Slides Session7 ProfBrahm

Francisco Brahm London Business School 1
STRATEGIC
INTERACTIONS
Session 7: BSB vs. Sky

Agenda
• Summary of previous session
• Case BSB vs Sky
1. Could have BSB anticipated Sky’s entry?
2. Could have BSB done something differently?
3. In October 1990, what should BSB/Sky do? Fight
or exit?
4. What happened?
• Game theory
• Closure
Agenda
• Case BSB vs Sky
or exit?
4. What happened?
• Game theory
• Closure
Overview of session 6
• Course: “conceptual map to guide diagnosis and
choices”
• Management matters! (it can be source of comp. adv.)
From the case:

• Technological innovation needs strategy to succeed!
1. Attention to business model choices
2. Dynamics are very important
• Learning and scale effects // Disruption dynamics // Long run
imitation
From the reading / framework,

• Best practices v/s strategic approach
A map for the course

Concepts for
Objectives Sources Frameworks / Tools
diagnosis and choice
Industry
attractiveness
Industry structure S2 5 Forces
8% yes
Focus on Strategic S3 - Generic strategies
Uniqueness? Positioning - Value curves
no
Profits Origin? Focus on no Business S4

new tech? Who-What-How
S1 model
no Management
yes
Productivity S6 practices
Competitive Focus on
Objective
advantage interactions? Innovation S6 Innovation map
of the firm
36% yes
Nash S7 Classic game
Focus on no equilibirium theory tools
changing
the game? yes - PARTS
Co-opetition S7
- Value-net
Corporate - Governance Corporate

- Resources S8 scope S8 - Discriminating
parent advantage alignment
14% - Expansion
Corporate structure S9 criterion
Luck and other
42% Social dilemma S10 Collective action
Social Externalities not no
impact internalized? Materiality S10 Materiality maps
yes
Seek profit 5
Agenda
• Case BSB vs Sky
or exit?
4. What happened?
• Game theory
• Closure
“We were not concerned about competitive

threats until Sky came along. Murdoch’s
announcement came from left field and took
everybody by surprise.”
Richard Brooke, Treasurer

Could have BSB anticipated?

Your quiz answers:
Could have BSB anticipated SKY’s entry?
No, it was very

hard to
anticipate
7% Yes, there
were clear
indications
21%
More or less,
there were
some
indications
72%
Which indications?
How to scan/understand other relevant players?

Michael Porter in the chapter 3 of his 1980 book proposed this framework to analyse players:
What is Sky doing (& is capable of doing)? What drives Sky?
1 Current strategy 3 Assumptions / Beliefs

- English speaking countries (UK, US, AUS) - Low cost operations
- Shifting from printed media to electronic (US) - Proven technology (US example)
- In electronic, satellite rather than cable - Commercial and “low brow” programming
- In the US and in Europe - Speed as a crucial element (Adelaide TV)
- In UK, only news papers but ITV stake - Using regulatory loopholes (Sydney)(Astra)
- In US, willingness to divest on news papers - UK TV market ready and in-need for
- Part of losing consortia on the DBS franchise “expansion / openness / novelty”
that BSB won
Will Sky enter
satellite TV in the
UK and how?
2 Resources and capabilities 4 Goals and motivations

- Large and strong media conglomerate - Global multi-media company
- Ownership of 20th Century Fox Library and - Non-pecuniary motivations
Fox broadcasting
- Experience with satellite TV in the US
- Political goodwill from Tories (important for
satellite TV)
Allocentrism:
Considering the world from the
perspective of others
Allocentric management:
Making strategic choices that anticipate
how others will behave, and how they
will react to your strategic choices
Lessons from the case

1. Be allocentric: scan and understand your rivals (current &
potential)
Agenda
• Case BSB vs Sky
or exit?
4. What happened?
• Game theory
• Closure
What game are BSB and Sky playing?

