TV turmoil will take Sky to a new high

By Alex Brummer, June 18, 2009

I bumped into James Murdoch at a party recently and he was in chipper mood.

At a time when both the writing and broadcast media are struggling, as a result of an advertising famine, the UK arm of the Murdoch empire looks to be emerging stronger than ever.

Much of the recent success can be attributed to Murdoch the younger, the likely heir to Rupert Murdoch’s empire , who at the end of 2007 stepped up to become the chief executive of News Corporation, Europe and Asia, and chairman of BritishSkyBroadcasting.

It was during James Murdoch’s stint as chief executive of BSkyB that the group took a great leap forward. In the early years of satellite broadcasting much of the emphasis was on acquiring viewers by overpaying for the best sports rights, including Premiership football and movies. Sky also aimed to develop a first class news service to rival the BBC.

The younger Murdoch’s period as chief executive focused on refurbishing the infrastructure and technology and keeping competition at bay. On the technology front it saw the birth of BSkyB’s ‘triple play’ digital services, which included telephony and broadband and also the launch of the killer application of High Definition (HD).

At a corporate level, the younger Murdoch’s task was to prevent Sir Richard Branson’s Virgin Media — with potentially superior cable technology — becoming a serious challenger. It was with this in mind that he acquired a blocking 17.9 per cent stake in ITV for £940m in 2006, fearing Virgin might seek to acquire the terrestrial broadcaster with its tradition of strong content.

The younger Murdoch’s current confidence is not surprising. When I last saw him he was waxing lyrical on the decision to put Sky News, already widely regarded as Britain’s best 24-hour news channel, on HD. It is also strengthening its news gathering, recruiting among others Mark Kleinman, talented City Editor of the Sunday Telegraph, who will be competing on air with the BBC’s ubiquitous Robert Peston.

But I suspect there were other reasons for Murdoch’s good cheer. Although Sky has heavily written-down its investment in ITV and has been told it must dispose of it by the Competition Commission, it has served its purpose. It kept Virgin and other potential predators at bay at a time when ITV has been weakened by the advertising downturn.

Hopes that Michael Grade, brought in from the BBC to revitalise the ITV channels, would turn things around have proved a chimera. Grade is in retreat and the search is on for a new chief executive, with former Sky insider Tony Ball among the favoured candidates. Grade may have followed the Sky example by using sports rights as a hook. But all ITV’s acquisition of the FA Cup, part of the Champions League and home England football matches has done is underline the qualitative difference between Sky and its competitor. Production values and commentary at Sky have proved a hands down winner.

Then there is Setanta. The Irish-based broadcaster, backed by investment bankers Goldman Sachs and financed by a pile of debt, has hit a financial brick wall despite having a generous dollop of Premier League and England football.

At the time of writing, the Russian born US billionaire Len Blavatnik, who lost part of his fortune in the chemical industry, seems likely to step in with a £20m lifeline in exchange for a majority 51 per cent shareholding. Blavatnik’s private company Access Industries was already a small shareholder. Access also has a minority stake in the Israeli media group RGE, which includes TV channel Sport 5 as well as a big holding in the sports rights business Perform.

Perform clients include the Premier League and it also manages rights for the Football League. Blavatnik clearly has a strong interest in making sure that there are viable bidders — other than Sky — in the sports rights business. Perform has also advised Chelsea, West Ham and Rangers on their digital strategies and how best to maximise value.
Sky, Virgin and the rest of the industry will also be keeping a close eye on developments at BT. The telecoms group suffered a series of setbacks with the resignation of former Hollywood producer Dan Marks from BT Vision after five years. Marks had promised he would “revolutionise” customers’ relationship with television.

When it was launched with great fanfare in December 2006 Marks pledged that the BT on-demand service, which would provide TV programmes, film and sports down telephone lines, would attract 3m subscribers by 2010. As an on-line service it might also be used on second or third television sets in homes which were already Sky or Virgin subscribers.
At last count it had attracted a dismal half-a-million customers. Marks has attributed the disappointing take-up to the lack of Premiership football. So it is possible that if Setanta were to sink without trace then BT, along with ITV, would look at acquiring its Premiership and England rights.

The turmoil suits Murdoch and Sky. In the quarter which ended in May, Sky added almost a quarter of a million new HD subscribers alone and it is rapidly upgrading customers to higher quality and more expensive subscription service despite the credit crunch.

The strong HD take-up should increase profitability and helps to define Sky as the star pick in the media sector. It doesn’t hurt when three of your most potent rivals — BT, ITV and Setanta — are in turmoil.

Alex Brummer is City Editor

Last updated: 4:02pm, June 18 2009