BT GROUP PLC
UEFA FOOTBALL RIGHTS CALL TRANSCRIPT
11 November 2013
Company speakers:
Gavin Patterson
Tony Chanmugam
Chief Executive
Group Finance Director
Gavin Patterson
Slide 1: Good morning and thank you for joining the call. This is Gavin Patterson here. I want to
take you through the announcement on UEFA football rights that we announced on Saturday
morning. We sent you out the slides and hopefully you have those in front of you.
Slide 2: Turning to slide two this is our normal caution about forward looking statements for you to
peruse at your pleasure, and then onto slide three.
Slide 3: This slide sets what we’ve won; it explains the exclusive live rights to both UEFA
Champions League and UEFA Europa League, costing £299m a season for three seasons
starting in August 2015. A huge number of matches across two competitions, 350 per season in
total.
Slide 4: Turning to slide four, this is a little bit more colour on the two competitions for those of you
who aren’t football lovers. They’re the two top competitions in European football. The Champions
League includes the top four from the Premier League, so in this year’s competition Manchester
United, Manchester City, Chelsea and Arsenal, plus the winner from the Scottish Premier League,
Celtic, and also obviously includes the best clubs from Europe, the likes of Bayern Munich who
won it last season, and Barcelona, Real Madrid etc. The Europa League includes the fifth placed
side in the Premier League, so in this season it was Spurs, the winner of the League Cup and also
the winner of the FA Cup, but also top teams in Europe, the likes of Valencia, Lazio and PSV are
in this season. Both competitions attract huge audiences, 170 million for the Champions League
final, 71 million for the Europa League final.
Slide 5: So in terms of what this looks like for our schedule if you turn to page five, we believe this
will truly deliver a step change in our proposition. We’ll have what we think is unrivalled ownership
of weekday football rights, and you can see it on the slide here. Champions League Tuesdays and
Wednesdays, Europa on Thursdays, Scottish Premier on Fridays and then on Saturdays Premier
League and SPL. On top of this of course we’ve got other European leagues and world football
leagues, and of course Rugby Union, tennis and MotoGP for example.
Slide 6: Which takes me onto slide six. This sets out our content for the next couple of years, and
you can see we’re adding a lot more content. The FA Cup, which started in proper over the
weekend, 25 matches this season for five years kicking off last Friday. MotoGP nearly 20 events a
year for five years from 2014. The Rugby Champions Cup, which is the replacement for the
Heineken Cup for three years from Autumn 2014, to be confirmed of course, there’s still some
negotiations on that. Champions and Europa League from Autumn 2015, and so in total if you add
all these together it’s around a thousand hours a year of live sport in the BT Sport schedule.
Slide 7: Looking on page seven, there are many ways to monetise these rights. Firstly it’s winning
incremental customers, adding value to both BT Consumer and Openreach. And the rights
themselves mean our channels will be an even more compelling proposition to sports fans. We
will be introducing charging for the new UEFA rights but it will be at a level that’s far more
1
accessible and affordable than it is now. On the commercial revenues front we’ve now got over
13,000 commercial customers, and this adds highly attractive content for that market place and to
reiterate we remain a willing wholesaler and we’ve got a couple of wholesale deals in place of
course, and these rights could drive additional revenues on top of that, plus of course additional
advertising revenues.
Slide 8: Turning to slide eight now, we’re very confident the UEFA competitions can transform the
channels and attract new customers, and I think the slide here demonstrates this. This is the first
time that the competitions are exclusive to a non-PSB provider, they’re very popular competitions,
as you can see, 30 million viewers each year in the UK, c.5 million viewers each match on ITV,
and we’ve put a lot of work into researching what people want to watch, and you see on the left
hand side, of course, football is by far the most popular sport on TV, and on the right hand side
you can see, in terms of the football competitions, how important both Champions League and
Europa League are, and how they add to our football content.
Slide 9: And if you look into the survey in a wee bit more detail on slide nine this sets out what
impact we think it’s going to have incrementally on our business. So the green block shows the
opportunity, this represents football fans that like football but aren’t currently considering BT
Sport, so we won’t persuade all of them but it will be a swing factor for some, and on the right
hand side, again the green blocks show the opportunity. We fully expect UEFA rights to drive
incremental broadband sales compared with what the Premier League would drive on its own.