A game of a standard-setting race
Value to
Consumer
(the “B”)
Size of the installed base //

Numbers of customers
Could have BSB done something different to

reduce the threat of entry?
Could have BSB done something different to

reduce the threat of entry?
• Quicker launch date (no room to rivals)
• Consider a using the Astra satellite and PAL technology (even if they were
going for their own DMAC technology)
• Accelerate launch date of its own rockets
• Secure key assets/partners earlier (preemption)
• Locking-in films earlier
• Secure (and hold on to) sales channels (Amstrad)
• Partners with more TV programming experience
• Attract and secure customers earlier (establish the standard)
• More aggressive marketing early-on
• Pre-sell dishes at a discount
• Reduce cost base (better positioned to fight)
• Better cost discipline (redundancy in satellites needed? Marco Polo house?
• Expand to “low-brow” programming

1. Be allocentric, scan and understand your rivals (current &
potential)
2. Understand what is the game that is being played and act
accordingly
Agenda
• Case BSB vs Sky
3. In October 1990, what should BSB/Sky do?
Fight or exit?
4. What happened?
• Game theory
• Closure
First broadcast
https://www.youtube.com/watch?v=pmLIvX035fc
Sky takes a strong lead

What should BSB / Sky do? Fight or exit?

Your quiz answers:
• If Sky keeps competing/fighting, what should BSB do?

• Keep competing/fighting ………… 72%
• Exit the market …………………….. 28%
• If BSB keeps competing/fighting, what should Sky do?

• Keep competing/fighting ………… 82%
• Exit the market …………………….. 18%
Who is in a better position in Oct-90?

Who is in a better position in Oct-90?

• Sky is better. Relative to Sky, BSB:
• Is 8 yrs. (vs. 4 yrs.) away from breakeven
• Has 1/5th of Sky’s installed base
• Faces higher costs
• Is bleeding ££ more quickly
•BSB: Losing £6-7 m/week
•Sky: Losing £2.2 m/week
• Higher amounts invested in the start-up:
•BSB: £800m
•Sky: sunk £450m
Payoff Matrix
BSB
Fight Fight Exit
(£699 , - £185) (£2,943 ,- £180)
Sky
TV
(- £70 , £2,089)
Exit
For more information about the formulas used and the payoffs derived from these simplifying assumptions,
see Excel spreadsheets on Canvas
The Battle for British Satellite TV:

Payoff assumptions
• First number, Sky; second number, BSB
• Market projections in Exhibits 6 & 7 at face value (e.g., 80K new dishes
sold each month, etc.)
• Exit has a lag: player incurs losses through 1991. The other player
monopolizes thereafter.
• If both companies stay in, they are assumed to have equal market
share by 1993. In 1991 and 1992, market share estimates correspond
to Sky TV’s.
• Losses through 1990 are ignored (they are sunk!)
• Cash flows after 1999, if any, are treated as perpetuity without growth
(and discounted)
• Discount rate in calculating NPV is 10%
• Figures in millions of pounds. Inflation ignored.
BSB cash flow if both stay in the Market

