BT has not had an easy ride with its TV business. Setting out with great aspirations nearly four years ago, the entertainment arm of BT is on its third CEO and a long way from its original, ambitious customer numbers.

But the fortunes of this once monopoly telephone giant in the entertainment world may be entering a new, brighter period. Certainly, BT Vision, under CEO Marc Watson, is pushing a positive, long-term strategy that is impressive both in terms of its funding and the detail.

BT has finally put TV at the forefront of its strategic plans. In March the company outlined a £150m investment plan for the next 12 months to support the entertainment service. After several years of tackling the technology and working on its customer-service proposition, BT says that the number of customers leaving BT Vision is falling appreciably – although the figures remain firmly under wraps.

“Our long-term strategic view is we need to be in TV and we need a successful TV offering as part of our consumer bundle of products and services,” explains Watson, who also runs BT.com.

“It’s very hard to be competitive in pay-TV without premium sports. We’ve now got to a point in time which is a good starting point and from which we think we can grow the business.”

The good news for Watson is that the premium sports he mentioned have been made available for the first time. He sees the addition of Sky Sports 1 and 2 as keys to ramping up growth. According to Enders Analysis, 30% of customers leave BT because they cannot get Sky Sports.

“Sky Sports allows us to acquire customers we wouldn’t otherwise acquire and to retain customers we might not otherwise retain,” says Watson.

BT also has high hopes for the success of the recently approved Project Canvas, which aims to add on-demand content, catch-up TV and interactive services to traditional Freeview channels. The hope is that by the first half of 2011 the inclusion of Canvas will make BT Vision more attractive to potential and current customers.

“The opportunity in Canvas is to establish a brand in the marketplace quite quickly that has got resonance, and to really make this the new Freeview,” says Watson. “Freeview has been successful but it is now mature. Canvas is the next-generation platform.”

Watson, who took over as CEO of BT’s TV and dotcom businesses in June 2009, is not known for sugar-coating the enormous challenge of making BT a credible TV player. “You don’t click your fingers and get a big-scale, profitable TV business overnight,” he says. “It doesn’t work like that. It takes time and commitment and tenacity.”

Watson will need all the determination he can muster to take BT Vision into the entertainment big league. At the end of March the number of BT Vision subscribers had more than doubled over the previous year to 467,000, up from 214,000 in March 2009. But this is a long way short of the 3 million customers forecast by executives before the service launched in December 2006.

“There is a Chinese expression that every journey starts with a single step, and in many ways the past three years have been a single step,” admits Watson. “We are now right at the beginning of quite a long but quite an exciting journey.”

The fight to convince UK regulators to intervene over Sky’s wholesale pricing of its premium channels has been fierce and protracted. And with more legal appeals to come, it is not over yet.

Indeed, even as BT Vision launched its £30m advertising campaign, trumpeting the addition of the Sky Sports channels for as much as a £10 discount to the satellite broadcaster’s prices, Sky was revealing plans to increase the price of the flagship sports channels to its own subscribers.

This may seem counterintuitive, but an annual rise for Sky’s customers is not unusual, and the £3 hike planned for 1 September will likely be easily absorbed by Sky Sport enthusiasts. Crucially, the wholesale price it must offer to competitors such as BT is linked to the retail price. Therefore, the Sky price increase will also raise how much BT must pay Sky for its sports channels.

The move was vintage Sky, and not against any rules, but Watson admits that BT was caught on its back foot. “Sky usually increases its prices most years but this was quite a significant rise,” admits Watson. “We weren’t expecting a rise of that magnitude.”

According to Enders Analysis, the new Sky prices mean that BT could lose even more than it planned – up to £9 a month – on each subscriber.

Watson rejects Enders’ figures. To be fair, Enders admits that it is difficult to parse out the TV numbers from the overall bundle of BT services customers pay for. “We take a long-term view,” Watson says. “We sell a lot of stuff to the customer. They take broadband from us and telephony from us and TV from us, and over the right period of time that customer is profitable.”

What Enders and Watson agree on is that Sky’s retail price hike will increase the cost to BT of offering the two Sky Sports channels – and could mean that BT will have to raise its own prices to customers.

“No one guarantees prices forever but obviously customers who sign up for these prices (for the Sky Sports channels) will get them for the foreseeable future,” says Watson. “But bear in mind that we are in a legal case around pricing.”

That case will come to the Competition Appeal Tribunal (CAT) in 2011.

BT Vision also plans to challenge Ofcom’s regulated wholesale price structure as well. “We think that the wholesale pricing is too high,” says Watson.

Given the amount of legal and regulatory wrangling that is part and parcel of making BT Vision a success, Watson’s background as a barrister is an asset. As the former head of legal and business affairs for Channel 5’s new owner, Richard Desmond’s Northern & Shell, he is no stranger to the media business. Watson has also worked in sports-rights negotiations at the Football League and the Scottish Premier League.

Over the next few years, BT Vision will continue to seek customers who want a triple play of phone, TV and broadband, but the company will be playing catch-up with Sky and Virgin for a while yet. And there are other hurdles, too: Canvas is not a guaranteed success, and BT’s HD channels are still about a year away.

Watson believes that BT can crack the entertainment market and that BT Vision can grow to be a significant business with customers counted in the millions. But he is understandably cautious about setting targets.

He adds: “The internet is here to stay and customers have a lot of choice about where and how they access services. Our view is we should enable that,” says Watson. “If a customer wants to buy a movie from LoveFilm, as opposed to BT Vision, I don’t think it’s for me to say no. It’s for me to find a business model to allow that customer to access that product… This reflects the way the market is developing. We’re going with the tide.”

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