasscheduled6monthsbeforeBSBslaunch,which
clearlycutthegrassunderBSBsfeetintermoffirstentrantinthe
market.
BSBmanagementthroughtheirmarketintelligencedidrealizethe
bigthreatofMurdochsannouncementknowing:
Murdochsintentiontogettothebusiness
NewsCorp.ExperienceinBritishTVbroadcasting(stakesin
ITV)
NewsCorp.agressivityanddeterminationtohaveacriticalmass
ThesizeofNewsCopr.(oneofthetopthreebiggestMedia
GroupsandonethirdofBritishnewspaper)
BenedictionfromPrimeMinisterMargaretTatcher
Fromthisperspective,andgiventhemarketestimatesforthe
penetrationofthedishesintheBritonshouseholdstheGame
couldbepresentedasfollow:

Withaforwardthinking,profitmaximizationdecisionmaking,
BSBmanagersshouldhavegetoutofthebusinessrapidlyinorder
tominimizetheirlosses,sincetheywillbedivingdeeplyifthey
keeponrollingthebusiness.
BSBmanagersshouldhaverunthisexerciseassoonasMurdoch
announcedhisintentiontogetintothebusinesswithacheaper
technology(thusacheapercosttoentryandaloweroperational
cost).
BSBmanagersbehavejusttheopposite.TheyridiculedSkys
proposal,claimingthatPALtechnologywouldbetoodegradedby
satellitetransmission,andthatinanycaseBSBhadasuperior
programming.Theyalsohadincreasedtheircommitmentinthe
industry.
Whydidtheyhavebehavedthisway?Aretheyjustinsane?
Absolutelyno.Theyhavepredictedthatthesatellitedishes
penetrationintheBritonshouseholdswillbemuchhigherthanthe
penetrationofVCR,whichregressionhasbeenprimarilyusedto
forecastthesatellitedishespenetration.Theyhaveappliedarateof
approximately2.3timesthespeedofVCRpenetrationwithinthe
samemarket.Theyaresupportedintheirapproachbythefactthat
theysigneduptherightsforfilmsandensuredaccesswithin6
monthsoftheirreleaseonvideoinsteadof12months.Theyalso
havethoughtthatamuchdiversifiedoffercouldhelpcannibalize
bothVCRaddictsandregularterrestrialTVwatchers(BBC,ITV
andChannel4).They,besides,havedecidedtolaunchavery
aggressiveMarketingandpromotionalplaninordertospeedup

theadoptionbythemarketforthesatelliteTVbroadcastingand
theirinnovativeandhighquality(thoughveryexpensive)
technology.
Giventhenewmarketgrowth(highlightedinyellowinthe
Exhibits)thegamecouldbepresented(fromBSBsideatthat
moment)asfollow:

Accordingtothematrixabove,BSBsmanagementhasalotto
gainfromahighersatellitedishespenetrationamongBrittons
households(evenbetterthanstayingalonewiththeformer
assumptionofmarketgrowth).Thusarealisticdecisionshouldbe
inthatcasetoincreasethecommitmentandharderthegame.
ThebasisofthethinkingoftheBSBsmanagerswashealthy.
Theirassumptionswerevaluable.Theyanticipatedabooming
changeintheTVbroadcastingandarapidadoptionoftheBritish
marketforthehighqualitysatelliteTVbroadcasting.
Nevertheless,theyeclipsedonerelevantpointwhichwasthatBSB
andSKYofferrelyontwodifferentstandardsandthatthepublic
couldbeskepticandwaitbeforeinvestinginthereception
equipment.Andthisiswhathappened.
Furthermore,BSBcostswereveryhigh,andeventheirwayof
managingwasextravagantcomparedtoamuchmorepragmatic
wayofitscompetitor.AsanexampleBSBhiredpeopleinstalled
theminaluxuryheadquarter,hadengaged500startupcosts
whileSkyTVhadleasedtheirheadquarterinanindustrialsuburb
ofLondonandpaidonly100millionasstartupcosts.