BSB Cashflows:
Sky remains in market
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
Average Dish HH 1.89 2.85 3.81 4.77 5.73 6.69 7.65 8.61 9.57
Average Cable HH 0.80 1.00 1.30 1.80 2.30 2.70 3.10 3.50 3.90
BSB Market Share 0.30 0.40 0.50 0.50 0.50 0.50 0.50 0.50 0.50
BSB Dish HH 0.57 1.14 1.91 2.39 2.87 3.35 3.83 4.31 4.79
BSB Cable HH 0.24 0.40 0.65 0.90 1.15 1.35 1.55 1.75 1.95
Discount rate 10.00%
Revenues
Film [£120×65%×Dish HH] £44.23 £88.92 £148.59 £186.03 £223.47 £260.91 £298.35 £335.79 £373.23
Cable [£42×Cable HH] £10.08 £16.80 £27.30 £37.80 £48.30 £56.70 £65.10 £73.50 £81.90
Advertising [£20×(Total HH + SMATV)] £26.14 £40.80 £61.10 £75.70 £90.30 £103.90 £117.50 £131.10 £144.70
Total Revenue £80.45 £146.52 £236.99 £299.53 £362.07 £421.51 £480.95 £540.39 £599.83
Costs
Sub Mgmt [25%×Film Rev] £11.06 £22.23 £37.15 £46.51 £55.87 £65.23 £74.59 £83.95 £93.31
All Other £365.00 £365.00 £365.00 £365.00 £365.00 £365.00 £365.00 £365.00 £365.00
Total Costs £376.06 £387.23 £402.15 £411.51 £420.87 £430.23 £439.59 £448.95 £458.31
EBIT £295.61 £240.71 £165.16 £111.98 £58.80 £8.72 £41.36 £91.44 £141.52
EBIT×[1 – %Tax] £206.93 £168.50 £115.61 £78.38 £41.16 £6.10 £28.95 £64.01 £99.07
Depreciation £50.00 £50.00 £50.00 £50.00 £50.00 £50.00 £50.00 £50.00 £50.00
Working Capital [10%×Rev] £8.04 £14.65 £23.70 £29.95 £36.21 £42.15 £48.10 £54.04 £59.98
Capex £15.00 £15.00 £15.00 £15.00 £15.00 £15.00 £200.00 £15.00 £15.00
Cashflow £179.97 £148.15 £104.31 £73.34 £42.37 £13.25 £169.14 £44.97 £74.08
Discount factor 100.00% 90.91% 82.64% 75.13% 68.30% 62.09% 56.45% 51.32% 46.65%
Discounted Cashflow £179.97 £134.68 £86.21 £55.10 £28.94 £8.23 £95.48 £23.08 £34.56
Cumulative PV £179.97 £314.65 £400.86 £455.96 £484.89 £493.12 £588.60 £565.52 £530.96 £345.60
PV thru 1999 £530.96

Total NPV £185.36
BSB cash flow if it exits the Market

BSB Cashflows:
Sky remains in market
1989 1990 1991

Average Dish HH 1.89
Average Cable HH 0.80
BSB Market Share 0.30
BSB Dish HH 0.57
BSB Cable HH 0.24
Discount rate 10.00%
Revenues
Film [£120×65%×Dish HH] £44.23
Cable [£42×Cable HH] £10.08
Advertising [£20×(Total HH + SMATV)] £26.14
Total Revenue £80.45
Costs
Sub Mgmt [25%×Film Rev] £11.06
All Other £365.00
Total Costs £376.06
EBIT £295.61
EBIT×[1 – %Tax] £206.93
Depreciation £50.00
Working Capital [10%×Rev] £8.04
Capex £15.00
Cashflow £179.97
Discount factor 100.00%

Discounted Cashflow £179.97
Cumulative PV £179.97
Payoff Matrix: Likely outcome?

BSB
Fight Fight Exit
(£699 , - £185) (£2,943 ,- £180)
Sky
TV
(- £70 , £2,089)
Exit
For more information about the formulas used and the payoffs derived from these simplifying assumptions,
see Excel spreadsheets on Canvas


• We know that Sky has the upper hand in a war
• The Nash equilibrium says BSB exits, Sky stays alone

• But Nash equilibrium is not robust! … £5 M is enough
• Is an exit by BSB valuable to Sky? How much?
• The negotiation dynamics are not obvious:

• If BSB shows strength/patience  What happens?
• If BSB shows weakness  What happens?
Negotiate: Deal? Price?
Anthony Gooding Rupert Murdoch

Exercise
Classroom:
• Form groups of three students
• Match your group with another group
• Decide which group negotiates on behalf of Sky
• Decide which group negotiates on behalf of BSB
• Negotiate: 1) whether you do a deal, and if so, 2) its price
• You can stay here, go outside, and use any (legal) negotiating technique
• Designate one person (among the 6) to submit the outcome of the
negotiation to menti.com
• Go to menti.com and type 3202 9307, and answer the questions
• You will have 10 minutes max
Zoom:
• We will create break out rooms for you to negotiate.
• Also report to menti.com
Exercise Stream A Stream B
Stream C Stream D
Stream E Stream F
Exercise Stream A Stream B
Stream C Stream D
Stream E Stream F
The deal
• On November 2, 1990 a merger is announced
between Sky and BSB to form BSkyB
• Price? BSB got 50% shares of the merger entity

