Dark Sky over Europe

Murdoch struggles to replicate U.K. success in Italy, Germany

Rupert Murdoch is the undisputed king of pay TV in Blighty, thanks to his controlling 39.1% stake in money-spinning satcaster BSkyB, which he is bidding to buy outright.

But Murdoch’s Midas touch has yet to work on his struggling Sky Deutschland, while Sky Italia is faced with falling subscriber numbers and a price war with rival Mediaset.

So why has Murdoch been so successful in the U.K. while his companies continue to struggle in Germany and Italy?

In terms of their program offerings, there seem to be few synergies between BSkyB, Sky Deutschland and Sky Italia as Murdoch moves to beef up the latter two. Movie and sports rights — the traditional bait for pay TV platform owners — are acquired on an ad hoc basis and determined by local market considerations.

But News Corp.’s expertise, whether skillful management or techno know-how, is something that can be leveraged across all three payboxes.When Brian Sullivan was appointed to run Sky Deutschland in April, he had more than 14 years’ experience at BSkyB. There, he successfully masterminded innovations such as the Sky Plus digital video recorder and the firm’s increasingly successful move into HD. Tom Mockridge, who runs Sky Italia, is another seasoned and much-trusted News Corp. senior executive, having run Murdoch’s pay TV operations in New Zealand and Hong Kong.

But despite the BBC’s British TV market strength and concern over possible government regulation, there is little doubt that the U.K. market for subscription TV is much more News Corp. friendly than that of either Germany or Italy.

“BSkyB will always be better off in the U.K. than the Sky operations in Germany and Italy because Britain is a far less competitive market for pay TV,” according to Toby Syfret, a consultant at Enders Analysis.

In Blighty, the numbers speak for themselves.

With about 40% of U.K. homes subscribing to BSkyB, and each customer spending in excess of £500 ($797) a year, it is not hard to see why the satcaster packs such a punch.

Net profit was $846 million for the year to the end of June, up from $704 million in the previous year. The satcaster has 9.86 million subscribers and aims to have 10 million before the end of the year.

It also has longevity on its side. Founded in 1989 as Sky TV, it merged with failing rival British Satellite Broadcasting the following year to create BSkyB.

It struggled in its early years, paying out huge sums for movies and sports to attract subs that even threatened Murdoch’s control of News Corp. The strategy paid off once soccer-mad Brits realized they could no longer watch games free-to-air.

Now BSkyB is hugely profitable and expected to be even more so in the future as Murdoch’s pricey investment in high-definition TV and broadband pays off. “Next year BSkyB’s £1 billion ($1.56 billion) marketing budget will be bigger than commercial web ITV’s entire program spend,” said Mathew Horsman, author of “Sky High: The Rise and Rise of BSkyB.”

Meanwhile in Germany, Sky Deutschland has yet to break even.

Last week the web’s stock price fell to a record-low $1.39 after the company disclosed it needed a fresh injection of capital. Murdoch is obliging to the tune of $450.5 million.

Local analysts see News Corp.’s rescue package as a long-term strategy to up its 45% stake in Sky Deutschland in the same way it wants to own BSkyB — a potentially smart move given Sky Deutschland’s rock-bottom share price.

Sky Deutschland is battling to attract subscribers in a tough market with a large number of free-to-air channels. It had 2.48 million subs in June, but Sullivan needs close to 3 million paying customers before he can start to think about turning a profit.

“I am happy that the business is moving in the right direction; I am not satisfied with the pace of development,” Sullivan said.

Sky Deutschland, too, has longevity on its side — it was founded as Premiere by media mogul Leo Kirch in 1991. In the late ’90s, Kirch invested heavily in movies and sports, especially soccer and Formula One motor racing.

But while that paid off in Blighty, Premiere continued to hemorrhage red ink. It eventually brought Kirch’s media empire to its knees in 2002 in Germany’s biggest bankruptcy.

News Corp., which took a 14.6% stake in Premiere in January 2008 for $377 million, rebranded it Sky Deutschland in July 2009.

But Sky Deutschland faces the same problems Premiere had.

“Unlike the U.K., Germany has very high levels of cable penetration,” Syfret said. “Meanwhile, the big free-to-air channels like RTL have very strong content including a lot of classic U.S. shows.

“Sky Deutschland doesn’t have the content that enabled BSkyB to establish itself in the U.K. with its famous battering ram of exclusive sports, led by soccer, and movies.”

While Sky Deutschland holds exclusive pay TV rights to all top league Bundesliga matches through 2013, pubcaster ARD offers extended highlights soon after matches end. In other countries, including the U.K., post-game coverage airs much later.

With German TV viewers already saddled with TV license fees of $24 a month plus cable or satellite costs, Sky Deutschland has had a difficult time persuading consumers to shell out yet more money for pay TV, especially when there are some 35 free-to-air channels to choose from.

News Corp. deputy chairman Chase Carey recently described the pay box as “clearly a work in progress” but indicated that the size and wealth of the German market, where there is big potential for HD, would see Sky Deutschland ultimately thrive.

“These are tough jobs that rarely follow a straight line,” Carey observed, referring to the conglom’s experience of building platforms in the U.K., Italy and the U.S.

Sky Italia, which bowed in 2003, is the only one of the three payboxes owned outright by News Corp.

It competes against Prime Minister Silvio Berlusconi’s Mediaset empire and saw its first drop in subs in the first quarter, down 39,000 to 4.7 million compared with 5 million last fall.

In July, in an effort to reverse the decline, Sky Italia cut the cost of its basic movie and soccer packages by 25% to a monthly $36. News Corp. said the initial response was “quite encouraging” and it would “stimulate subscriber growth.”

Mockridge hopes that by successfully lobbying the European Commission to allow Sky to enter Italy’s burgeoning digital terrestrial TV market two years ahead of schedule, News Corp.’s position will be strengthened.

Augusto Preta, director of Rome-based IT-Media Consulting, said the DTT advertising market is expected to be highly lucrative. “I believe this is the main reason why Sky Italia is keen to bid for a DTT frequency,” he said.

Preta added that Sky could use up to five free channels on a new digital frequency to cross-promote the pay service.

It remains to be seen if Sky Deutschland will eventually take off and whether Sky Italia can move back quickly to a growth curve.

Given News Corp.’s skill, determination and deep pockets, chances are that both payboxes will do well in the end.

Meanwhile, there are signs of discontent at BSkyB, where toppers fear losing their independence in the event of a Murdoch takeover.

On all three fronts, the next 12 months look likely to be a testing time for News Corp.’s European pay TV ventures.

(Ed Meza in Berlin and Michael Day in Milan contributed to this report.)

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