OnecouldnotblameonlyBSBmanagers,IBAhavealotof
responsibilityinthefailureofthisfranchise.Indeed,byforcing
themtouseacostly,notproven,notsustainableandnontested
alternative(DMAC)theyimplicitlypushedBSBtothehighest
costalternativeandbynotregulatingthemarkettoforceofftheair
newentrantswithlowerqualitybroadcasting,theyhaveweaken
BSBfuturewealth.
Howhasfinallywonthatgame:
OnecansaySkyTV,whomergedwithBSB.Consumersand
advertisershaveprofitedbythissituation,withhighquality
programmingandmoviesfortheformerandlowadvertisingfees
forthelatter.USmoviesgroupshavealsoprofitedbythissituation
astheyhavebeenpaidalmost3timestheirrights.
Amstradcouldbeconsideredastheonehowhavewonthegame.
HecameoutofthedoubtfuldealofBSBandcontractedadeal
withSkytoselltheequipment.Heistheuniqueplayerwhohas
notlostapennyinthatgame(Virginhavingleftthegameandthe
industry).

BSB vs SKY number 2

PayoffMatrix:
Sincetheplayershaveonly2options"compete"and"exit",
calculatetheNPVoftheprojectfortheplayersundergiven
scenarios:Takingthegivenassumptionsintoconsiderationand
year1990asYear0'(asthelossesandcostsincurredthrough
1990areconsideredsunk):
IfBSBcompetesandSkyTVexists=NPV(BSB)=104.09

(I.e.(179.97)/1.10+(139.86)/1.21+(71.25)/1.33)+
(30.99)/1.46+9.8/1.61+(13.25)/1.77+(169.14)/1.95+
44.97/21.14+74.08/2.36+74.08/2.60/0.10)
IfSkyTVcompetesandBSBexists=NPV(SkyTV)=660.702
(I.e.(61.88)/1.10+(34.39)/1.21+(18.27)/1.33)+18.90/1.46+
56.06/1.61+50.75/1.77+79.86/1.95+108.97/2.14+
138.08/2.36+138.08/2.60/0.10)
IfbothSkyTVandBSBcompete:Starting'93,boththecompanies
willhaveequalmarketshares(Assumptiongivenincase).Inthe
givencashflowmodel;bothcompaniesstarting'96arealready
assumedtobehavingequalmarketshare.Somakingadifference
intheassumptionsfortheirmarketshareforyears'93,'94and'95
willnotmakeahugedifferenceintheabovecalculatedNPV's.In
suchascenario,NPV(BSB)willstillbenegativeandNPV(Sky
TV)willstillbepositive.Themainreasonbehindthenegative
NPVforBSBisitshugecapitalexpendituresandnotmarketshare.
CompeteExit
Compete(30,70)
(L,G)
(100,0)
(L,0)
Exit(0,100)
(0,G)(0,0)
SkyTVBSB

(L=Loss(negativeNPV),G=Gain(positiveNPV),0=Noloss
nogain).Alsobasedonpercentageofmarketshares.
Ascanbeseenfromthepayoffmatrix,thesatellitebroadcasting

businessisalosingpropositionfortheBSB.Itisnotpossiblefor
themarkettosustainthesetwocapitalintensivesatelliteoperation
companiesincompetition.BSB'sshoulderstheburdenofbuilding
andlaunchingitsownsatellites,moreambitiousandexpensive
technologyandhighercapitalexpenditureoverall.Sky'searlier
launchandleasingoftranspondershasallowedittoovertakeits
rivalinthisbattletowincustomers.BSB'sdominantstrategy
shouldbe"exit",aswithSkyinthemarket,itisnotpossiblefor
BSBtohaveapositivereturnonitsinvestments.BSBshould
remaininthemarketifSkyplanstoexit(howeverthishasalmost
nochancesofhappeninginnearfuture).Sky'sdominantposition
shouldbe"compete"asitspositionismuchstrongerinthemarket
comparedtoitscompetitor.
Sincebothcompaniesarestrugglingwiththeburdenofmassive
losses,onecompanyshouldovertaketheothertosurviveinthe
market.Aprospectivemergerwillalsohelpcleartheexisting
confusionamongcustomers.Thereisahugepopulationof
potentialcustomerswhohavedecidedtowaitandseewhich
companywouldsucceedratherthancommittingthemselvesto
buyingequipmentthatmightsoonbeobsolete.BSBhadbeenno
matchtoshrewd,aggressivemarketingandcapitalexpenditureof
SkyTV.SkyshouldofferBSBabout30%shareinpossible
merger.EventhoughSkyhasgainedbiggermarketshare,itstill
hasweakadvertiserscomparedtoBSB.Skyshouldaskfor50%
shareifBSBoffersfirsttheideaofmerger.Ascanbeseenfrom
thepayoffmatrix,itisBSBthatisinbiggertroublecomparedto
SkyTV.EventhoughSkyisincurringlosses,ithasbiggerpockets
behinditsback.Ontheotherhand,BSB'spartnersarealreadyin
financialtroubleandmaynotbeabletosustainlossesforlongin
thisrivalry.