• Given that it is worth ~ £3,000 M (sky payoff when BSB
leaves), BSB got ~ £1,500 M
• This is 2/3 of the value created to Sky by BSB exiting!
• Management control was granted to Sky


In situations of strategic interactions:
1. Be allocentric, scan and understand your rivals (current &
potential)
2. Understand what is the game that is being played and act
accordingly
3. Use payoff matrices and the concept of Nash equilibrium
(and its robustness!) to assess strategic interactions
4. “Pay me not to compete” can be extremely valuable
Agenda
• Case BSB vs Sky
or exit?
4. What happened?
• Game theory
• Closure
Immediate years right after the merger

• Murdoch fired most of BSB workers
• Some of BSB programming was retained
• Cost cutting initiatives:
• Overhead costs cut by roughly half
• Programming costs cut by roughly half
• Renegotiate deals with Hollywood studios
• 1991 Joint BSkyB / BBC consortium wins rights to the
Premier League
• 1991 Disney pulled-out
• Drop of BSB technology: all dishes replaced by 1992 and
discontinues Marcopolo satellite
• 1992 BSkyB profitable for the first time
A successful business
Revenue Profit before tax

16 2
14 1.5
12 1
Billions (£)
Billions (£)
10 0.5
8
0
6 Price war with Canal+
4 -0.5 and 1.2 billion write-off
-1 of stake in KirchGroup
2
0 -1.5
1991
1994
1997
2000
2003
2006
2009
2012
2015
2018
1991
1994
1997
2000
2003
2006
2009
2012
2015
2018
• Nowadays, Sky has approximately ~24 million

subscribers worldwide, with half of it in the UK
Changing ownership
• Murdoch, via 21st Century Fox owned a
controlling 39% of the company in 2016.
• Murdoch via News Corp attempted to buy 100%
of shares in 2016 (but the phone hacking
scandal derailed it)
• After a biding war that included Disney –which
bought 21st century fox –, Comcast bought sky in
2018
• Before the acquisition, its market value was £19
billion in the FTSE
15 minutes break
Agenda
• Case BSB vs Sky
or exit?
4. What happened?
• Game theory
• Closure
How do you think game-theory can be

useful for strategy?
How do you think game-theory can be

useful for strategy?
1) Outmaneuver your rivals (given a game)

2) Change the game to create and capture
value
Game theory is a big topic…

Main concept
Simultaneous
games
Foresight Classical Nash equilibrium
game theory
Sequential
Structured Limited games
interactions foresight
Behavioral Steps/levels in
No game theory strategic thinking
foresight
Evolutionary Evolutionary stable

Unstructured
game theory strategies
interactions (and
foresight)
Cooperative - Added value

game theory - Co-opetition

Main concept
Simultaneous
games
game theory
Sequential
foresight

Unstructured
interactions (and
foresight)

John Nash
Nash Equilibrium
• Defines what strategic outcomes from a “game” are
stable
• Each player chooses a strategy that is “optimal” for that

player, given the strategy of all other players
• Stability means that no player would like to change their

strategy, given everyone else’s
• Usefulness? NE is a “prediction”: it allows to “lift the fog

of complex interactions” and “see the endgame”
Simultaneous game:
Nash equilibrium?
Competition on advertising:
Big budget Low budget

Big budget $2, $2 $4, $1
Low budget $1, $4 $3, $3
Sequential game: Market entry

• Imagine the following situation:
• An industry is dominated by an incumbent (INC), with 1.2 £ billions

of firm value (present value of future cash flows)
• An entrant (ENT) is considering entering the industry.
• ENT estimates:
• if INC “fights” after ENT enters,
the firm value of ENT is -0.8 £ billions; of INC is 0.5 £ billions
• if INC “doesn’t fight” after ENT enters,
the firm value of ENT is 0.5 £ billions; of INC is 1 £ billion.
• INC is displaying a “bravado attitude”, and thus ENT estimates that the
likelihood that INC fights is 80%.
• Should ENT enter the industry?
Sequential game: Nash equilibrium?

