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.

Another possible scenario for both firms. but also the gives each firm a chance to improve their competitive positions. . based on the payoff matrix analysis is a possible merger between the two companies. BSB should accept because of its weaker bargaining position. The cons of the matrix however. For instance.As firms will generally choose actions which can be expected to maximize their payoffs. the payoffs are 714m for Sky and 483m for BSB. Since BSB stands in a more flexible position to exit since its payoffs would be positive. An advantage of this merger would be allowing compatibility of the PAL and DMAC dishes that could improve total sales. Over time. For instance. based on the payoff driver of the matrix. This assumes that the financial information for both firms is transparent. is that it over simplifies the options available to the two players. a related game could be in the broader European market or where situations there could impact each player’s decisions. BSB could decide to take actions that could improve their cost structure. This helps in guiding not only the choices of each firm. it would be more likely to accept to accept an offer from Sky. I would offer BSB a forty percent share in the merger. 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. this game could be linked to others thus it can be misleading to make decisions based on the numbers in this matrix. As Sky. The pros of this matrix are that is shows the likely actions of the other competitor assuming that financial information are transparent and accurate. if both firms compete. Per the matrix. the upper right hand corner of the matrix would be the most likely outcome as both firms will likely compete.

443 Compete 714 Compete 164 (56) (56) 483 Exit 164 1. (Amount in millions of pounds) BSB Exit 2.527 . BSB Vs SKY PAYOFF MATRIX.Exhibit 1.

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