BT (LSE: BT-A) is in the midst of a transitional period. Indeed, the formerly nationalised company is gradually moving from being a telecoms operator to a fully fledged media play. While this has excited investors at times, the companys share price performance during 2014 reflects a more subdued attitude among investors, with shares in BT being down 1% year-to-date.
A key reason for this is concern surrounding the cost of taking on media rivals, such as Sky (LSE: BSY), as well as nagging doubts with regard to BTs pension obligations. Despite both of these negatives, BT can overcome such challenges and, in the long run, beat what is now a key rival: Sky.
Customer Loyalty
BTs advance as a media company has been well though through. Indeed, it has realised that customers are not necessarily loyal to the provider of media services, but rather to the services themselves. In other words, when it comes to TV, for example, BT has realised that most of Skys customers do not subscribe because of loyalty towards Sky. Rather, they seek the content that Sky has exclusive rights to.
This may sound like a very obvious statement to make, but is crucial for understanding how BT can overcome the threat from Sky on its road to becoming the leader of media services in the UK.
Financial Firepower
BT showed how committed it is to attracting new customers when it spent a record 900 million for the exclusive rights to screen Champions League football. It has also won the exclusive rights to a portion of Premier League football (which is due to be bid for again shortly), as well as other sports such as MotoGP and rugby union. In other words, it is attempting to beat Sky at its own game of being the only place to watch certain sports live.
In BTs favour, though, is its financial standing. Certainly, the triennial pension review could force BT into making additional contributions to its pension scheme (which remains possibly the biggest challenge to the companys future success). However, even if this occurs, BT has the resources to compete with Sky for the rights to a wide range of sports and Skys decision to merge with Sky Italia and Sky Deutschland shows that it may be concerned about its future capacity to outbid all rivals.
Looking Ahead
Certainly, BT seems to have clear long-term potential. While it is unlikely to become the UKs top media player in the short term, over the medium to long term it could find that customers welcome an extra (and familiar) player in the pay-tv market. Until now, Sky has enjoyed near-monopoly status, but with a larger rival now in competition, its status as the only realistic choice to watch live football and other sports may be coming to an end.
In addition, with a price to earnings (P/E) ratio of just 12.8 and an earnings growth forecast of 7% next year, BT looks good value and could be worth buying for long term investors.
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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has recommended British Sky Broadcasting. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