Payoffs:
(ENT ; INC)
Doesn’t 0 ; 1.2 What if this payoff
enter is much smaller?
Payoffs:
(ENT ; INC) Does it matter
ENT Doesn’t
0.5 ; 1 whether E can
Fight signal credibly to
“stay small”?
Enters
INC
Fights
-0.8 ; 0.5
The equilibrium can be a probability of doing “X”

The equilibrium can be a probability of doing “X”

Petrol discounts by retailers

Main concept
Simultaneous
games
game theory
Sequential
foresight

Unstructured
interactions (and
foresight)

Beauty contest
• We are going to play a simultaneous game:
• Choose a number between 0 and 100
• The average is calculated and then multiplied by 2/3
• Winner: The student that is closer to the average

multiplied by 2/3
Go to menti.com, type 3926 6306 and report your number

Beauty contest Stream B

Stream A
Stream C Stream D
Stream E Stream F

Main concept
Simultaneous
games
game theory
Sequential
foresight

Unstructured
interactions (and
foresight)

Complex behaviour in animals


Main concept
Simultaneous
games
game theory
Sequential
foresight

Unstructured
interactions (and
foresight)

Added Value
Added value of X =
Total value created when X is in the game

Minus
Total value created when X is NOT in the game
Added Value Proposition:

A firm cannot expect to capture more than its added value
Company’s value net
Source:
Brandenburger and Nalebuff, 1995 “The right game: Use game theory to shape strategy”, Harvard Business Review, July-August
Brandenburger and Nalebuff, 1996 “Co-opetition”, Crown Business Press
Brandenburger and Stuart, 1996. Value‐based business strategy. Journal of economics & management strategy, 5(1), 5-24.
PARTS Framework
• Players
• Added Values
• The Rules of the Game
• Tactics
• Scope
Source:
PARTS Framework
• Players
• Added Values
• Tactics
• Scope
Source:
https://www.youtube.
com/watch?v=W6Yi_
bTYby0
Photos: Dyxum, SCL, Priceline

PARTS Framework
• Players
• Added Values
• Tactics
• Scope
Source:
Grocery Stores & Brand Power

Grocery Stores & Brand Power

PARTS Framework
• Players
• Added Values
• Tactics
• Scope
Source:
Adjusting incentives over time…
• What do these examples have in common?

Rules of the game where today’s effort hurts you in the future
• Consequence?
Effort withholding, which can be quite large
PARTS Framework
• Players
• Added Values
• Tactics
• Scope
Source:
Changing Rules: Golden Balls
https://www.facebook.com/Britishumour/videos/woman-
wins-100k-with-sensational-
shthousery/1127818344236313/
Payoff Matrix:
Player 2
Split Steal
Split 50% , 50% 0%, 100%
Player 1
Steal 100%, 0% 0% , 0%
Changing Rules: Golden Balls
https://www.youtube.com/watch?v=S0qjK3TWZE8&list=
TLPQMDQxMTIwMTlTE0kU8pTAQg&index=2
PARTS Framework
• Players
• Added Values
• Tactics
• Scope
Source:
Making the future salient
Japanese automakers American automakers
VS
Making the future salient

Market share in the car industry
Connecting industries
Industries
Cement Ceramic Plumbing Gypsum
Tiles products products
Firm 1 45% 40%
Firm 2 30% 55% 55%
Firm 3 15%
Firm 4 10%
Firm 5 25%
Firm 6 20%
Firm 7 28%
Firm 8 32%
Firm 9 30%
Firm 10 15%
Total 100% 100% 100% 100%
Takeaways of the theory part
• Given a game, the idea of Nash equilibrium

allows you to “predict”, to see the “endgame”.
• Classic game theory tools are useful
• You can also change the game. To do so,

