Mediaset grapples with change

Berlusconi empire faces challenges as prime minister topples

Eighteen years after becoming the first media mogul to be elected prime minister, Silvio Berlusconi is losing his political power. And with Italy engulfed in an economic crisis, his Mediaset TV empire is set to feel the pain.

In recent days, Berlusconi’s parliamentary majority crumbled, and he promised to step down; that same day, Mediaset posted a 31% drop in nine-month operating profit to €368.2 million ($507.8 million), while shares closed down nearly 3%.

On Saturday evening, Berlusconi officially resigned after the Parliament approved sweeping austerity measures.

Since the start of 2011, stock value has nearly halved at the company, Italy’s dominant commercial broadcaster, which also operates a pay TV service and is a prominent player in Spain. Both ratings and advertising are down.

Though the Berlusconi-controlled conglom remains a muscular media player, with 60% of the advertising market, the Milan bourse and other stock exchanges see tougher times ahead for the company.

Swiss broker Credit Suisse recently downgraded Mediaset from “neutral” to “underperform,” citing Italy’s fragile economic situation and its longterm impact on advertising, among other factors. Similar notes have come from other brokers, including Goldman Sachs and Italo merchant bank Mediobanca.

Berlusconi was forced to step down when political allies withdrew their support on a normally routine budget bill in parliament’s Lower House on Nov. 8.

Elections are expected as early as January, marking the probable end of Berlusconi’s political leadership era — though similar political obituaries were written for the media mogul after his party lost nationwide elections in 2006, to end his second stint as prime minister.

The day before his fateful parliamentary test, Berlusconi held a private and confidential meeting at his Arcore mansion outside Milan with his oldest children, Marina, who chairs his Fininvest holding company, and Piersilvio, VP of Mediaset. Fedele Confalonieri, Mediaset’s chairman and Berlusconi’s old friend, was also present.

At the very least, Mediaset faces losing the political clout that critics charge has given it a largely captive market.

“With the end of the Silvio Berlusconi cycle, we are likely to find out to what extent Mediaset’s performance has been boosted by his conflict of interest,” says former Italo communications minister Paolo Gentiloni, now a prominent parliamentary opponent.

Gentiloni believes Mediaset’s TV rivals — pubcaster RAI, Telecom Italia Media and News Corp.’s Sky Italia paybox — will feel more secure about investing once their main competitor is no longer head of the government.

This, in turn, will help them “significantly erode” Mediaset’s 60% share of the Italian TV advertising pie, he says.

New TV players might even set up shop in Italy where — with the notable exception of Rupert Murdoch — “nobody has been crazy enough to enter the market, when the person who dictates the rules of the game is your main competitor,” Gentiloni says.

Case in point is the Berlusconi government’s recent so-called “beauty contest” auction to assign five new digital TV multiplexes that can carry between two and six DTT channels each. It failed to attract any foreign investors, aside from News Corp.’s Sky Italia, which did so only after fierce legal wrangling.

But there are other, more sanguine takes on Mediaset’s predicament and future outlook.

Francois Godard at London-based Enders Analysis agrees that Mediaset leverages its dominant position and political clout to the highest degree. But he also thinks a change in the political scenario will make little difference.

“It’s inconceivable that Mediaset could lose its dominant share of advertising in Italy,” Godard says. “Rather, it’s bound to lose a bit of its margin, notably to Sky.”

Godard doesn’t buy the theory that Berlusconi has scared off foreign players.

“The German market is open to anybody,” he notes. “Any international company could come in; but nobody has because, in the end, free-to-air TV is an oligopolistic industry, and you need economies of scale.”

Everyone agrees that the ongoing battle between Mediaset and Sky is bound to escalate. And that this clash of the media moguls in Italy will be interesting to watch.

Mediaset has a two-pronged business model in place in Italy. On terrestrial TV, it airs broadcast channels Canale 5, Rete 4 and Italia 1, plus a half-dozen specialized stations. It also runs a digital terrestrial pay TV operation, Mediaset Premium, which competes fiercely with Sky Italia.

But Mediaset Premium, launched in 2007 to generate a revenue stream less dependent on advertising, is still losing money, due to high content costs and cut-rate prices in its effort to position itself as a low-end pay TV player. Premium doesn’t charge monthly subscription fees, but rather operates with pay-as-you-go cards to deliver its content on-demand. It has 4.5 million subscribers, compared with Sky Italia’s 5 million. But Sky Italia, with its high-def channels and monthly subscription fee, rakes in close to four times as much cash per customer.

