Oct 2002

Among the stock-price challenged and debt-laden companies littering today's media scene, News Corp's recent successes in Italy and the US satellite markets, put owner Rupert Murdoch a step ahead.

In the case of Italy, Murdoch had to play a waiting game, but patience paid off in September with a fire-sale price for pay TV platform Telepiu of 893 million Euros, including debt, or less than two-thirds the original price tag that was being discussed in June. But the deal only gets better for Murdoch.

Not only was the wily Australian able to exact a cut price from Telepius beleaguered owner Vivendi Universal, which is struggling to reduce its debt and focus its business, but he also inherits one of pay TVs biggest drivers, live sports. As part of the Telepiu deal, Murdoch receives 370 million Euros of pre-paid football rights, lasting until the end of the 2003-2004 season. In addition, under Italian rules, Murdoch must sell two terrestrial TV licences owned by Telepiu, worth an estimated 200 million to 300 million Euros, which will add cash to the loss-making Italian venture. Another side effect of the deal is that the potentially costly anti-piracy lawsuit against News Corp's software subsidiary NDS has been dropped by former Vivendi subsidiary CanalPlus Technologies.

Putting Telepiu together with Stream, the countrys number two pay TV operator owned 50:50 by News Corp. and Telecom Italia, will create the newly-dubbed Sky Italia with some 2.2 million subscribers. With no cable in Italy to speak of, the merged platform will be the only pay TV player in town. Maybe thats why Murdoch had such a Cheshire grin recently when he spoke about the deal in New York to stock analysts. Murdoch believes that he can grow Sky Italia's sub-base to 3.5 million by 2006, because Italy is a "wealthy and untapped market". He also forecast E1.7 million in sales for the combined platform in 2003. Both Stream and Telepiu lose money (and will for some time) but Murdoch says that this is because the market has been fragmented and signal piracy has been rampant. The first problem will be addressed by merging the pay nets and the recent launch of the new Canal Plus conditional access cards with a better encryption should solve the latter problem, and has already made an impact.

In the US, Murdoch's dream of being a player in the satellite pay TV business came back into focus last month when the Federal Communications Commission blocked Echostar's bid to merge with rival Hughes' DirecTV service on anti-consumer grounds. Murdoch is the most credible bidder for DirecTV and with 3 billion Euros of cash on its balance sheet, Murdoch also has the economic ammunition. Probably the easiest way for Murdoch to get control of DirecTV would be to buy General Motors' 30 per cent stake in Hughes Electronics, for an estimated 4 billion Euros. Under US rules Murdoch can't begin formal discussion with GM until after Jan 21, 2003.

Murdoch has long held ambitions in continental Europe as a way to extend the successful BSkyB pay TV formula, but he is not always a welcome media player by local governments concerned about media quality and protecting local company champions. This is important to remember because although Murdochs now in kingpin position in Italy's pay TV market, he still has to contend with the other Italian media mogul Silvio Berlusconi. As Italy's Prime Minister as well as head of its biggest media conglomerate Mediaset, Berlusconi will always be one step ahead. For example, if Berlusconi, the media owner, decides to favour his three Mediaset owned national terrrestrial TV channels over Murdochs pay platform, he can. If Berlusconi, the PM who has the power to appoint the heads of Italy's state-owned RAI channels, wants to add more 'free' live sports there, he could. Just because Murdoch owns the live soccer rights today, doesn't mean he will after next season.

Murdoch's fortunes in Italy have been fortified with the latest deal, but this is only phase one of making the Italian version of BSkyB pay off.