By Piero Muscara

Rupert Murdoch is a man of his word. Years ago he claimed that he “would never buy a newspaper” that he couldn’t “understand what’s written in it.” Now that he is going to become the king of the Italian pay TV market, he is studying the language of Dante and Michelangelo and he is spending a lot of time in Rome and Milan to meet with Italian politicians and business leaders.

The consolidation process in Italy’s pay-TV field is the result of an agreement signed by News Corp, Telecom Italia and France’s Vivendi. According to the contracts, News Corp and Telecom Italia will acquire the leading Italian pay-TV operator, Telepiu, from Vivendi for 920 million euros ($987 million) – half in cash and half in debt acquisition. At the end of this process, which is still ongoing, Telepiu will be merged with its rival Stream into a new company to be called Sky Italia. Murdoch will own over 80 per cent of the new company; Telecom Italia will own the rest. According to several analysts, the acquisition was done at a bargain price – 600 euros ($644) per household with a base that in October was believed to be 1.5 million subscribers.

Time Is A Key Factor

The parties were supposed to have completed the due diligence process in December. But merging Stream and Telepiu might be a more difficult task than expected. First of all, Telepiu claims to have increased its total subscribers to 1.8 million users, including 1.6 million with its digital platform. It’s good news and bad news at the same time. Sky Italia might need to put on the table at least 60 million euros ($64.4 million) more than forecasted. More important are the issues related to the European Commission’s antitrust regulator, Mario Monti, who was expected to give his response to the merger last November, but postponed the ruling until March. Given that Sky Italia has agreed to exit from the terrestrial pay-TV business (Telepiu owns two terrestrial TV licenses), three of the main issues that Monti and his team are analysing are: (1) the Telecom Italia position in the Italian convergence market; (2) the potential competitive restrictions for platform access to content providers and right’s holders (football and movies); and (3) the potential market restrictions for newcomers in the digital TV arena.

To reinvent the business and product strategy of Sky Italia, News Corp has sent one of its leading executives to Rome – Tom Mockridge, who has a long career in the media business. He was for years an adviser to Paul Keating, former CEO of Foxtel. In 2001, he became CEO of News Corp’s Newspapers Ltd. and chairman of Sky Network in New Zealand. He is known for having overseen the merger of the two Wellington daily newspapers. Mockridge arrived in Italy in late August and since then has worked with a small team of News Corp executives to design the Sky Italia architecture.

Final Decision From Brussels

Mockridge is waiting for the final decision from Brussels to go ahead with the Sky Italia launch. August is still set as the official launch of the new digital pay-TV operator in Italy. The strategy of Murdoch’s people includes several points: (1) cost cutting derived from the merger and from the renegotiations of existing programming contracts; (2) technology related issues (launch of the new NDS decoder, conversion of the SECA subscribers base and launch of interactive services); (3) restructuring of the channels and services line-up; and (4) subscribers base growth and increase of the average revenue per unit (ARPU).

The renegotiation of the studio’s contracts for all the pay-TV and pay-per-view (PPV) rights has already begun. The idea is to bring down the “minimum guarantees” and shift it to a “revenue sharing” model. Concerning football rights, which is a major cost, the company is not keen at present to start negotiations with the teams and will probably begin the discussions later in the summer.

One of the major tasks Mockridge and his team face is trying to review the channel line-up of Sky Italia. The idea is to have a bouquet of 40 basic channels. At present Telepiu has 26 channels, while Stream offers 19 basic channels. The new bouquet will not be just the combination of the existing channels. It is very possible that Sky Italia will launch eight to 10 new channels in the year to come. It is known for instance that News Corp subsidiary Fox Entertainment is working to launch three new channels and to redesign the existing National Geographic Channel.

The new Fox channels will cover the following topics: general entertainment (based on TV series like Multithematique’s Canal Jimmy), reality TV and documentaries.

The Targets Of Sky Italia

Given that both Stream and Telepiu have been losing money over the past year, analysts believe that Sky Italia might negatively impact News Corp’s profits by as much as $150 million to $200 million this fiscal year. That’s probably the reason why News Corp has set an aggressive cost-cutting plan for Sky Italia with the aim of reaching break-even by 2004.

According to these forecasts, Sky Italia will go from the existing 2.2 million to 2.4 million subscribers up to 3.4 million to 3.6 millions subscribers by 2006. The subscriber increase will be driven by a reduction of the churn rate (from 19.5 per cent to 14 per cent) and by using the NDS technology to reduce the estimated 1.5 million to 2 million TV Italian pirates accessing Telepiu and Stream content.

This latter issue is considered very important with the recent decision by Telepiu to use SECA 2 smart cards. The Milan-based company claims that since the cards substitutions were completed in late September it saw subscriber growth double over the previous year.

Piero Muscara is president and CEO of Rome-based broadcasting and satellite consultancy Nexta Media. He can be reached by telephone at 39-06-6819-2431 or by e-mail [email protected].