FTSE 350: Consolidate the broadcasters and regulate the telcos

This isn’t the first time the TV industry has endured a seismic shift. The 1990s saw the arrival of the first paid-for broadcasters in the UK when Sky (SKY) began to bundle premium content at hefty prices. But that new model didn’t hurt the traditional free-to-air channels in the same way digital TV is now.

In 2018, affordable streaming services and catch-up TV are expected to cause further problems for industry stalwarts. Free-to-air channels such as ITV (ITV), Channel 4 and Channel 5 are likely to see advertising revenue eroded as companies look to more popular entertainment channels (such as social media) to market their goods. Meanwhile, the rapid decline in the number of new TV subscriptions at BT (BT.A) and Sky is likely to continue, particularly if the two companies can’t afford to increase premium content.

Increased competition for global screens has caused a flurry of consolidation in the broadcasting and production markets. Most recently, US giant Disney bid for the media assets of peer 21st First Century Fox, including its 39 per cent stake in Sky. Previously, Disney had fended off competition from Sony, Comcast and Verizon before receiving the approval from Fox’s founder Rupert Murdoch.

With companies across the spectrum of technology, media and telecommunications all looking to expand in the TV world, original content has become a very valuable asset. We expect industry consolidation to continue in 2018 and reckon Entertainment One (ETO) could be a prime candidate for a takeover. At the last count, the company’s portfolio of film and TV titles was worth $1.7bn (£1.3bn), which would fit nicely into Netflix, Apple or Amazon, all of which are in the process of expanding their TV offerings.

Meanwhile, long-time rivals BT and Sky have finally decided to join forces and share their TV businesses, perhaps as a way to fend off competition for the broadcasting rights to Premier League Football. According to media reports, US tech giant Amazon has held talks with the Premier League, fuelling speculation that it may wade into the battle for the rights to the 2019 to 2022 seasons which come up for auction in February. There’s no doubt that deep-pocketed Amazon’s entry into the sports market would be a sucker punch for BT and Sky, both of which rely on unique sports rights to attract subscribers.

But, while competition is rife in the broadcast industry, regulators seem to think there isn’t enough of it in the telecoms market. In broadband, the British government has come down hard on the lack of investment in fibre connectivity and is helping support new initiatives in the market. Vodafone (VOD) and CityFibre (CITY) recently agreed to develop their own network of fibre broadband cables to offer an alternative to Openreach – the broadband company spun out of (but still 100 per cent owned by) BT. That’s good news for TalkTalk (TALK), Sky and all the other internet providers that currently rely on the core infrastructure of Openreach, but less positive for BT which could be forced to up investment in expensive fibre cables.  

In mobile, the main event on the horizon is the auction of the spectrum of wavebands that will carry the 5th generation mobile network, 5G. Vodafone, BT, Three and O2 are all contenders for the wavebands, which will be crucial for networks hoping to provide customers with the fastest possible connectivity. However, Three and O2 are attempting to block the amount of spectrum BT (and its EE mobile subsidiary) can own, citing the group’s dominance as bad for consumers. The government is due to make a decision early this year, with the auction – which last time cost EE and Vodafone £589m and £791m respectively – set to follow.