BSB vs SKY number 3

Sky'sdecisiontoleasechannelsratherthanpurchaseasatellite
resultedinanannualcostof?10million,incontrasttoanannual
?50milliondepreciationchargebornebyBSB.Ascomparedwith
thedelayedApril1990introductionofBSB,Skyhasacrucialhead
startingainingcriticalmassfortechnologystandardization.BSB
shouldchoosetofightinsteadofexit,aimingtocapture64%ofthe
marketby1993.However,inordertogainapositiveNPV,as
opposedtothecurrentnegativeamountof?474.Insteadof
purchasingsatellites,Skyleasedseveralchannelsat?10millionper
yearfromamediumpoweredsatelliteusinganolderPAL
technologythatwouldbroadcastacrossEurope.Skypromotedits
serviceheavily,andbyOctober1990hadinstalled946,000dishes.
ThemarketgamegiventhesestrategiesisdetrimentaltobothBSB
andSkyaseachchoosestocompete,resultinginsignificantlosses
unlessanewstrategyisimplemented.Giventhatbrandsarebuilt
overtime,bothBSBandSkyarefocusingtheirstrategieson
generatingconsumerawarenesswhileedgingoutthecompetition
throughincreasedadvertisingandpromotions.Sincethesatelliteis
alreadyasunkcosttheyshouldnottrytoswitchgearsand
cooperatewithSkyTelevision'sPALsystem.AsshowninExhibit
4,BSBhasquicklyseized16%ofthemarketafteronly7months
anditsinstallrateisgrowingatanaverageof50%frommonthto
month.ThisimpliesthatBSB,inordertogainaprofitablestance
inthefightformarketshareandtechnologystandardization,must
applyanewbusinessstrategyforcostcontainmentandoperating
structure.Thisnotionhasalreadybeenillustratedinthehigherrate
ofadoptionexperiencedbyBSBcomparedtoSkyforthediffering
technologystandards,atrendthatwouldbeexpectedtobeeven
greaterunderthenewstrategy.Thefirmwasabletoproduce
programsmorecheaply(andquickly)thanBSB.

BSB vs SKY number 4

ThecentralissueinGhemawat'sfinalcasestudyisthis:Doprice
warsofthesortinwhichBSBandSkyengagedimplyirrationality
onthepartofoneorbothofthefirms?
WhatdoesGhemawatmeanhereby`irrationality'?Thisismore
complicatedthanitseemsorthanGhemawatindicates.
Itissometimessupposedthatapplicationofaneconomicmodel
requirestheassumptionthatallagentsactinsuchawayasto
maximizemoneyprofits.Thisisnotthecase.Economistspresume
rationalityinonlyaverythinsense:totreatsomethingasan
economicagentisonlytoassumethatitschoicesareconsistent
withanacyclicalorderingofpreferencesoverstatesoftheworld.
Wherefirmsaretheagents,thistypicallyinvolvestheassumption
thatstatesoftheworldinvolvinghighermoneyprofitsare
preferredtostatesthatinvolvelowerones,butthisisnotessential.
(E.g.,BSBcouldhavebeenmaximizingitsreputationfor
toughness,forthesakeofprestige.Thiswouldnotrenderit
`irrational',inthatitsbehaviourcouldstillhavebeenmodeledby
thetheorist,orbyitscompetitors,ingametheoreticterms.)
8.2
However,supposethatBSBwasinternallydivided,inthatits
manager(i.e.,SimmondsGooding)wastryingtomaximizeone
thing(inthiscase,statusincorporatehistoryasa`winner')while
hisshareholdersweretryingtomaximizeanother(inthiscase,
moneyprofits).Inthatinstance,wecouldnottreatBSBasasingle
agent;ourgamewouldinvolveatleastthreeplayersSimmonds
Gooding,theBSBshareholders,andSky.
ThisiswhyGhemawatwonderswhetherthecasecastsdoubton

