Setanta football gamble turns into spectacular own-goal.
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Setanta have failed to attract enough customers to justify their huge outlay on securing the rights to broadcast a number of Premier League games over the course of the past two seasons and the forthcoming one. Their experience allows us to consider concepts such as break-even analysis, income elasticity of demand and the impact of the recession.
bbc.co.uk today reports a cable TV company on the brink. Setanta needs to pay the Premier League the next GBP30m instalment of their football rights deal worth GBP392m for 46 matches per season between 2006-2009 or risk going out of business. The broadcaster has also already failed to deposit 3m with the Scottish Premier League for a similar, if lower value, agreement. So why has Setanta fallen into this difficulty? Well, their business model is based on securing exclusive rights for sporting events and then selling them in ‘bundles’ to Sports fans for an annual fee.
Whilst many have been quick to blame the abysmal punditry of Steve McManaman for the channel’s troubles, a simple break-even model can illustrate what has gone wrong. To make the sporting rights contracts pay they need to attract enough subscriptions and advertising revenue to cover their outlay which is reported to be in the region of GBP300m per year. Their costs, on the whole, will be fixed since the marginal cost to Setanta of adding a new customer to the network can be assumed to be negligible. On average, a subscription to their sports package costs GBP12.99 per month or GBP156 per year. Using the contribution method to calculate the break-even number of subscribers suggests almost 2 million subscribers are required. Although this figure is dwarfed by the 8million active customers SKY attracts, it is a very ambitious figure for a package aimed solely at the sports viewers market segment.
Setanta has only been able to amass 1.2 million subscribers despite various sales promotions designed to boost their market share. this is only 60% of the number required to break-even and has left the company haemorrhaging GBP100m per year. It’s failure to build the required subscriber base can be attributed to a number of factors. It has shared the rights to EPL matches with SKY and there is widespread feeling that Setanta has only managed to acquire rights to matches involving the ‘weaker’ teams and not the ‘box office’ sides such as Manchester United, Chelsea and Aston Villa.
Setanta must now hope to stay in business by conducting an auction of some of the TV rights packages in it’s portfolio to bring in some much needed revenue. However, evidence suggests that the income elasticity of demand for pay-TV services is more elastic than had been thought. As consumers look to tighten their belts during a recession that is biting increasingly hard, packages like those offered by Setanta are seen as luxuries and are an easy sacrifice for people to make. The broadcaster’s bargaining position is weakened considerably by the downturn making it unlikely that would-be suitors such as ESPN will bid an amount that will buy Setanta much needed breathing space.
It looks unlikely that this one will go to extra time. The plucky underdogs from Ireland haven’t managed to upset the form book and get one over on their more experienced opponents, SKY.
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