BUMO 756, Section DC01

Student ID: 107061041

British Satellite Broadcasting versus Sky Television

With combined losses of nearly 10 million pounds a year, and two major players focused

on gaining market share, the strategic issue for both BSB and Sky is whether to compete or exit

the British satellite television industry. As firms will generally choose actions which can be

expected to maximize their payoffs, the payoffs of their strategic options become very important

to their decision in a competitive environment. In this case, the payoff objective for both

competitors is to maximize the net present value of future cash flows. To fully understand their

strategic options, a payoff matrix illustrating players and options in the television industry has

been created and is shown in Exhibit 1. From this payoff matrix, we can address the various

options and implications available to both Sky and BSB and the best strategy for each firm.

Based on the matrix, there are implications for BSB’s decision. Although BSB will get a

positive payoff with an ‘exit’ or a ‘compete’ decision, they do not make substantially more if

they choose to compete than if they exit the market (483m if ‘compete’ and 164m if ‘exit’.)

However, BSB decision would make a huge impact on Sky if Sky chooses to compete as their

payoff would decrease substantially from 2,443m pounds to just 714m pounds. BSB’s options

are somewhat flexible. See exhibits 2-6.

On the other hand, Sky options are less flexible than BSB. Sky stands to lose 56m pounds

if it chooses to exit, regardless of BSB decision. Therefore, the dominant strategy for Sky would

be to compete as payoff for a ‘compete’ decision is positive in both cases where BSB chooses to

compete or exit. The payoff drivers for both BSB and Sky are their cost structures. While

market share and revenues are even starting in 1993 and continuing thereafter, their BSB has

higher fixed costs than Sky.

 As firms will generally choose actions which can be expected to maximize their payoffs,

the upper right hand corner of the matrix would be the most likely outcome as both firms will

likely compete. This assumes that the financial information for both firms is transparent. Per the

matrix, if both firms compete, the payoffs are 714m for Sky and 483m for BSB.

The pros of this matrix are that is shows the likely actions of the other competitor

assuming that financial information are transparent and accurate. This helps in guiding not only

the choices of each firm, but also the gives each firm a chance to improve their competitive

positions. For instance, based on the payoff driver of the matrix, BSB could decide to take

actions that could improve their cost structure.

The cons of the matrix however, is that it over simplifies the options available to the two players.

Over time, this game could be linked to others thus it can be misleading to make decisions based

on the numbers in this matrix. For instance, a related game could be in the broader European

market or where situations there could impact each player’s decisions.

Another possible scenario for both firms, based on the payoff matrix analysis is a possible

merger between the two companies. An advantage of this merger would be allowing

compatibility of the PAL and DMAC dishes that could improve total sales. Since BSB stands in

a more flexible position to exit since its payoffs would be positive, it would be more likely to

accept to accept an offer from Sky. As Sky, I would offer BSB a forty percent share in the

merger. BSB should accept because of its weaker bargaining position. A lower share could lead

BSB to go ahead and compete since it still would make a positive payoff and a greater offered

share would not be ideal for Sky since have more to gain if a merger agreement is not reached.
Exhibit 1. BSB Vs SKY PAYOFF MATRIX. (Amount in millions of pounds)

BSB
Exit Compete
2,443 714

Compete

164 483

(56) (56)

Exit

164 1,527