We’ll also see the benefit of people resigning contracts, both on broadband and lines, so we’ll see
that coming through in the churn, in particular channel-only sales, and I think the takeaway from
this is very clear that the Premier League plus UEFA rights when combined are a very, very
powerful combination.
Slide 10: Turning to slide 10, so while it’s early days and we re-iterated that a number of times I
hope you’ve sensed, our performance on BT Sport has given us a great deal of confidence. We
already have 2 million customers, retail customers, but it’s 4 million if you include the wholesale
deal with Virgin Media. Viewing figures are growing and of course we’ll benefit from economies of
scale as we’ve got an established platform, studio, talent and beginning to build some expertise.
Slide 11: In terms of the financial impact, slide 11 sets out the financial details. I think the most
important thing to take away is the financial outlook that we reaffirmed in the Q2 results for the
period 13/14 to 15/16 is unchanged. So we have to pay a deposit of £60m later this month, we’ll
swallow that within this year’s outlook, and despite this of course we’ll continue to retain our
guidance of around £2.3bn free cash flow for the year.
Then if you roll forward to July 2015 we have to make another payment of £90m, followed by five
equal instalments of £150m every six months from January 2016. So in spite of the launch costs
we still expect to grow EBITDA and free cash flow this year as we have guided previously.
Slide 12: So in summary slide 12, BT Sport’s performance gives the confidence that this is a
platform that we should be investing in. We think we can further expand the market for premium
sport and our outlook remains unchanged, and we believe that these rights will further grow both
top and bottom line for our consumer business, which of course is the key measure. So with that
I’ll open it up for questions. I’ve got Tony Chanmugam here with me and we’re happy to take
questions now. If you keep it to one question each please.
QUESTION AND ANSWER
Steve Malcolm - Arete
Good morning all, I’ll just go for one. I understand it’s only a couple of days since you secured the
rights and you probably haven’t all the finer details of your commercial plans sorted out yet, but it
seems you want to maintain a free headline BT Sport service and charge separately for access to
the European content. Is that right and if so can you give us an idea of any commercial
2
precedents that you have in mind that can help us with an opportunity, pay-per-view typically
hasn’t worked very well in exclusive football rights. Just some sense to allow us to model what you
would hope to get in terms of retail on the Champions League rights.
Gavin Patterson
You’re right Steve it is extremely early days to be giving too much detail in terms of what we are
planning to do with the proposition. I think it is fair to say that we will be maintaining the free
proposition for Premier League football and Premiership Rugby in England, but we will be looking
to create a second pay channel for a small amount, significantly less than the equivalent cost that
a customer would have to pay today, but a small amount that would cover access to all UEFA
rights. So as we said one or two of the games will be available free to air but the majority, in fact if
you want access to all of them it will be through a premium channel.
Steve Malcolm - Arete
Do you look at the ESPN model in the States which is a lot of customers at a relatively low
monthly subscription, is that the model you have in mind?
Gavin Patterson
It’s broadly along those lines, yes.
Tony Chanmugam
Can I just add something. We are very early on this and there are different models to
commercialise this. Gavin’s talked about a low subscription rate, and yet we can have a low
subscription rate coupled with for example a discount if you took top end BT services. There’s
plenty of optionality on this and nearer the time we’ll got into the detail, but it would be
commercially nonsensical for us to give you all the detail relating to our pricing now.
Steve Malcolm - Arete
It’s more a philosophical perspective on where you are. Thank you.
Andrew Lee - Goldman Sachs
Gavin I wonder if you could give us some more colour on how you see the UK triple-play
competitive environment being impacted by this, you didn’t really mention your competitors in the
presentation. Do you still see the same scope for price rationality or rises in the UK triple-play
market as a whole?