theextenttowhichgametheoreticmodelingcansafelytreatfirms
as"unitaryagents".Thisquestionisexactlyequivalenttoasking
whetherwecantreatfirmsasrational.(Thereisnothingpeculiarto
gametheoryhere;wecouldsayexactlythesamethingwith
respecttotheapplicabilityofanyeconomicmodel.)
Note,however,thatfirmsarealwayscomposedofindividualswith
differentutilityfunctions.Wecouldnevermodelthebehaviourof
firmsatallunlessweoperatedwiththefollowingmethodological
default:
Institutionalincentivescoordinatetheactionsofafirm'smembers
insuchawaythatindividualidiosyncrasiescancelout.Wetreata
firmas`unitary'(and,hence,as`rational'intheeconomicsense)
unlesswecannotfindanyconsistentutilityfunctionthatis
consistentwithitsactions.
8.3
IsthisdefaultconsistentwithGhemawat'sconclusionthatBSB
behavedirrationally?No.Itisnotdifficulttoexplainthepricewar
inaccordancewithconsistentprofitmaximizingbehaviourbyboth
firms.Wewillfirstshowthis,andthenanalyzethebasisof
Ghemawat'sphilosophicalmistake.
8.4
TheBSBSkyMonopolybiddinggame
BSBandSkyarecompetingoverthechanceatmonopolyan
extraordinarilylargeandprofitablemonopoly.Modelthegameas
follows:

Inroundone,BSBcaneitherstayinthegameorexit.Inround
two,Skyfacesthesamechoice(withinaninformationset).This
continues,inalternatinglogicalsequence,uptoroundk.Assume
thefollowingpayoffs.IfBSBexitsinroundone,itearnsapayoff
of0.Ifitexitsatanylaterpoint,itearnsastrictlylowerpayoff
lowerthelateritexits.IfSkyexitsatroundone,BSBearnsits
maximumpayoff,winningthemonopolyafternobiddingwar.For
eachroundthatSkystaysinthegamebeforeexiting,BSBearnsa
smallermaximumpayofffromwinningthemonopoly.
Sky'spayoffsareexactlysymmetrical.
Eachfirmfacesatimet>katwhichthecostofremaininginthe
biddingwarexceedsthevalueofthemonopoly.Ifbothfirmshave
perfectinformation,then,iftBSB<tSky,thenthereisoneNEin
thisgame:BSBexitsinroundoneandSkystaysinindefinitely.If
tBSB>tSky,thenthereisalsoonlyoneNE:Skyexitsinround
oneandBSBstaysinindefinitely.IftBSB=tSkytheneverypair
ofstrategiesisaNEunlessonefirmcantakeastrategicactionthat
theothercant.
8.5
Intheactualgame,bothfirmsbiduptotBSB,almostdestroying
thevalueofthemonopolyintheprocess.ThisiswhyGhemawat
saysthatthegame"didnotreachaNE."
Butthisassumesthatbothplayershadperfectinformation.Surely
theydidnt.Neitherfirmknewitsownfuturecostofcapital,let
alonetheother's,sincetheexpectedcostofcapitaltoeachisitself
afunctionofthedynamicsofthegame.(Investorswillrevisethe
priceofcapitaltoeachfirmastheyacquireinformationthrough
observingtheplayofthegame.)Furthermore,neithersideis

