Kate Bulkley, Media Analyst.

Love, honour and make profit

By Kate Bulkley

Broadcast News

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For Broadcast May 05, 2011

The road to a happy TV union rarely runs smooth, says Kate Bulkley

The word of the moment is marriage, and while marriages can be expensive, they often make good business sense. The marriage of Prince William to Kate Middleton, watched by at least 26 million people on UK TV channels alone, cost around £30m, but should benefit the British exchequer many times over through increased tourism.

But not all business marriages are as straightforward. YouView feels like a marriage of convenience in which the joint venture partners (who are not usually friends) have banded together because they need each other.

Tesco’s acquisition of Blinkbox last month was more of a marriage of love. Tesco liked the idea of owning the technology behind a video rental company, while Blinkbox needed the scale of a national retailing giant to make its brand a real player.

News Corp’s proposal to buy BSkyB is a marriage for money – it wants the pay-TV giant’s growing cash flow pile. Sky’s adjusted free cash flow was up 60% to £615m in the last quarter and may top £1bn for the full year.

And then there are marriages for power. Virgin Media has been eager to sell its 50% stake in UKTV for some time, and for months, the likeliest buyer has been Scripps Networks, owner of The Food Network. It wants a bigger foothold in the UK and a larger arsenal for a worldwide rollout. And who wouldn’t want access to all that lovely BBC programming?

But while Wills and the ex-Ms Middleton look happy enough, these other partnerships feel like they need a little marriage counselling.

The problem with YouView is the delayed launch. If it’s too little, too late and YouView doesn’t build up critical mass (and I mean users in the millions), then the partners will really question the basis of their relationship. Tesco and Blinkbox are in the honeymoon period, and while it’s questionable if Blinkbox could have made it as a standalone player (even with a tonne more investment), this new twosome should be taken seriously as a couple. But they will have serious competition in the shape of LoveFilm (backed by Amazon) and Netflix, which posted $60m (£36.4m) profits last quarter and has nearly 24 million paying subscribers (nearly outpacing US pay service HBO). It intends to come to Europe soon.

The odds are that if consent is given by the DCMS godfather (aka Jeremy Hunt), News Corp will pony up what it takes to get Sky. But it will likely have to find a better offer before the two partners walk down the aisle. Mr Murdoch offered 700p per share last June, but one Credit Suisse analyst expects a 870p price, which would be 11 times 2011’s EBITDA forecast and a premium of four times over the value of other European pay-TV businesses.

Finally, the link-up between UKTV and Scripps has been delayed by a simple dowry issue: the value of the 10-year ad sales contract with Channel 4 signed last July.

The still volatile UK TV ad sales environment and the lack of an historical track record of how much money C4 will be able to bring in makes a valuation by the beancounters at Scripps difficult. If this goes on much longer, another suitor could step in – say, NBC Universal. Sometimes it’s best to take a leap while you can, even if the numbers aren’t as certain as you might like. Otherwise a girl might start casting her eyes elsewhere.

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