Gavin Patterson
Well in terms of how we see the market, we characterise it more by frankly customers getting
better value, so if you look at what’s happened in broadband and fibre generally we’ve provided
faster speeds for the same price, or in some cases we’ve brought prices down to make them
competitive. So overall I think you will see some prices may well go up but some prices will come
down. I think it is a value-driven marketplace in that respect and I think we need to be sensitive to
the economic conditions that our customers are feeling at the moment. Clearly we need to make
sure we get a return on this, however, and I think the impact we get across our broadband
customer base in terms of retention and attraction is key. We see the commercial revenues are
going to get much stronger on the back of this, advertising is a much stronger proposition in that
area, and of course the wholesale market, I think our business will be strengthened there. So
there are many different ways of monetising it, I wouldn’t necessarily see it all coming through in
price rises.
3
Andrew Lee - Goldman Sachs
Thanks Gavin, just as a follow-up, are wholesale deals part of your thinking in this?
Gavin Patterson
We’ve always been clear we’re a willing wholesaler. We’ve done a wholesale deal for three years,
starting this year with Virgin Media, and of course the UEFA rights overlap for one year with that
deal, and then we’ve also done a deal for the wholesale rights in the Republic of Ireland with
Setanta, which is another good deal. So we’re open to them, obviously this changes that equation
to some extent, but not at a philosophical level.
John Karidis - Oriel
Two questions but no follow-up, promise. Firstly can you help me understand which line in your
cash flow allows you to afford the £60m deposit this year without hitting the £2.3bn free cash flow
for guidance, and if it’s capex what we should infer from this for future years? And then secondly
you mentioned, Gavin again, churn today, and last month you said that well over a million BT
broadband customers re-contracted to get BT Sport, and just to better assess the significance of
this, what proportion of your consumer broadband customers usually are out of contract?
Gavin Patterson
I’ll ask Tony to talk about the cash flow question and then I’ll tackle the churn question in a
second.
Tony Chanmugam
In terms of the cash flow John, look it’s going to come from a number of lines, it’s not going to
come entirely from one line. There’ll be movements on working capital, there’ll be a little bit of
movement on EBITDA, there’ll be movement in capital, £60m is not a big number. I have high,
high confidence that we will deliver what we said we would do in relation to guidance. The followup in relation to that question was what’s going to happen with capital in future years and does
this change it. No it doesn’t change the guidance we’ve given on capital, it’ll stay exactly the same
in line with what we said previously, no change.
Gavin Patterson
And then on churn we haven’t given out the number of customers, or the percentage of customers
that are under contract. I’m not overly keen to do that now. I mean it’s clearly going to strengthen
our TV proposition and, as you saw in the slides, there are a number of customers who want to
watch football on TV who haven’t come to us yet, and we think this is going to be one of the areas
that might swing them across. So we think there are more customers we can secure on contracts,
and indeed this kicks in, in a couple of years’ time, so I think it will provide more momentum to us
as we come towards the end of this Premier League contract as well. So, we’re confident it will
strengthen the overall proposition and that churn will continue to improve on the back of it.
Nick Lyall - UBS
Can I just ask, £900m seems a heck of a lot more than the others are willing to pay Gavin, so
could you maybe flesh out on slide nine a little bit and just give us an idea what sort of market
share gains are possible here. Why is Champions League more attractive to these subs than
Premier League? And back on Andrew’s point, how do you pencil in something like a Sky
response when you’re thinking about bidding these sort of numbers? Cheers.
4
Gavin Patterson
Well in terms of the comment first of all that it’s a lot more than Sky were prepared to pay, that’s
the comment of somebody who’s just lost the rights. At the end of the day, we know they really
wanted these rights and they tried very, very hard to keep the bidding open. In terms of the
impact, look we’ve very happy with the start we’ve made on BT Sport, it’s only 13, 14 weeks old
now and it’s got a good customer base, we’re continuing to grow that customer base, both directly
and indirectly. We’re getting good viewership on the shows, but what we’ve been able to identify is
that actually if we could, as we have done, get the exclusive use of the Champions League and
Europa League, it really strengthens the schedule and it takes it from being a channel that
potentially there are some customers can say well actually do I really need to take this, to one that
actually will be a must-have channel for anybody who’s a really keen football fan, and particularly
those who follow the top clubs. If you’re as passionate about football as certainly I am and a
number of others are, if your club is in the Champions League you want to see all those games
full stop, and it’s not something you’re prepared to mess around with. So if you add that to
Premier League we think it’s a significant swing because it’s taking something out of the
alternative channel and putting it into ours in that respect, in football terms it’s a six pointer, and
you can see that in the research.
