Sky profit warning over channels rowVirgin Media contract expires midnight Wednesday

27 February 2007

BSkyB has warned of a possible £20 million hit to profits if a row with Virgin Media leads to its basic channels being pulled from the cable network.

Virgin Media's contract to air Sky One, Two, Sky News and Sky Sports News ends at midnight on Wednesday unless the two sides can agree on a renewal price.

It estimated that, if an agreement was not reached in the remainder of its financial year to June 30, it could see a reduction of between £15 million and £20 million in operating profits.

This reflects lower carriage fees and weaker advertising revenues, but does not include the potential benefit of cable customers switching to Sky.

Virgin Media, rebranded from NTL earlier this month, claimed on Friday that Sky had doubled the price of its channels. Chief executive Steve Burch called Sky's behaviour 'heavy handed and anti-competitive'.

Increased investment

Sky said it had increased investment in its basic channels by 68 per cent over the last five years to around £200 million a year.

The company said it had shown flexibility on price and pointed out that it offered more to Virgin Media than before, including new channels such as Sky Three and Sky Arts.

Chief financial officer Jeremy Darroch said: 'Sky offered more channels to Virgin Media than ever before. We have invested in developing our channel offering and sought a fair price which reflects that fact.'

The row follows news earlier this month that Sky planned to withdraw channels from free-to-air digital terrestrial television platforms, such as Freeview - a move which is being closely looked at by the industry watchdog, Ofcom.

Sky is set to broadcast the channels - Sky Three, Sky News and Sky Sports News - on a terrestrial pay-TV service, set for launch in the summer.

Ofcom said it was looking into whether or not Sky's plans would "unacceptably diminish the appeal" of Freeview.

Commercial logic

A spokesman for Virgin Media said last night no talks were currently taking place ahead of the Wednesday night deadline, but this did not mean further discussions could not occur.

In a statement, it said: "We pay based on channels' popularity not how much has been spent on them: to pay double for channels that are losing viewers defies commercial logic.

"Sky, on the other hand, seem to think Virgin Media and its customers should compensate them for all the money they've spent trying to stem the decline in their basic channels."

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