Profit from the battle for broadband

British Sky Broadcasting (BSY) and BT (BT.A) are going head-to-head in a multi-billion-pound fight to win over big-spending sports television customers. Challenger BT is trying to muscle in on Sky's near-monopoly of paid sports TV by offering 38 Premier League football matches a year for free - as long as you subscribe to BT's broadband services. Besides investing heavily in celebrity endorsement, advertising and swish new studios in London's Olympic Park, the telephony giant is forking out £246m a year for the next three years to secure British football broadcasting rights.

Incumbent BSkyB, meanwhile, is responding to BT's challenge with the same aggression and dominance that has seen it lay waste to numerous previous competitors. The media behemoth has cut prices, acquired the lion's share of football television rights and is spending tens of millions on advertising and celebrities of its own - mostly David Beckham watching Sky Sports on his mobile, tablet, laptop or television.

Yet strangely, this high-stakes tug-of-war isn't really even about sports. Instead, it's about broadband. BT has been losing market share in broadband internet services to Sky and other operators for years, and it is hoped BT Sport will stem the tide. As Mark Watson, chief executive of BT Vision, told the Financial Times earlier this year: "[BT Sport] will get people to look at us in a new way, it will attract new customers that might otherwise have not come to BT, and it's a good reason for existing customers to buy some more products and to stay with us."

Crucially, it will allow BT to better compete for the lucrative 'triple-play' customers - loyal consumers who subscribe for broadband, landline telephone and television services from a single company. By strengthening its TV offering, which had been widely perceived as lacklustre, it will be better positioned to lure customers from competitors and stop existing ones leaving.

A Sporting Chance

Research from Citigroup shows BT's ambitious new strategy could work wonders. Citigroup hired market research agency GfK in early June to survey 1,365 UK households and look into the market prospects for BT Sport. Although it took place before BT's high-profile marketing campaign properly kicked off, the survey yielded a stronger result than the broker anticipated. Around a quarter of the total consumers surveyed expressed an interest in BT Sport, and 13 per cent said they would be prepared to either switch broadband supplier or pay subscription fees to get it. That might not sound like much, but it equates to 2.8m potential new broadband customers for BT based on the total 21.7m home broadband connections in the UK - and could quite possibly be the difference between BT keeping its dominant position in the market (6.5m subscribers or 30 per cent) and losing it.

Below, we examine what we think will be the likely impact of BT's high-profile foray into televised sports and look at which listed companies stand to gain or lose the most.

Sky way or the highway

Few analysts really believe BT will take many sports television subscribers away from BSkyB, given the depth and breadth of Sky's sports rights portfolio. Sky's paying TV sports customers are mainly those who are willing to spend top dollar for the best access to a wide range of sports, and besides, the company managed to keep the lion's share of Premiership football matches in the latest auction anyway, having agreed to spend a record £760m a year on 116 games per season for the next three years.

BSkyB also has an impressive track record of fending off competition. ESPN, Setanta and ITV Digital all placed big, expensive bets on the rights to broadcast live football matches over the past decade - and all three emphatically lost.

That said, Sky badly wants to keep growing its core customers in broadband, and BT's triple-play offering could slow down what has been strong growth there. Moreover, there's a chance that over the long term a successful BT Sport rollout could embolden BT to push harder into other premium content - such as movies, drama or original programming - a worrying prospect given that is currently Sky's domain.

BT

The survey from Citigroup suggests the impact of BT Sport could be much greater than the market is currently expecting. In fact, BT recently announced it had signed up over 1 million customers to the service in just three months. Most of those are receiving it for free, mind you, as part of a bundled broadband pack. But some are paying - and importantly, BT says some are brand-new broadband customers.

But even if BT Sport isn't a long-term success, the primary aim of BT's push into television is probably to defend the roughly 43 per cent of its broadband customers that also take Sky TV. And here we think it will be largely successful.

That said, Citigroup only expects BT to increase revenues by 1 per cent a year from now until 2017, demonstrating how BT firmly remains a recovery story rather than a growth story. But even that would be a notable improvement from the 2.5 per cent decline it managed from fiscal 2009 to 2013. What's more, the broker foresees substantial EPS growth (greater than 15 per cent) not this year but next, as BT Sport drives earnings growth by cutting costs.

Overall, we think BT Sport has the potential to mark the next stage in BT's recovery, but we continue to rate the shares a 'hold' until we see BT Sport improving the company's bottom line. That's probably not until next year, especially with chief executive Ian Livingston leaving the company in September.

BSkyB

While BSkyB arguably stands to lose the most from BT's high-stakes gamble, we're backing it to bat away BT's challenge eventually, as it has done with many other rivals before. We agree with Citigroup's analysis that "continued EPS growth at Sky and a successful BT Sport Strategy are not mutually exclusive". True, growth at BSkyB might be slower than before, but Citigroup still sees BSkyB delivering around 10 per cent compound EPS growth for at least the next three years while returning roughly 8 per cent of its market capitalisation per year in dividends and share buybacks. Long-term buy.

ITV

The share price of broadcaster ITV (ITV) has jumped sharply higher in recent months helped by bumper TV ad revenues as a result of BT and Sky's sports advertising battle. We expect this trend to continue over the short term and, with the shares trading on 15 times current-year earnings but just 10 times forecast earnings for 2014, the shares remain a 'buy'.

Liberty Global

American cable company Liberty Global (NASDAQ: LBTY.A) acquired Virgin Media in a £15bn mega-deal earlier this year. While a better BT offering clearly poses risks to Virgin's earnings power, we think BT Sport will have a muted effect on the parent company for two reasons. First, the UK market only represents a third of Liberty's pre-tax earnings. And second, Virgin has a superior broadband offering with loyal customers who are willing to pay for faster internet speeds. Hold.

Talk Talk

Shares in rival broadband and television provider TalkTalk Telecom (TALK) sold off harshly in advance of the BT Sport launch. Yet Talk Talk chalked up very impressive growth in the quarter ending 30 June, with pay TV subscribers up by 160,000 to take its base to 390,000. We're fans of Talk Talk's recovery story, but we also feel the company is the most exposed to BT stealing back broadband customers looking for a deal. Trading on nearly 18 times consensus forward earnings, we downgrade the shares. Hold.

Set-top box makers

The ability to stream programs over the internet has often been touted as a potentially lethal threat to the set-top box makers, but they're still very much alive and kicking. Of the two UK-listed set-top box designers, Pace (PIC) and Amino Technologies (AMO), we favour the latter as it has better growth prospects and its shares trade on just nine times 2013's forecast earnings (after stripping out the company’s large cash pile).