Let me ask you a question. Is competition a good thing?
Erm, I hear you reply, of course it is. If you dont have competition, then one company will dominate the market, set any price it wants, and its the customer that ultimately suffers. Thats why we have bodies like the Competition and Markets Authority, to prevent this sort of thing from happening.
Sounds fairly obvious, doesnt it? Except dig a little deeper and you find thatcompetition can, sometimes,actually be a bad thing.
Monopolies arent all bad
Take the pay-TV market. For the past25 years Sky (LSE: SKY) has monopolised the sector. No other firm has managed to getanywhere near Sky, and the company has been the sole supplier of live Premier League football, cricket, golf and a range of othersports. Its also been a key provider of movies from all the major Hollywood studios. It sounds like a recipe for rising prices and lowering standards. But actually, it means that we have in Britain the best pay-TV platform in the whole world.
By being sole supplier, Sky has built up a critical mass of customers, which means it has unrivalled buying power. And most people it seems, myself included, wouldnt choose any other pay-TV platform. By being unencumbered by competition, it has been able to focus all its attention on providing a better service for customers.
Its recent move into Italy and Germany means theres further scope for growth. Thats why, despite the share price rising so much already, I would still rate this firm a buy, both for its growth potential, and for its income. At a 2016 P/E ratio of 17.44, and a dividend yield of 3.24%, I think its fairly priced.
What about the competition?
I was a little irritated to find I could no longer watch Champions League football or several Premier League matches, because they had moved over to BT (LSE: BT.A). This telecoms giant is muscling into pay-TV in a big way. Yet this additional competition actually means that I now pay a higherTV subscription for less TV.So there you have it, this is a case of competition being not such a goodthing.
Nonetheless, I understand BTs motives, and I suspect it can make a success of it by providing a cut-price alternative to Sky. If you add pay-TV to BTs booming services and broadband businesses, you can understand why this companys share price has also been pushing higher. The acquisition of Everything Everywhere (EE) makes BT an even better proposition. Thats why I rate BT, just like Sky, as a buy for both growth and income. A P/E ratio of 15.94, with a dividend yield of 2.9%, makes the company very reasonable value.
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Prabhat Sakya has no position in any shares mentioned. The Motley Fool UK has recommended Sky. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.