Jul 2001

(Note: written ahead of the July 5 news announcement that Stream and Vivendi are to merge)

The Italian pay TV scene is on the verge of change, again. Or is it? Like Italian politics it's the same players, only different. The much-anticipated merger of the two loss-making pay TV platforms, Stream and Tele-piu, will put Vivendi Universal and News Corp together as partners in one of the most troublesome of European TV markets.

The marriage, which includes divorcing the current Stream partner Telecom Italia, could flounder on a number of points: what is the buy-out figure for TI's 50 per cent of Stream? Which brand and operating philosophy - Tele-piu, read Canal Plus, or Stream, read News Corp - will win out in a merger of the two pay platforms? How will the lynchpin programming of live soccer be re-negotiated when the current rights deals expire next summer?

It should be cheaper because there will be one less pay-TV player, but that's not a guarantee. Remember that when Rupert Murdoch tried to buy 100 per cent of Italian soccer rights the first time around the government blocked it limiting each platform to a maximum of 60 per cent of the live games. In the end, Stream secured the rights to seven first division teams and Tele-piu to 11 teams out of the total 18.

With 700,000 subscribers, Stream is the minnow against Tele-piu, which counts more than double the subscribers at 1.8 million. Stream's losses for 2000, at E200 million, were double those at Tele-piu and Stream's breakeven, without a merger, is set for 2003. Despite this, Stream has launched some pioneering interactive services, and its new sub growth has been healthier than its erstwhile rival - at about 1,300 new gross subs a month (Stream has about 12 per cent average churn, close to Sky's 10 per cent churn in the UK). From having just 10 per cent of the pay TV market in mid-1999, Stream now has 35 per cent.

The planned download of simulcrypt software to both Stream and Tele-piu boxes in August could also spur increased take-up for both platforms. The hard-won agreement, means that the pay TV channels of each will be available to both platforms, reducing at least somewhat customer confusion over which service to buy. Crucially the soccer season ticket offers of each will be available to both sub bases without buying an entire second service or set-top box. However, the simulcrypt software will not allow subscribers to order either the PPV offers or the interactive offers, nor see the on-screen programme guides of each other's service.

Telepiu has traditionally pushed more TV-based content, while Stream, which began as a cable TV company before moving to a less-capital intensive satellite distribution model in early 1999, has focused increasingly on interactive services. These include home banking, home shopping and 'community gaming' where teams of players compete in a Fantasy League socce game. Five thousand fantasy teams teams were created in the first week of the project (April 2001) and by the beginning of June there were 15, 000 teams; Stream now plans to allow bar owners to put up fantasy teams starting in August. The teams 'buy' and 'sell' players and play other teams of accumulate points using the Stream set top box and phone line return path. Stream's TV email, launched in December, now counts about 2,000 mails a day.

"The business model for us is TCP/IP protocol because we think that interactivity is the way to sell something more," says Antonello Pistis, technical and new media director of Stream. About 75 per cent of Stream's subs are connected with a telephone line and 50 per cent are using interactive services on a regular basis.

Further distancing itself from its current parent TI, Stream recently began a trial in Milan with Italian broadband provider e-biscom using ADSL on phone lines. A 10 to 12-channel Stream service is being bundled with e-biscom's FastWeb 'web-DVD package' of services, which offer an IP telephone connection, multichannel television, VOD, a built-in DVD player and web access via a 10Mbps ethernet connection. TI could launch its own DSL service but given the bigger corporate issues it is probably safe to take CEO Robert Colaninno at his word when he recently said that the pay TV sector is "non-strategic."

So it comes down to the kind of deal that Murdoch and V-U CEO Jean-Marie Messier can do with each other and with Telecom Italia. For Murdoch Italian pay TV is an important leg in his global satellite TV vision. For Messier the focus at Canal Plus is to cut the red ink and quick. So the incentive is there. But remember that this is the same Messier whose lightening strike accumulation of a 25 per cent stake in BSkyB (and a seat on the board) caused Murdoch to not talk to the wily Frenchman for nearly a year.