certainofthevalueofthemonopoly,sotheymayhavediffering
estimatesoftBSBandtSky.
Thislastbitofuncertaintyisespeciallyimportant.Considerwhat
BSBdidfollowingSky'sentry:itexpandeditsadvertisingin
searchoffastermarketpenetration.Ghemawatispuzzledabout
this:doesitnotimplythatBSBthoughtthemonopolymore
valuableinthepresenceofcompetitionthaninitsabsence?This
wouldindeedimplyirrationalityonBSB'spart(orbeliefbyBSB
thatSkyisirrational).Butweneedbelievenosuchthing.
8.6
Thebiddinggamecreatesacommitmentwaramongthepotential
customers.Nocustomerswishtobestuckholdingtheloser's
technology.Therefore,customershaveanincentivetodelay
commitmentwhilegatheringinformationabouttheprobable
outcomeofthegame(byobservingthegameitself,and,evenmore
informatively,bywatchingeachother).BSB,initsadvertising
afterSky'sentry,offeredlargediscountstocustomerswho
committedearly.Thisprovidesadirectincentivetocustomersto
commitearlier,andanindirectonebysignallingthatBSBhasa
largerwarchestthantheymightotherwisehaveassumed.Each
customerwhocommitsearlyincreasestheincentiveofothersto
commitearly.Thismaycreateabandwagoneffect,givingthe
victorytoBSB.Thereisthusnothingnecessarilyirrationalabout
BSB'sincreasedinvestmentfollowingSky'sentry.Thegamenot
onlyhasaninfinitenumberofNE,butalsoaninfinitenumberof
sequentialequilibria!AwarofattritionuptotBSBisamongthem.
Ghemawat'sownanalysisonpp.185193buildsinthis
imperfectionofinformation(sothatisnotwherehemakeshis
mistake).Inhismodel,thefirmsdontknowoneanothersbeliefs

aboutrelevantconditionalprobabilities.Theyeachmake
conjecturesabouttheother,assigningprobabilitydistributionsover
theseconjectures,andthenadjusttheprobabilityassignmentsas
theyacquireinformationthroughplayofthegame.Rational
behaviorinsuchasettingconsistsinusingallinformationthat
becomesavailable,andtakingtheactionthatmaximizesexpected
utilityateachstagegivenonesconjectureatthatstage.
8.7
SowhydoesGhemawatsaythatthegamedoesn'treachaNE?
Andwhydoeshesuggestinotherplacesthatthefirmswere
irrational?Thesetwoconclusionsofhisareindirecttensionwith
oneanother,butIseenomotivationforeitherofthem.
Itwillhelpustodistinguishriskfromuncertainty.Considerthe
intuitiveideaofaNE:IamnotplayingaNEstrategyifIwould
regretmystrategygiventhestrategiesoftheotherplayers.Where
mixedstrategiesaren'tinvolved,thenotionof`regret'isnot
ambiguous.Butwheremixedstrategiesareinvolved,`regret'
obscuresadistinction.
Hereisthedistinction:IfIusethewrongrandomization,Iwill
regretmystrategyinthesensethat,givenyourstrategy,Icould
havestrategizedinawaythatwouldhaveincreasedmyexpected
payoff.Thisisgenuine`regret'inthegametheoreticsense.Butif
mybestrandomizationleadstodisasterIammerelydisappointed
atmybadluck;Icouldnothavestrategizedmorewisely,given
whatIknewexante.(Compare,inourrivercrossinggamefrom
Lecture2,theescapeewhochoosesapurestrategyandgetscaught
[regret]withtheescapeewhorandomizesrationallybutmeetshis
pursuersbysadcoincidenceorishitbyoneofthefallingrocks
[disappointed].)

8.8
BSB'sbehaviourinthiscaseisconsistentwiththeplayofa
rationalagentthatfollowsitsNEstrategyandisdisappointed.I
thusrejectGhemawat'sconclusionthatthiscasepinpointsa
limitationontheapplicabilityofgametheoreticmodels.Wemay
usesuchmodelstopredicttheprobabilitiesofpricewars(ortheir
logicaltwinsinCournot,quantitywars).
BritishSatelliteBroadcasting(BSB)(19861990)wasacompany
setupin1986toprovidedirectbroadcastsatellitetelevision
servicestotheUnitedKingdom.RivalSkyTelevisionwasalso
sufferingmassivelossesby1990andthecompaniesmerged50:50
financiallywhenSky'sparent,NewsCorporation,wasfinancially
threatened,thoughitwasineffectamanagementtakeoverbySky
toformtoday'sBritishSkyBroadcastingorBSkyB.BSBmain
shareholdersGranada,PearsonReedandChargeursmaintainedan
interestinBSkyBthroughBSBHoldingsLimited,butgradually
soldtheirsharesinthemarketthroughoutthe1990s,realisinghuge
profitsontheirinvestment.BSB'sshortlifehadpreventedRupert
Murdochfrommaking100%oftheprofitsavailablefromUK
Satellitetelevsion.
Background
BSB'sFiveChannels:TheSportsChannel,Galaxy,TheMovie
Channel,PowerStation,Now
EvolutionofUKsatellitetelevision
ASquarialinstalledonahousewall
BSBTVMonthpromotionalmagazine,firstissueTheBritish

