Monday, 9 February 2009

Sky, football and the back of an envelope (very UK-centric post warning!)

Sky has just won the rights to show five out of the six available Premiership football games packages from 2010, by bidding £1.62bn over three years . They're not allowed to bid for all six packages; the European Commission says so.

It's an interesting exercise to work out how much that means Sky think the football is worth to them. In 2006-2007, Sky made £4.1 billion in revenue (OFCOM) and the vast bulk of that (93%) came from subscriptions.

The first thing to say, is that Sky must think they'd lose subscribers if they lost the football. Of course they would.

Lets assume that Sky are trying to be profitable (because I'm an economist and economists like to pretend people are rational) and also that their margin is about 15%.

The 15% margin on £4.1bn means that Sky make something like £615m per year profit before tax, or 1.8bn over the three year life of the Premiership contract. That's very close to what they pay for the football - the price hasn't changed that much this time around (what's £100m between friends?) So if Sky could drop the football and all their subscribers stayed with them at the same price, they'd close to double their profit.

Or to put it another way, Sky are behaving as if live Premier League football makes up at least half of their business model.

That's not the whole story though. There's a longer term benefit of owning the football that comes from eliminating Setanta, which has been left with half the amount of football that it has at the moment. Setanta don't have much other than football to support their subscriber base and could be in a lot of trouble.

So now you know how football players can afford to insure (and then crash) £200,000 Ferraris. And don't be suprised if you see the European Commission taking an interest in the Premiership TV rights again in the next couple of years.

Update: Judging by their reaction to losing, Setanta really need that football.

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