Nick Lyall - UBS
On the Sky response, as I say a bit like Andrew’s, but how do you legislate for something when
you’re bidding, because surely the most obvious thing for them to do if they want to respond is to
hit back at say fibre pricing or broadband prices when their base is far, far lower, but they can do
significant damage to your cash flow. So how do you think about when you’re putting your bids
together?
Gavin Patterson
We’ve got a financial model and we do factor in those sorts of impacts. It’s not as though we
haven’t been living with the competitive response for a while though, Nick, so for the last year Sky
have been offering free Sky Sports for a year, they’ve been offering significantly discounted
broadband, and over the last six months they’ve been pushing fibre. Now I don’t know whether
you can go any lower than free on broadband and Sky Sports, and I’m very happy if they continue
to push fibre because obviously that’s driving the fibre business model through Openreach. So we
have factored into the business model a response from Sky, we recognise that this is a body blow
to them, and they’ll want to respond, but we’re confident that we can defend it.
Tony Chanmugam
Can I add to that? Last quarter we got 93% market share, Sky were on 12 months free for copper,
six months free for fibre, that’s on broadband. You can’t really drop much more than that. We’re
having to cope with that right now. Just another point in terms of value for money. In terms of
Premier League the we’re paying £6.5m per game. In terms of what we’re paying here we’re
paying for the top British clubs, and we’ve got the top five clubs in these two competitions, plus
the winners of the League Cup and the FA Cup, it’s about £4.1m a game. So we’re paying
something like more than 30% less than the Premier League.
Carl Murdock Smith - JP Morgan Cazenove
Hi. Two questions please. Firstly looking at the chart on page eight on the interest in different
sports I suppose it highlights so far the barbell approach you’ve taken in targeting football and
rugby and then a range of more niche sports. I was just wondering are you happy with that
approach or might you broaden going forwards in targeting other things like men’s tennis or
athletics? And then secondly in any wholesale negotiations with Sky that might happen now,
regarding access rights, would it be purely a monetary discussion or are you much more
interested in trading access to content and channels. Thanks.
5
Gavin Patterson
In terms of rights first of all we’ve got a model that identifies which sports bring in the biggest
audiences, how we can incrementally add to the overall audiences of the channel by targeting
particular sports, and which sports are able to bring in different customer groups as well. So partly
it’s audience, partly it’s customer. And then you’ve got to factor in when rights deals become
available and you’ve got to piece it together a bit like a jigsaw. However, in all that model there’s
one thing you’ve got to bear in mind. There are only a couple of big rights deals that really move
the needle, and one is the Premier League and the other is the UEFA Champions League and
Europa Cup. Those are anchor deals to anybody’s schedule, and obviously they’re now both
secured. We’ll continue to look at other rights as they come up, it’s not I think immediately obvious
that we need to add anything more, but at the same time as rights become available we’ll look at
them and see whether or not they can provide value to the channel, value to the business and
strengthen our overall business plan, which as you know is to grow Consumer revenues and
EBITDA in the medium term. There was a second question, it’s completely slipped my memory.
Carl Murdock Smith - JP Morgan Cazenove
It was asking around in any wholesale negotiations with Sky now, would you be willing to accept
wholesaling your access to your channels purely on a monetary basis, or is it much more trading
of access. You know, if you want access to our channels on a wholesale basis we want full access
to all of your Sky channels.
Gavin Patterson
We’re open to all negotiations with Sky, so there are many different facets to the relationship,
clearly we are a big supplier to Sky on LLU and fibre, and they’re increasing their consumption of
fibre in particular, which we’re very pleased to be. We’d also like to be a bigger customer of Sky,
particularly along the sports channels as well. BT Sport plays into that mix. We have had
conversations in the past but there’s a big difference between the bid and the ask, so we’re open
to reopening those negotiations, but it’s also worth bearing in mind that these rights don’t change
hands for 18 months, so we’re not in any rush in that respect.
Simon Weeden - Citigroup
Apologies if you’ve tackled this already, I don’t think you have, but I wondered what proportion of
games typically of the 350, involve a UK participant? And my second question is more for the
CFO, if you look at the outgoings when do you think the time comes when you have to take the
golden chequebooks away from your colleagues for this type of content thing?