SatelliteBroadcastingconsortiumwasformedin1986byGranada,
Pearson,Virgin,AngliaTelevisionandAmstrad.Inearly1988the
BSBconsortiumwasawardedalicencetooperatethreechannels
bytheIndependentBroadcastingAuthority(IBA).Theconsortium
changedaroundthistime;AmstradwithdrewandAustralian
businessmanAlanBondjoinedalongwithReed,Chargeurs,
LondonMerchantSecuritiesandothers.
RupertMurdoch,havingfailedtogainregulatoryapprovalforhis
ownsatelliteservice,announcedinJuly1988thathispan
EuropeanSkyChannelwouldberelaunchedasafourchannelUK
basedservice,SkyTelevision.
TheBBChadpreviouslyproposeditsownsatelliteservice,but
pulledoutwhentheGovernmentinsistedthattheBBCshouldpay
forthesatellite'sconstructionandlaunch.InadditiontoBSB's
threechannelslicencesfortwomorechannelswouldbeputoutto
tender.
Thestagewassetforadramaticconfrontation.BSB,anticipatedas
theUK'sonlysatelliteservice,wasfacedwithanaggressivedrive
byMurdoch'sSkytobethefirstservicetolaunch.
BSBwasforcedbytheconditionsofitslicencetopayforthe
constructionandlaunchoftwosatellites,namedMarcopolo1and
2afterMarcoPolo,capableofbroadcastingfivechannelsthat
couldbereceivedon30cm(12")diameterdishes.Thesatellites
werehighpoweredversionsofHughesSpaceand
Communications'HS376satellites.AsBritain'sofficialsatellite
providerBSBhadhighhopes.Thecompanyplannedtoprovidea
mixtureofhighbrowprogrammingandpopularentertainment,
fromartsshowsandoperatoblockbustermoviesandmusic
videos.Theservicewouldalsobetechnicallysuperior,

broadcastingintheDMAC(MultiplexedAnalogueComponents
typeD)systemdictatedbyEUregulation,withpotentiallysuperior
picturesharpness,digitalstereosoundandthepotentialtoshow
widescreenprogramming,ratherthantheexistingPALsystem.
IncontrasttoBSB'sambitious(andhighlyexpensive)technology;
SkychosetousetheEuropeanAstrasatelliteandbroadcastinPAL
withanaloguesound;thissystemwouldrequire60cm(24")dishes,
although80cmversionswererecommendedforScotlandandthe
northofEngland.BSBridiculedSky'sproposals,claimingthatthe
PALpictureswouldbetoodegradedbysatellitetransmission,and
thatinanycaseBSBhadsuperiorprogramming.FurthermoreSES
Astrahadnoregulatorypermissiontobroadcast,hadplansforonly
onesatellite,sonobackup,andtheEuropeansatellitelaunch
vehicle"Ariane"sufferedrepeatedfailures.
TodistanceitselffromSkyanditsdishantennas,BSBannounced
anewtypeofflatplatesatelliteantennacalleda"Squarial"(i.e.,
"squareaerial").TheillustrativemodelSquarialshowntothepress
wasadummyandBSBcommissionedaworkingversionwhich
wasunder45cm(18")inwidth.Aconventionaldishofthesame
diameterwasalsoavailable.Thecompanyhadserioustechnical
problemswiththedevelopmentofITT'sDMACsiliconchips
neededforitsMACreceivers.WhenSkywentonairinFebruary
of1989itslaunchwassopoorlymanagedthatDisneycancelledits
planstolaunchtheDisneyChannelonAstraforfearofdamaging
itsimageatthetimeoftheopeningoftheDisneyParkinParis.
BSBwasstillhopingtolaunchthatSeptember,buteventuallyhad
toadmitthatthelaunchwouldbedelayed.Howeversincenoone
elsehadcomeforwardtooperatethetwosparechannels,BSBnow
hadalicencetooperatefivechannelsratherthanjustthree.The
companycontinuedtopromoteitsSquarialwiththeslogan"It's
SmarttobeSquare".Despitethelengthoftimesincetheservice

closeddown,squarialscanstillbeseenonsomehouses.BSBalso
hada"minidish"inadditiontothesquarial,thesecanalsostillbe
seenattachedtosomeproperties.
BSB'sfivesatellitechannelswere:
TheMovieChannel
TheSportsChannel
Galaxy
ThePowerStation
Now
BSB vs SKY number 5

