A Piece of Sky Falls In – Chicken Little On Alert At Virgin 1

01Feb08

While many industries are subject to free market economies, global merger and acquisition; the TV industry is a little different. While the industry is perhaps more protected than some, many TV companies and programme producers are struggling to revise their business models. The way things were done for over 40 years may not be the way channels and producers make money in the coming decade.

Stations and programme producers have to adapt to cope with globalisation, viewer preferences, the illegal sharing of programmes and mixed audience viewing results. Particularly where the viewing of programming simply isn’t being reported appropriately. A programme may no longer be measured by a TV schedule and the next day’s reported BARB ratings alone.

The industry is also still, from my point of view, very local in its thinking and action. The idea of a global and digital audience is only slowly being responded to. Subscription, preferential viewing opportunities and streaming content over mobile and PC devices appears to be only slowly edging forward. I beleive consumers will pay more of what they want, where and when they want it. But of course this isn’t necessarily easy to facilitate or earn revenue from for TV channels. Particularly if you restrict yourself to a being a domestic market supplier, rather than regional or global.

While governments understandably wish to avoid broadcast monopolies. Fair competition and the ability for businesses that do work well to set-up, grow and acquire other businesses within broadcast and print sometimes appears very restricted; at least in the U.K. media market.

Below is a recent article from Management Week regarding John Hutton, the British Secretary of State for Business and Enterprise and his decision to force BSkyB to sell half of its stake in ITV.

I’m sure Virgin Media’s initial reaction will be delight, as the forced sale of ITV shares will cost BskyB considerably; following the significant decline in ITV’s share price in recent months. But the longer term implication that Sky won’t have a controlling infuence over ITV means Sky’s interests will be focused and developed elsewhere and with vigour.

Virgin were forced into a very costly competitive battle over both the ITV share-buying issue and the pricing wrangle over Sky One. This resulted (or moved forward) the launch of Virgin 1 on the Virgin Media digital TV service. Virgin committed a huge investment in both launching its own digital channel and advertising their Virgin Media service in 2007 (over £50m in media spend according to Nielsen).

Should Virgin find killer programming content, to complement its service offering across broadband and mobile, it may find it easier to fight on a point of differentiated and compelling viewing offering; rather than commodity and rational service propositions, such as speed, convenience or pricing.

In its first few months Virgin 1 may not have had much in the way of compelling programming. In fact the modest launch of Dave, with it’s high carb diet of Top Gear, Qi, Have I got news for you, Red Dwarf and Never mind the buzzcocks re-runs appears to compare very favourably on its viewing performance compared to Virgin 1. Give Dave credit; with little ceremony it’s doing a great job with its choice of series.

However, with the arrival of Boston Legal, Blade the Series, Terminator: The Sarah Connor Chronicles, and Battlestar Galactica, things at Virgin 1 are stepping up to the challenge a little better. A differentiated channel with a reasonable 16-34 profile from compelling programming may well outperform a ‘Dad’s TV’ station in 2008, at least on the pricing it commands for its audience.

A reality check for Virgin 1 may fall to an evaluation of how many U.K. viewers will find the latest programmes added to the schedule compelling? Probably enough to improve in Virgin 1’s viewing figures to be honest. But certainly there will already be established fan bases for their latest shows in the U.K. As cult viewing will have already been accessed; on other channels, on imported DVD or through illegal download.

Here is a copy of the Management Today article:

Management Today

BSkyB faces big ITV bill

Date: 29-Jan-08

The government is forcing BSkyB to sell half of its ITV stake. The Murdochs will not be amused…
John Hutton, the Secretary of State for Business and Enterprise, has given his backing to a ruling by the Competition Commission that Sky should be forced to reduce its holding from 17.9% to less than 7.5%. Hutton said the forced sale would ‘address the substantial lessening of competition’ by diminishing Sky’s influence – at the new level, it won’t be able to block shareholder resolutions or take a seat on the board (not that it had one anyway, to be fair).

It’s a sizeable blow to Sky, which is in line for a heavy loss on the stake it bought for £940m in November 2006. ITV’s share price has since tanked, falling by almost half, so if Sky is forced to sell at the current price (it opened at 73p this morning) it would suffer a loss of more than £250m. Let’s hope that blocking the Virgin/ NTL takeover was worth it…

There was one silver lining: the government has agreed to Sky’s request not to publicise the deadline for the sale. And you can see why it’s so keen to keep this quiet – if it was forced to dump the stock within a month, it would have no chance of getting a fair price. In fact, the situation would just create a false market and drive ITV’s share price down even lower.

But with press reports suggesting that the government has in fact imposed a nine-month deadline (apparently ITV was pressing for just three, so it could have been worse), Sky has just four weeks to launch an appeal. Our guess is that its lawyers are sharpening their knives even as we speak…

One thing’s for sure – it’s certainly not going to improve the Murdochs’ opinion of regulators, who are just about their least favourite people. And to some extent you can’t blame them. The Communications Act of 2003 – brought in by Hutton’s own government – permitted Sky to take a stake of up to 20% in a rival broadcaster (it was even dubbed ‘the Murdoch clause’). So if Sky played entirely by the government’s own rules, why on earth should it be penalised so heavily because the regulator decided afterwards that the rules needed changing? Hutton may live to regret taking this one on.

James Murdoch, who bought the stake, has since left the Sky hotseat to take command of his father’s News Corp empire in Europe and Asia. But we imagine that his new staff will be tip-toeing around him very carefully this morning…

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