Gavin Patterson
I’m offended by the way your characterise that Simon! But I’ll answer the first one. Typically over
35 games feature a British side in the Champions League and over 30 in the Europa, but
obviously it does move around a little bit depending on how far the English and Scottish sides get
through the competition. Tony?
Tony Chanmugam
We do this because it makes financial sense. In each piece of content that we get we look at the
incremental games that we’ll get from that, so this is not about keeping a chequebook or taking a
chequebook. If it makes financial commercial sense we’ll do it, if it doesn’t we won’t do it.
Mandeep Singh - Redburn
Thanks for taking the question. I had a couple of quick questions. First of all the guidance that you
reiterated today, I know this call is about the sports rights, but would that also incorporate any
6
launch of mobile that you may spend money on? That’s the first question. The second question I
would like to ask is, other than Sky would you in the future be allowed to own 100% of Premier
League rights?
Gavin Patterson
Okay, on the first one in terms of mobile we’re just firming up our plans on mobile, so if we were to
do something dramatic in the mobile space we would potentially need to look at this, however I
think that is unlikely within the next couple of fiscals, but we would need to keep that option open if
we did something truly significant. In terms of owning 100% of Premier League, it’s probably a
question better directed to Richard Scudamore. Certainly in previous years the EU have stipulated
that no one company could own all the Premier League rights, but I think that clause has fallen
away. So it might be something that Richard would be better to comment on in terms of how they
intend to manage the rights going forwards.
Mandeep Singh - Redburn
Can I just follow-up then. If there was an opportunity to bid for 100% of Premier League, is that
something that would be of interest?
Gavin Patterson
I’m not going to be drawn on that. That auction’s certainly 18 months away I would say, so I think
that’s probably a question that’s best answered nearer the time.
Terence Tsui - Morgan Stanley
Yes good morning everyone, thanks very much. I’ve just got a follow-up on the Premier League
question. You said the Premier League and Champions League works well together, but yet
there’s only one year of overlap on the contract. Is it a must that you at least maintain their
existing Premier League package or do you think there’s actually a good opportunity to look to
acquire even more games than you currently show. Thank you.
Gavin Patterson
Well just to reiterate that is an auction that will take place in 18 months’ time, and we’re I think in
day a hundred and two of our channel, so being too public in terms of what our intention is within
the Premier League auction at this point would be I think inappropriate.
Maurice Patrick - Barclays
You reiterated your outlook for the March 16 year and for the periods, that’s growth in free cash
flow and EBITDA. Curious to your thoughts as to what extent that reiteration is an assumption of
revenues from selling the product, but also cost reduction, therefore supporting the investments.
The balance of revenues from it and cost. Thank you so much indeed.
Tony Chanmugam
Maurice, it’s a combination of the two. Our revenue position will get better with each year, we’ve
said that quite categorically, and in terms of scope for cost transformation we’ll take costs out this
year, we’ll take costs out next year and we’ll take costs out the year after. That’s why we remain
confident that we can maintain our financial guidance.
Robin Bienenstock - Bernstein Research
This still seems to be less about growing the TV market and more about gaining share of all
services, and you put out the 93%, notwithstanding competitive promotion in the last quarter, so
7
I’m just wondering how do you think about the regulator risk and the risk that they come back
sooner against you on fibre?
Gavin Patterson
Well we’re currently in a period of consultation and we’re hoping that, we’re expecting that Ofcom
will come back in the New Year and confirm their position for 2014 through to 2017, that’s the
period that we’re looking at. Certainly all the signals are within the consultation period, are that
they won’t and they’re not minded to, provide more regulation on fibre, and that is something that I
know the EU support as a position, indeed they would see that going out to 2020. So I think it’s
unlikely but it’s something we’re minded of. It is also worth noting that within the fibre market, just
to reiterate if it isn’t clear, I mean we sell on an open basis and indeed the other service providers,
apart from BT, are beginning to really get behind it, so within Q2 the retail market share was 61%,
so that retail adds were round about the same amount as they were in Q1, but other service
providers started selling a lot more fibre, so that reduced our market share. So that’s critical to the
way we’ve looked at fibre is to say it is an open business model rather than something that’s
purely expected to be driven through the BT brands.
