[2/27/07] In response to Virgin Media’s rhetorical broadside on Feb. 23 claiming BSkyB (Sky) was charging an exorbitant price to carry its basic channels, Sky’s CFO Jeremy Darroch parried with a Feb. 26 statement that Virgin Media “should focus on getting a deal done rather than on their [public relations] offensive.”

The dispute centers on the carriage fee that Virgin Media would pay to carry Sky’s basic channels – Sky One, Sky Two, Sky Sports News and Sky News – on its cable platform. Virgin Media stated in its release last week that “Sky has consistently demanded a carriage fee more than double the existing arrangement” for what Virgin Media described as “underperforming channels.”
Furthermore, Virgin Media CEO Steve Burch blasted BSkyB’s business practices, saying “throughout its history, Virgin has challenged the attempts of dominant corporations to manipulate markets, stifle competition and dictate consumer choice. It has done so simply by giving consumers a better deal, and Virgin Media is going to do the same. Sky’s behavior is a heavy-handed and anti-competitive response to that challenge, and consumer choice has been reduced as a result.”

Sky struck back the next business day by saying that it had “shown flexibility on price” and was offering new channels such as Sky Three and Sky Arts as well as HD services. Sky added there was “a very real possibility” that an agreement will not be reached before the existing one expires at the end of the month.

Despite the posturing from both sides, Sarah Simon, a media equity analyst at Morgan Stanley, said in a Feb. 26 research note that she believes a deal will get done.

“We should also put this dispute into context,” she said. “In the past, Telewest has dropped and then reinstated channels including Nickelodeon, Nick Junior, Nick Toons, Nick Replay and the History Channel. These channels are far weaker, in our view, than the Sky basic channels under consideration in the current wrangling. Meanwhile, in the U.S. disputes of this nature are far more prevalent, with Echostar having had similar spats in the past with Viacom, Disney and Time Warner-provided channels, and Comcast [the previous home of] Burch having also had issues with content providers such as Starz Encore. Ultimately, issues with all of these channels have been resolved, as both sides have recognized the merit of reaching agreement.”

She continued “it thus seems likely that while there may be a period of time during which the Sky channels do not feature in the Virgin Media lineup (which Sky will likely look to use to its advantage in its marketing message), the likelihood remains that a deal will be concluded.”

While having no deal would be negative for both sides, Simon believes Virgin Media stands more to lose. “Clearly, there would be a negative impact on both sides if negotiations were not to conclude in a deal,” she noted. “It does seem, though, that Virgin could experience greater long-term detrimental impact than BSkyB, in our opinion. Indeed, if content is king, having channels exclusive to the Sky DTH platform could well play to the long-term benefit of BSkyB, which is surely not Virgin Media’s goal.”

For BSkyB, its loss of carriage fees would be compounded by reduced revenues from advertising among the channels in question: In its Feb. 26 release, the company estimated it would lose between 15 million British pounds ($29.46 million) and 20 million British pounds ($39.28 million) of operating profit for the remainder of this year to June 30 if the channels were not carried on Virgin.