In 2013, Sky Italia is expected to overtake Mediaset as Italy’s top-earning commercial TV player, according to a report by ITMedia Consulting, citing the longterm impact of Italy’s economic crisis on the advertising market. The company, which also operates free-to-air channel Cielo (Italian for sky), is expected to launch more feevee stations on DTT, encroaching on Mediaset’s core biz.

Nobody expects News Corp. to invest heavily in free TV. Analysts see Sky Italia’s move into Mediaset’s turf as purely strategic, “a way for them to say to Mediaset ‘Let’s talk’ when it comes to soccer rights and maybe to regulation,” Godard says. “It’s like an arms race.”

Mediaset also is battling on a different front, partnered with private Italian equity fund Clessidra, for control of global giant Endemol, best known for “Big Brother,” “Deal or No Deal” and “Extreme Makeover: Home Edition.” As part of its strategy to diversify from its core biz, Mediaset, Goldman Sachs and John De Mol’s Cyrte Fund purchased the Dutch content giant in 2007.

But since then Endemol’s debt has spiraled out of control, raising the prospect that it could end up in the hands of hedge funds.

Time Warner has bid €1 billion ($1.4 billion) for the cash-strapped entity. There are reports that pan-European broadcaster RTL has also made a nonbinding offer.

Deutsche Bank analyst Alessandro Bai-Badino still gives the inside track to the Berlusconi group.

“I don’t think the Americans or the Germans have much of a chance. I think Mediaset will hold on to it,” Bai-Badino says.

Mediaset’s chief financial officer Marco Giordani assured analysts during a conference call last week that the company is moving ahead quickly to secure control of the Dutch giant.

For Mediaset itself, content has become a sore spot, with Italo audience share dropping from 38.2 in 2010 to 37 this year, while ratings at flagship Canale 5 are down two points to an 18.1 seasonal share. Advertising is down 2.9% over the past nine months.

“Five years ago, Mediaset was leading the way and creating its own content ideas,” Bai-Badino says. “But no longer.”

As evidence of the need for better programming, he cites “Baila!,” a recent Mediaset flop that was based on an Endemol format. It was pulled early last month after the BBC and RAI lodged a copyright infringement suit claiming the show was an illegal ripoff of the BBC’s “Strictly Come Dancing” format — known as “Dancing With the Stars” Stateside.

More recently, the 12th season of “Big Brother” bowed on Canale 5 to its lowest ratings ever, leading to speculation it might be canceled.

“Mediaset’s weak spot is its lack of real investment in content,” concurs Milan media analyst Francesco Siliato. “They’ve always preferred either not to invest at all, to give Berlusconi and other shareholders a bigger dividend, or to invest in infrastructure, as though they were an infrastructure operator instead of a content provider.”

sides snapping up frequencies, Mediaset closed a deal in October to take over the country’s telco towers operator Digital Multimedia Technologies, achieving dominance in the TV broadcasting tower market. It’s a move seen by some as symptomatic of a need to control every part of the Italian market.

But Giordani firmly denies that Mediaset has let content quality slip, citing a $2.7 billion-per-year investment in programming. He blames lower viewership on the growth of DTT channels, adding that audiences are fragmenting throughout Europe.

“Today, 25% of viewers are watching something other than RAI and Mediaset,” he says. “Five years ago, that figure was just 12%.”

Giordani sidesteps the question of how Italian politics could impact Mediaset, preferring to consider the impact of the troubled economy on all players. “The situation is difficult right now, but it’s difficult for other countries in the Eurozone,” he says. “We’re all interconnected.”

Tim Westcott, a senior analyst at Screen Digest, agrees on that account. “All advertising-supported broadcasters are facing tough times,” he says. “Mediaset is still an enormous business with about half the TV spend in one of the largest economies in Europe.”

However, he adds, “if the sentiment is that once Mediaset loses its obvious connection with political power things will be downhill, then perhaps it will lose some of its aura.”

Westcott also noted that, as part of its diversification plan, Mediaset has long been active in Spain, where it operates six channels, including top broadcaster Telecinco and Cuatro. On a positive note, adjusted net profit at Mediaset Spain was up 7.3% in the third quarter, up $156 million compared with the same period last year.

A sound diversification strategy does seem key for Mediaset to offset its likely loss of privilege in a post-Berlusconi political era.

“For them to have a problem, they’ll need to drop to 45% of the Italian advertising market — still probably a record in Europe,” Gentiloni predicts.

Gentiloni is among the many who agree that, with Berlusconi in power, Mediaset has always greatly improved its advertising share regardless of ratings. He notes that Mediaset’s current 60% ad share is being obtained with a much lower 38 ratings share, a gap he considers anomalous.

“Hopefully,” he says, “we will discover what portion of this difference is justified by the market — and part of it certainly is — and what part is not.”