Robin Bienenstock - Bernstein Research
Can I just follow-up, does that mean then that you think about this as being a window to get as
much market share as possible to 2017 because there’s a risk that there’ll be another round then
and that the world will look very different at that point?
Gavin Patterson
I wouldn’t characterise it quite that way. We see the benefit of fibre, it’s a good customer
proposition with better churn characteristics, better customer satisfaction, it really does meet an
unmet need for customers. It’s very competitively priced if you look at any benchmark across
Europe, and so we see it as an opportunity to really grow our business, so it started, and I
reiterate this, it started well as a business case, but this is a double-digit payback, and I think
we’re only in the year four, so we are going to drive the volume hard because the economics
improve because it’s predominantly a fixed investment. The economics improve with the number
of customers you get on there. So that’s the way we look at it. What happens in 2017 we need to
be prepared for, but at the same time if it eventually does become regulated we need to make
sure that we get a fair return for our investors, and they’re the ones that put down the £2.5bn that
we’ve committed already. I’ve got time for two more questions.
Jerry Dellis - Jefferies
Do you believe within your business model planning that you’re capable of getting consumer line
loss down to zero with the current rights that you now hold, or would you imagine that that would
require extending your content outside just the sports perimeter and perhaps into movies as well?
And then just a very quick follow-up if I may, just within the perimeter of keeping growing free
cash flow is there scope within that for a higher re-auction price associated with the Premier
League in 2015? Thank you.
Gavin Patterson
Well, you’ve seen the impact that sport has had on our line losses in Q2, where line losses were
down three-quarters year-on-year, so significant progress, but I think some of that will be a one-off
benefit we received at the start of launching the channel, so I think there’s some way to go before
we can get it to flat. I think that’s one of the things we see as being a key lever to drive with the
addition of the UEFA rights. We are focussed on sport at the moment, we’re not intending to go
beyond that. We can generally get access to good movies content for the pay-per-view window,
and indeed we’re open to retailing others in terms of other movie propositions on our platform, for
example the Sky Movies deal that we’ve just recently done, and we’re open to doing others along
8
the way, the likes of Netflix and LoveFilm for example. So movies don’t have the same impact in
terms of switching customers particularly as sport and football goes, and we can get access to it
through the wholesale and retail market.
On the auction, I’m not going to add to that to be perfectly honest. We recognise the importance
of Premier League to our proposition, just because we’ve won the UEFA rights doesn’t mean that
we’re necessarily changing our thinking with respect to the Premier League.
Wilton Fry - BAML
Hello there. You’ve paid billions of pounds into the pension scheme over the last few years, with
that now de-risked, you won’t need to continue paying in as much going forward. Conceptually
should we think about a small amount of that freed up cash flow being used for operational
purposes, so I guess you’d be able to de-lever whilst also growing a top line, is that how we
should think about BT going forward. Thanks.
Gavin Patterson
I’ll let Tony give the details of this, but just to introduce it. I think that we are about to about to go
into the triennial on the pension, I think that it would be premature to suggest that we would be
paying less into it at this stage, but obviously we want to make sure that it’s properly funded but
not excessively funded going forward. So Tony do you want to give any more specifics?
Tony Chanmugam
Yes, just generically on this. On the triennial in 2008 and over a three year time frame we spent
roughly speaking £2bn. On the 2011 triennial it would have been roughly speaking £3bn. My take
is the number will be whatever the number will be, but bear in mind it’s not a question about
freeing up more cash for the business, because we generate, when you think about it, we
generate £2.3bn of cash anyway, and what we choose to do with that cash is pension, it’s
shareholders, it’s investment in terms of the business, and it’s dividends, that’s not fundamentally
going to change because of anything we’ve done here.
Gavin Patterson
Okay we’re going to have to call time here. One or two of you didn’t manage to get your questions
in, but Damien and the IR team will follow up directly with you and no doubt I’ll be seeing several
of you over the next few weeks, or Tony or I will, so thank you very much for joining today and
enjoy the rest of the day.
9