01 Aug 2003

The bankruptcies may be mostly behind us, but the clean-up from the dot-bust is still in full swing.

In this kind of market the pack mentalitty reigns supreme, with the result that everyone is busy trying to consolidate. Even the strongest players are receiving calls from their competitors.

A typcial example is Yahoo! which has just spent $1.6bn for Overture, a paid search provider which takes money from advertisers in exchange for putting their information higher up the search results pages of portals like Yahoo! and MSN. Overture is no sick dotcom, but Yahoo! needs to add fuel to its balance sheet, and paid search is one area of the internet advertising space that is actually seeing real growth.

In the world of TV, consolidation is also the order of the day, as demonstrated by News Corp taking advantage of Vivendi Universal's travails to merge its Italian pay-TV business with Telepiù to make Sky Italia.

On a smaller scale, consolidation also continues apace in the interactive TV space. Recently Digital Interactive Television Group (DITG), the maker of iTV bingo channel Avago, bought Go Interact TV, an interactive television technology and services company that designed Sony's Go Play TV, which makes Jeopardy! and Wheel of Fortune into interactive games but was having trouble attracting new business.

One market which could now be ripe for this kind of consolidation is the UK multichannel business, where the business models of most of the niche channel companies have reached a critical stage. Sky's digital satellite platform has made it easy for new niche channels to launch for as little as £500,000, and numerous new players have thrown their hats into the ring.

The result is there are literally dozens of TV shopping channels, an equal number of religious channels and 40-plus specialist music channels.

There are channels for motor racing fans, science fiction junkies and Bollywood movie watchers. Reality TV offers back to back real-life cops, nurses, and firefighters doing their jobs, while The Games Network airs endless chat and demos of the latest video games. Txt Me TV lets you chat via SMS on screen and buy rings tones while Fashion TV is one endless catwalk. The adult section of the Sky EPG now runs to 16-plus channels.

In fact in the last year, 60 new channels have launched, according to research by Cable and Satellite Europe's sister publication New Media Markets; in the same period 15 shut down. Meanwhile, as many as 40 new channels are looking to launch by the end of 2003.

The economics are dicey because advertising money is hard to find for channels that barely, if at all, register on the Barb ratings scale and few channels have the advantage of scale economies. On the advertising side, Telewest's programming arm Flextech offers media buyers a group of channels that together achieve a higher Barb rating as a group than they do standalone. Sky does the same with its channels as do big media players like Viacom, which owns MTV, Nickelodeon and Paramount.

But more could be done for the little guys in this space. This, at least, is the conclusion of Len Fertig, a veteran TV executive who recently re-emerged on the scene with about £50m of backing from West Private Equity to buy stakes in niche UK channels. His targets are those weaker channels looking for the cost savings and greater revenue prospects offered from working in a group. Fertig is well-known as the founder of Central European Media Enterprises (CME), which bid for licences and put together a string of broadcast TV stations in former Soviet bloc countries in the early 1990s, led by Nova TV in the Czech Republic.

Fertig got out of CME just as it was beginning what would become a drawn-out legal case over the ownership of Nova TV. His new enterprise is called Constellation Media Group. Fertig says that if enough channels will agree to come under his umbrella, he believes he can make the numbers work better for everybody. The argument is compelling. And some channel operators are already looking for this kind of scale economy on their own, such as Sirius TV, which owns Txt Me TV and shopping channel TV Warehouse and manages classic music channel Performance.

But first Fertig has to convince the operators that being part of a roll-up of channels is what they want to do. It all depends on how they think they are performing on their own. As has been the case in the pay-TV platform business, private equity gets in when other ways just aren't working.

Given the soft advertising market and the continued fragmentation of the Sky TV dial, this may be sooner rather than later.