When elephants dance the ants get trampled

Michael Hedges September 16, 2008

Television can be compared to a zoo. Build a park, bring in the animals and the curious line up to pay their €10. The animals are fed, ticket-takers are paid and the curious return to the real world after a nice afternoon. But the animals are demanding holidays, pensions and open cages, the ticket-takers are telecoms, zoo-keepers investment bankers. Will the curious be trampled when the elephants start dancing?

Right now big media elephants are dancing around UK television company ITV. Is this a performance or just so much noise? Most analysts believe outsiders’ quest for ITV has moved beyond the ‘tire-kicking’ stage. Former ITV chief executive and present Global Radio chairman Charles Allen was named to the Virgin Media board (September 10), fueling speculation that Virgin Media would take another shot at buying ITV. Virgin Media lost its 2006 bid when BSkyB acquired a sufficient share of ITV’s common stock to fend off Richard Branson.

That little transaction – pitting Branson and Rupert Murdoch – resulted in the UK Competition Commission ruling that the BSkyB share of ITV must be reduced. Allen was ITV chairman until a few months before Virgin Media offered. BSkyB has appealed the Competition Commission decision but most observers expect it to fail.

With notable coincidence Charlie Allen was also named to the board of Endemol shortly after being named an advisor to Goldman Sachs Capital Partners, an Endemol shareholder. Endemol – the ‘Big Brother’ people – is a major world-wide television production house. Goldman Sachs is a major investment bank that once made a bid for ITV. UK media watchers, concluding that one plus one equals three, predicted ITV would be split with Virgin Media getting the broadcasting licenses and Endemol taking the production house. Considering the enormous debt carried by Virgin Media, Endemol and ITV the level of financial creativity required to make those numbers work rivals that of Enron or WorldCom.

Endemol is primarily owned by Mediaset, the Italian media giant controlled by Italy’s Prime Minister Silvio Berlusconi. Italy’s ad market hasn’t fallen as flat as the UK’s, Spain’s or Germany’s but there’s still time. Mediaset paid a premium for Endemol, considering that Spain’s Telecinco wanted out. And, largely speaking, John de Mol is running the ‘Big Brother’ producer, which continues to crank out thousands of hours of win, lose or draw television time and sells same to thousands of television outlets around the globe.  

The same day Charlie Allen was named to the Virgin Media board, ITV was unceremoniously booted off the FTSE 100 stock index. Carphone Warehouse, of the UK’s biggest advertisers, was also booted off the stock traders reality show. Reality being the UK economy is in tatters and the ad market is unlikely to improve in the short-term or mid-term.  Television financed by advertising purely is in decline. Mr.Murdoch knows this: he’s buying cable and pay-TV channels.

The current ‘tire-kickers’ will continue kicking until the tires go flat. Europe’s alpha TV elephant RTL has no need to further upset its balance sheet, although merging ITV Productions with FreMantle could make sense. Having something to sell to customers with real money always makes sense. And don’t count on the Americans – NBC Paramount, Disney or Viacom. They’d need to call in a big banker and, in case you haven’t noticed, most of them aren’t answering the phones today.

In easier times, financially speaking, a consortium of private equity investors would leap forward, as they did for Germany’s ProSiebenSat. KKR and Permira have written down (read: written off) about 80% of the value of that deal and last week (September 12) bought €100 million of ProSiebenSat’s debt at 70% of face value. Don’t bother phoning Henry Kravis with another media deal.

The cringing in the UK about quality television – hopelessly oxymoronic – suggests that if ITV is sold to a lesser media god the last elephant standing will be the BBC. The curious – hereinafter thought of as viewers – have grown more sophisticated and demanding of more exotic animals. An ITV owned by Mediaset/Endemol conjures a programming lineup filled with naked and squealing bimbos playing games all day and into the night… and certainly getting great ratings. The BBC will trumpet loudly that the licensee fee must be raised and the ants will tremble accordingly.

ITV Chairman Sir Michael Grade has learned that show business is no substitute for accounting. Telling the regulator OFCOM that ‘public service’ programming costs too much and, therefore, bleeds the company blue was reciting the obvious.  Telling OFCOM they can have the ITV terrestrial licenses back to get out from under public service requirements showed that Sir Michael understands digital as well as financial reality. Channel Four is equally using economic stress as an argument for cutting new program development and ‘suggesting’ government funding for public service programming.

Another reason a financial lifeline for ITV has yet to be cast is the endless debate – whinging, actually – about the context and substance of UK television. Once politicians find themselves pressured to do something about something, television is a free winner. Taxpayers tend to view television, literally and figuratively, as an entitlement. Digital switch is expensive, all those new boxes and gizmos to buy…and learn to program. What, pray tell, is it all worth?

Regulators – the UK’s OFCOM included – have concluded that market economics have failed, except when they don their spectrum auctioneering hats, white and otherwise.  Regulation, of the micro variety, fails because estimating future value is substituted by the waving of a magic wand. Elephants do not respond well to objects waved in front of them.