1.HowmightBSBhavebeenabletoidentifyNewsCorporationas
itspotentialcompetitorevenbeforeRupertMurdoch's
announcementonlaunchofSkyTelevision?
AlreadyMurdochmadeanentryintheUSsatelliteTVindustry.
HewasaggressiveandduetohisstakeinSky,itwasonlyamatter
oftimebeforeheenteredBritain.Hehasthecapabilityto
overcometheentrybarriers.Butsodoother.Newscorpsoverall
strategywastobeglobalandtodominate.AlreadypresentinUS
andEurope.
FeltUKwasadominatedmarketandshookitupinthenewspaper
industry.Itwasanestablishedsocietyandtochangeitwouldbe
throughthenewsandmedianetwork.Sowantedtoenterand
dominateUK.
Competitorwhoiscompetingoneconomicparametersismuch
safer,asthenwecanapplygametheoryandrationalitytoit.But
Murdochwaslosingmoneyandyetstayingin.Thuseconometrics
didhaveasayinthisgame.
2.WhatmighthaveBSBdonedifferentlybeforeSky's

announcementofentry?Whatmighthavebeendonedifferently
aftertheannouncement?
BSBcouldtrytostoptheentryofSkyorminimizetheimpacton
BSB.Theyhavecurrentlymadethefollowingmoves.Theycold
haveprocuredmovierightsearlyandsavedcosts.BSBcould
lobbytopreventPALtechnologyofSky,asBSBwassinkingin
closeto1BinDMACtechnology.Nocountrywouldwantits'
citizensshareholderstolosethatmoney.
Intechnologychoice,theydidn'tderisktheirstrategyby
preventingPAL.Auseroftech,itmakesimmensesensetohave
optionsinmultiplestandards.B'cosbettingononly1,ifthatstd
fails,Istandtolosealot.Presalesofreceivingequipmentcould
havedoneifonehadtheoptionofPALtechnology.Couldhave
givencustomerinitiallyPALtechnologyandthenreplaceditlater
withDMAC.Insteadoflaunchingtheirownsatellite,couldhave
leasedit.Extravagant,expensiveofficespace.
Anticipatecompttn,idwhotheyare,takemitigatingsteps
3.WhatshouldBSBdoin1990?Why?
Bothtrytomerge.
Formacartel
AcquireSky
Sky/BSBStayExit
Stay369,2701748,256
Exit51,119051,58
Whatkindofforcesexistsintheindustryandwhatkindof
alterationscanbemadetogaincomparativeadvantageand
competitivepositioning?
Howcangametheorybeappliedtocompetitiontostrategise

better?
BSBhadareactivestrategyandthusletusexaminehowitwas
affected.
Sky
Fight&induceexitofBSB&thusacquirethefirmoritsassets
Notverylucrative.Iftheydon'tcompete,regulatorswillinterfere.
Thematrixisusefultoidthepayoffsofthecompetitorandthus
negotiateyrstrategy.WewillhaveanideatothelevelSkywould
goasagainstBSBwould.Arationalnegotiationispossibleusing
thismatrix.
BSBdecidedtoexit.Got50%staketoexit.BSBhadtobringin
cashasitwasrequired.80:20splitforskyindividends,50:50for
next400Mandthen20:80and50:50theonwards.Skygetscontrol
rightsastheyhadhighestcommitment.
WarsofAttrition
Rationalbattlesdivergentbeliefsabouthowlongtheotherwill
persist
Irrationalbattlesandescalationofcommitment
Marginalcalculationsversussunkcosts
Thiswarisparticularlycostly
Highcosts,stakes,switchingcostsforcustomers
Inelasticsupplyoffilms,advertisers