Setanta looks to backers for extra time

For a while, it looked as if Setanta Sports might be able to break Sky's stranglehold over British football. But now it is struggling to stay in the big league. Nick Clark reports

Setanta moved another step closer to the brink last night after losing the rights to show Scottish football next season, just as the Premier League south of the border was awarding its former contract to the US-backed broadcaster ESPN. (GETTY IMAGES)

The football season had started out so well for Setanta Sports. It had broken Sky's stranglehold on Premier League football in the national conscience, had renegotiated exclusive rights to the Scottish Premier League, and even snared England's international matches.

As managers Phil Scolari and Roy Keane know, a season is a long time for the beautiful game, and Setanta now faces an uncertain future and an urgent need for investment.

The latest cracks at the Irish broadcaster emerged this week as it is understood to have missed a scheduled £3m payment to the Scottish Premier League (SPL). Setanta declined to comment.

Winning the SPL rights marked a step change for the business in 2004, breaking the shackles of its Irish home market and setting it up for the biggest prize: the Premier League.

The seeds of Setanta were sown in a pub in Ealing in 1990. The founders, Mickey O'Rourke and Leonard Ryan, bought the rights to Ireland's World Cup game against Holland and screened, charging punters £5 entry. Setanta Sports was founded two years later, but really made waves in the UK two years after it won the Scottish rights. It secured the rights to two packages out of the six for the Premier League, with Sky picking up the other four. The following publicity campaign with Des Lynam and two seasons of Premier League action and the broadcaster is no longer referred to, as the adverts pointed out, as "sultana".

As the recession has hit, the company has stumbled. The group's SPL contract was due to expire at the end of next season, but extended earlier this year. After missing the payment, the future of the contract is under threat. PricewaterhouseCoopers is set to publish a report into Scottish Football next week saying "the SPL member clubs hoped to benefit from an extended four-year contract with Setanta worth £125m". If the channel goes under, this payment will vanish. Even if the group is rescued, the sum is expected to drop significantly, hitting the clubs.

David Glenn, Scottish football partner at PwC, said: "Its problem has been to rely on the subscription from the Scottish fan base, it was never going to be sufficient. Losing Premier League games was also going to hit the wider subscriptions."

The shattering blow came in February. The group, the first to break Sky's dominance of Premier League games, lost one of its two packages for the start of the 2010/11 season, "exposing it to the possibility of mass subscription defection," Toby Syfret of Enders Analysis said. The move did reduce its payment to the Premier League from £131m a year to £53m, but leaves it with just 23 matches. Rivals said a "bad judgement call" of slashing its offer by 20 per cent allowed Sky to grab hold of the package. Others said it had to cut the price "to rebalance the books".

The numbers do not look good for Setanta. It is currently running at annual losses of about £100m, and has weeks, rather than months, to attract necessary investment to continue or face closure, according to analysts. Enders Analysis said in a recent report: "Setanta is fighting for its life and the next four weeks will be critical towards determining whether it survives or goes bust."

The clock is ticking as the group's backers, including the private equity group Doughty Hanson and Goldman Sachs, have put in £450m and must decide whether to invest more.

The UK operation now accounts for about 75 per cent of the company's total budget and 85 per cent of its losses, according to Enders.

It has attracted about 1.2 million direct subscribers. The problem for the group is that the estimated break-even level is 1.9 million. Mr Syfret said: "The earlier management overestimated the audience they could bring in, and possibly overpaid for rights. They thought they could crack the 2 million mark and break even would be lower."

Setanta has been hit by the slump in advertising markets. It is also in its early stages and the nature of the business is for much of the costs to come upfront. Should Setanta collapse, the final Premier League package and the SPL would have to be put on the block once more. Broadcasters including the Disney-owned ESPN could be tempted to bid. It is understood that the Football Association is confident over the England games and the FA Cup as the broadcaster has paid much upfront, as with the Scottish rights. The group is in negotiations to lower its rights payments, which total £250m in the UK.

One expert said: "Setanta would have to pay a fair proportion up front. That will affect the business, as they are spending before they could earn any cash."

Setanta has been proactive. It called in Sir Robin Miller, a former Emap chief executive, to front a fundraising drive and draw up a new business model. The investors are waiting to see the shape of the plan before opening their wallets. "The challenge is to devise a business plan that offers the realistic prospect of viability inside the next couple of years," Mr Syfret said.

Simply, as the economic downturn has rumbled on, Setanta has proved more vulnerable to recessionary pressures than its main competitor, Sky. While Sky has become almost core sports television, Setanta, which also has an easy-to-cancel month-by-month plan, has not.

One insider at a rival group said: "The investors need to put their hands in their pockets to save it now. The group has overpaid for some rights and has made some bad decisions in recent years."

BSkyB: £1bn a year buys dominance

While Setanta's problems are set to come to head in the next few weeks, BSkyB, its direct rival for the Premier League packages, is in rude health.

The group, which is 39 per cent owned by Rupert Murdoch's News Corporation, revealed last month that profits were up 13 per cent in the first quarter over the first quarter of 2008.

The advent of its High Definition service helped to lift profits, but to prove that sport remains its bread and butter, the highest viewing figures for an HD programme were for a football match.

Sky's dominance has come from its focus on sport since its launch and it has continued to invest heavily in a range of sporting events. It currently spends £1bn a year, half of which is used to secure the majority of rights to the English Premier League.

One industry insider said: "Sky started by taking a punt on sport. The initial Premier League investment was massive and nearly took it to the wall, but it looks like the right call now."

As the broadcaster remains remarkably resilient to the downturn, one black cloud looms on the horizon. Ofcom, the media regulator, is investigating the pay-TV market and is due to report this summer.

Toby Syfret of Enders Analysis said Setanta's financial situation "could strengthen the regulator's perception that competition against Sky in sports and films is extremely difficult and probably impossible". He said Ofcom and the European Union would be concerned about the existing rules in the UK – "no company has ever found a way of competing successfully in pay sports outside of the US market".

The former FA executive director David Davies is also reviewing the Listed Events which guarantees that certain sports events are broadcast on terrestrial television, such as the Olympics, Wimbledon and the football World Cup. Mr Davies is expected to report later this year in a judgement that could affect Sky's output.