Murdoch has his eye on Sky in Itialia

Feevee adds subs, but goals will be hard to reach

Lachlan Murdoch spent the evening of his 32nd birthday on Sept. 8 at a hillside villa overlooking Rome playing host to a drab bunch of Italian politicos to whom he proudly boasted that News Corp’s new pay TV venture, Sky Italia, had begun to fly.

Rupert Murdoch’s son, a Sky Italia board member, announced to his guests, including Communications Minister Maurizio Gasparri and Telecommunications Authority chief Enzo Cheli, that the nascent paybox had acquired 200,000 new subscribers since its July 31 launch. That is besides the 1.2 million subs who converted to Sky Italia from Telepiu and Stream, the services it replaced.

Yet in the land of Silvio Berlusconi-bred terrestrial TV it will take more than some early believers to carry out Sky Italia’s mission of replicating BSkyB’s success in the U.K. Or even to make News Corp’s biggest investment in continental Europe profitable by 2005, according to plan.

Most media analysts believe Sky Italia will reach its target of 3.5 million subs by the end of 2004. But whether that enables it to turn a profit is another question. “My impression is that costs are higher than they thought and it will take more than expected to reach break-even,” says Augusto Preta, chief of Rome’s Italmedia Consulting.

In April, News Corp. paid e900 million ($1 billion) to Vivendi Universal to purchase Telepiu and roll it into its own Stream, closing a drawn-out deal brokered by Tarak Ben Ammar that created Italy’s sole pay TV player.

Sky Italia is shaping up as the country’s hot new tube trend, while its chief owner has been nicknamed “Lo Squalo,” The Shark.

Despite a hefty $550 million earmarked for startup costs, the Sky Italia team, headed by former Foxtel CEO Tom Mockridge, has been busy slashing spending, renegotiating deals with local film distributors, soccer clubs and Hollywood majors, all of whom now have just one pay TV buyer to turn to.

With payboxes merging into single operations across Western Europe (Italy follows Germany and Spain), this should come as no surprise.

“Five years ago everybody thought that two platforms could be profitable. But history has proven that’s wrong,” says News Corp. Europe chairman Martin Pompadour. “So what you’re seeing is bankruptcy or consolidation. And [as for] the enormous prices that were paid to the studios and soccer teams, everybody is in for a renegotiation, and they know it.”

Sky Italia’s initial goal was to halve the cost of its content compared to the old Telepiu/Stream days. But this is proving to be wishful thinking. Execs have achieved it with some Italian companies but Hollywood is holding out.

The real challenge will be to get Italians to shell out for TV.

The country’s 24 million TV homes watched a daily average of 4.5 hours of TV per person in 2002. With eight terrestrial national channels and dozens of local stations to choose from, auds have resisted pay TV — except for pirates, once estimated at half the country’s pay TV population.

But that has changed dramatically thanks to News Corp’s NDS technology, which has replaced Telepiu’s easy-to-crack smart cards.

Milan media analyst Francesco Siliato believes Sky Italia’s first subscriber goal will be met simply because former pirates will become customers.

That is already happening.

“A lot of our subscribers are buying a smart card but not a decoder,” says Sky Italia general director Osvaldo De Santis. “This means they already had a decoder, so either they were using it to watch Al-Jazeera, or they were getting pay TV for free,” he quips.

But the big question, according to Siliato and other experts, is how many subs Sky Italia will score after the honeymoon ends.

Sky Italia’s bouquet of 80 channels, which comprises a basic package of 43 stations including drama, news, music, docus, kiddie TV, and some sports — for $25 a month — plus nine movie stations, premium sports channels, and soccer — for up to $63– is a step forward from Telepiu and Stream’s fragmented and dysfunctional offering.

“Sky’s strategy is different from Telepiu’s. They are not premium TV for a niche audience, but pay TV with something for everybody,” agrees Preta.

That said, it won’t be easy to wean Italians off their free diet of titillating game shows, local drama and Hollywood movies on RAI and Mediaset, which run neck and neck in the ratings and command more than 90% of auds.

Sky Italia’s execs are in no hurry to be perceived as the new player that will break up the duopoly.

“We will never be Italy’s disrupting third TV force because RAI and Mediaset base their resources on advertising and we don’t. In the long run we might impact their audience, but we are never going to pose a threat to their advertising revenue,” says De Santis.

Yet Sky Italia’s first soccer Sunday, on Sept. 21, drew a more than 5% audience share, which prevented Mediaset from delivering the 25% share it had promised advertisers for the start of the season, according to Siliato.

“Murdoch is the world’s entertainment giant, he is successful in everything he does: it will be our task to counter him,” vowed Mediaset president Fedele Confalonieri when Sky Italia started beaming into homes.

But neither Mediaset nor RAI seem too scared, especially since they are reaping the lion’s share of more than $115 million that Sky Italia has allocated for TV ads through 2004 to promote the platform.

“Even if Sky reaches four or five million subscribers in the next few years, I don’t think it would really impact us,” says RAI Cinema CEO Giancarlo Leone.

Both RAI Cinema, RAI’s film arm and a theatrical distributor, and Berlusconi’s film unit, Medusa, have inked movie deals with Sky Italia. RAI and Mediaset also both provide TV channels to its bouquet.

Other agreements have been closed by Sky with the financially ailing Cecchi Gori Group, whose vast library of comedies and other Italian titles will air “as needed,” and with state film body Istituto Luce for use of its archives rich in historical footage. Distribs Filmauro and Eagle are also providing product. In late August Sky Italia announced in a statement that it would invest some 50 million Euros per year in the Italian film industry. This was taken to mean pay TV coin was back in Italy after a nearly two-year hiatus, following Telepiu’s demise. Yet several of the country’s indies, who once enjoyed close relationships with Telepiu — which had been investing a paltry $ 20 million a year — so far have been left out of the bargaining.

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