In early 1990s, British Satellite Broadcasting (BSB) and its chief competitor, Sky Television

(Sky) began their satellite broadcasting business in the British, one after another. This case
looks into the “game” with two oligopolistic players, a game that started even before BSB’s
awareness of the existence of a strong rival.

BSB, who was a consortium originally formed by Pearson, Granada, Virgin, Anglia and Amstrad
in 1986, was awarded by Independent Broadcasting Authority (IBA) of a license to exclusively
operate UK’s first DBS channels. According to BSB’s early estimate, it would have installed
400,000 satellite dishes after its 1st year of broadcasting, 2 million by 1992, and 6 million in
1995. However, actual numbers of installed satellite dishes were far less than its expectation. It
ended up that BSB continued losing ￡6~￡7 millions per week (as on Page 10) by October,
1990. Although BSB’s delayed launch of satellites and shortage of signal receivers accounted
for its setback, Sky’s surprising entry to the same market was the main cause of BSB’s
awkward situation. News Corporation announced in 1988 that a new satellite television venture,
Sky Television would be broadcasting to the same region by its subsidiary in British. While
BSB’s satellite was still stagnated on the launch pad, Sky soon went on the air in 1989 by using
conventional technologies and renting satellite channels. The market that BSB expected to be
monopolistic turn out an oligopoly, and BSB couldn't get any advantageous and became
doomed due to its late entry to the market. Exhibit 3 (on page 11) indicates that Sky
successfully had eaten up BSB’s target market.

Obviously, one of BSB’s biggest mistakes is its failure to identify News Corporation as a
potential competitor earlier. We believe BSB could have made the situation totally different if it
tried to identify and manage all possible threats more carefully. Assuming BSB managed to
detect Sky Television’s intention early, they would change their plans for better counteracting
Sky’s Invasion and remain themselves at leading position. For instance, BSB, at that time,
could re-evaluate their plans such as adopting D-MAC platform which brought both critical
issues in terms of schedule and finance as BSB had to build satellites (Marco polo I and II),
sending them into orbits, developing new chips and dishes – all of them brought considerable
delays and/or additional costs at the end. Another move which BSB could have possibly done is
to postpone the development of D-MAC (which eventually resulted in the delay of broadcasting
launch for 6 months) with consent from IBA and altered to another ready technology and
expedited the launch of the satellites and may get the first move before Sky.
From financial perspective, BSB and Sky were both losing money in the competition. The above
chart shows the net profit forecasts of both Sky and BSB for the first 6 years; according to the
forecasts, BSB clearly suffered greater losses. Although BSB seemed to have a deeper pocket
(as mentioned on Page 10), they still suffered great expenditures when co work with Paramount,
Universal, Columbia, and MGM/United Artists in film licensing. At the same time, their competitor
Sky is enjoying exclusiveness access to Fox through cross-ownership. The intense competition
between the two drove film prices up dramatically, resulting in the prices BSB and Sky paid to
Hollywood were two or three times of US buyers’, with higher up-front payment, and also
resulted a no-win situation. From the chart below we can see that films accounted a major part
of BSB’s cost structure.

Based on the payoff matrix of this case, Sky could earn positive profit either BSB decided to
stay or withdraw. Thus, for Sky, it should and would choose to fight regardless of BSB's
decision. On the other hand, BSB would suffer a loss of £190 million if both BSB and Sky stay
in game and fight, earn a huge profit of more than £2 billion if Sky exits, or suffered a loss of
£180 million if BSB exits lost. In addition, Sky was expected to have higher revenue and
lower lost comparing to BSB; plus as Sky had been operating satellite broadcasting
in 1989, they had higher present discounted value (PDV) comparing to BSB. BSB, on
other hand, was with higher debt and bearing higher cost of capital.

At first glance, “exit” seems to be a better choice for BSB, once Sky chose to stay and fight.
However, considering that BSB would lose around £180~£190 million either choosing to fight or
exit, when Sky stays in the battle, we think a merger or acquisition (M/A) would be the best
option for BSB. The only win-win situation for both firms is to reach an agreement and make
one of the firms stay in business.