• Consider co-opetition dynamics: cooperation and
competition is possible with any player.
• Use the PARTS framework as a check list
Further reading
Agenda
• Summary and knowledge application
• Game theory and PARTS Framework
• Case BSB vs Sky
or exit?
4. What happened?
• Closure
Takeaways of today
• Interactions matter for Competitive Advantage,
specially when N is small.
• From the case,
• Be allocentric!
• Understand the game you are in! BSB: 1st, no… then, yes
• “Pay me not to compete” can be important
• From the theory part,
• Given a game, Nash equilibrium allows you to “predict”,
to see the “endgame”.
• You can also change the game. Use the idea of co-
opetition and the Value-net/PARTS frameworks
For the discussion board

Directly following from the Applying session topics Apply session topics
case to other contexts to your career
How do you think that the Tell us about a business Do you know what
strategic interactions and the situation that required savvy game are you playing
game would have changed if the game-theoretic thinking and so far in your career?
dishes were capable of manoeuvring, and how it
decoding both DMAC and PAL unfolded. … and more important,
signals?
These business situations Do you know which is
BSB did not went for PAL (and could come from: the game you want to
scrapped DMAC) at the end of - Working experience play moving forward?
1989 when they had a chance to - Business press
do that (engineers were - Books How are you going to
suggesting that to the CEO of - Movies, etc. play it?
BSB). Why?
Next week:
Corporate strategy (1 / 2)
Next week:
Corporate strategy (1 / 2)

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How could BSB have anticipated Sky's entry?

How could BSB have anticipated Sky's entry?

What should BSB/Sky have done in October 1990?

What should BSB/Sky have done in October 1990?

Francisco Brahm London Business School 1

Session 7: BSB vs. Sky

From the case:

From the reading / framework,

A map for the course

Profits Origin? Focus on no Business S4

Corporate - Governance Corporate

“We were not concerned about competitive

Richard Brooke, Treasurer

Could have BSB anticipated?

Could have BSB anticipated SKY’s entry?

No, it was very

How to scan/understand other relevant players?

What is Sky doing (& is capable of doing)? What drives Sky?

1 Current strategy 3 Assumptions / Beliefs

2 Resources and capabilities 4 Goals and motivations

Lessons from the case

What game are BSB and Sky playing?

Size of the installed base //

Could have BSB done something different to

Could have BSB done something different to

Lessons from the case

Sky takes a strong lead

What should BSB / Sky do? Fight or exit?

• If Sky keeps competing/fighting, what should BSB do?

• If BSB keeps competing/fighting, what should Sky do?

Who is in a better position in Oct-90?

Who is in a better position in Oct-90?

(£699 , - £185) (£2,943 ,- £180)

The Battle for British Satellite TV:

BSB cash flow if both stay in the Market

PV thru 1999 £530.96

BSB cash flow if it exits the Market

1989 1990 1991

Discount factor 100.00%

Payoff Matrix: Likely outcome?

(£699 , - £185) (£2,943 ,- £180)

Payoff Matrix: Likely outcome?

Payoff Matrix: Likely outcome?

• The Nash equilibrium says BSB exits, Sky stays alone

• Is an exit by BSB valuable to Sky? How much?

• The negotiation dynamics are not obvious:

Negotiate: Deal? Price?

Anthony Gooding Rupert Murdoch

Exercise Stream A Stream B

Exercise Stream A Stream B

• Price? BSB got 50% shares of the merger entity

• Management control was granted to Sky

Lessons from the case

Immediate years right after the merger

Revenue Profit before tax

• Nowadays, Sky has approximately ~24 million

How do you think game-theory can be

How do you think game-theory can be

1) Outmaneuver your rivals (given a game)

Game theory is a big topic…