The Pay Master

Michael Hedges March 22, 2009

The drumbeat pounds louder and more frantic for a new business model for media. Nothing really new or really healthy has come of it. Addictions are tough to break and advertising is the toughest. But present day economics is calling the tune. It’s time to sing along.

A set of television providers and newspaper publishers are, in their special ways, freaking out. After taking out sub-prime mortgages on their foundations all that’s left when the easy money runs dry is begging…and slashing. Surely, they believe, viewers and readers won’t notice sub-prime content.

With sound and fury ITV’s chairman Michael Grade announced that he’s seen the light. And it is a freight train barreling down the tunnel toward free to air commercial television. ITV will be less. Television will be less.

Certainly, ITV faces unique challenges. UK rules put ITV in a box and the regulators seem incapable of finding a box cutter. And then the UK economy is on the bleeding edge.

“The new, broader context for television is content distribution, thinking beyond just being a television company,” says Ross Biggam, director of the Association of Commercial Television Europe (ACT). The prescription is a combination of difficult decisions and healthy living. Viewers will be paying for their TV fix not indirectly through the marketing budgets of companies selling products and services but directly to the content distributor.

Nobody understands this better than the master: Rupert Murdoch. In the early, glossy moments owning the Wall Street Journal he talked about shifting away from the subscription model. The accountants convinced him otherwise. Doubtful they had to twist his arm. News Corporation is most successful at pay TV - subscription satellite or pay per view.

BSKyB is the UK’s undisputed pay TV leader. News Corporation owns 39% of BSkyB. CEO Jeremy Darroch said “2009 is going to be a difficult year for the consumer environment,” in an interview with the Financial Times (March 13). “TV remains central to people's lives. They are consuming more TV than ever before.”

Free-to-air broadcasters in the UK are fighting the drift to pay TV. The BBC and ITV are planning to unleash Project Canvas as a successor to the free-to-air digital platform Freeview. Project Canvas will give access to everything currently available on Freeview plus HDTV channels and Web TV channels through a single set top box that provides all the customer-friendly tools – record, pause and rewind – offered by BSkyB.

Both major UK pay TV providers, BSkyB and Virgin Media, have a problem with Project Canvas. “Virgin Media would welcome wider regulatory scrutiny of the potential implications of Canvas for competition,” said a company submission to the UK government. With the BBC involved BSkyB suggested “market distortion” and “State aid” complaints.

News Corporation continues to pour money and talent into German pay TV operator Premiere. Still a minority shareholder, News Corporation won a waiver of competition rules while it vigorously restructures the operation, bringing in Sky Italia CEO Mark Williams to lead.  Cable TV is far more developed in Germany than satellite platform pay TV. Williams has stressed the need to improve customer satisfaction – and with it, retention – replacing several key executives.

Italy’s biggest commercial media operator Mediaset is also betting on pay TV. “The fact that free-to-air continues to be our core business doesn't mean we are not doing something else,” said Vice Chairman Piersilvio Berlusconi at a press conference (March 18). “Mediaset Premium may become the new Mediaset.”

Mediaset Premium relies on major movies and US serials from an exclusive deal with NBC Universal. Launched in 2007 Mediaset’s pay TV business reaches more than three million subscribers. Last November it launched a pay TV channel for children. The company reported a “marked fall” in advertising revenues during the first two month of 2009.

The battle of the media titans (Berlusconi v. Murdoch) for the Italian media market has produced considerable activity. Sky Italia is, by far, the dominant pay TV provider spending lavishly on sports rights and movie packages. It, too, is risk-taking; offering a general interest channel beginning April 1st.

With considerable investments in pay TV offerings both big Italian operators are noted for aggressive marketing. Sky Italia, capitalizing on digital switchover confusion, has been running an ad campaign on big screens in Italian shopping malls. The message – “'Special for your region: analog TV shuts off. Sky lights a new vision” – featured logos of all TV channels and was quickly called unfair by the DTT development association DGTVi who said people will confuse it for an official message.

“Pay TV companies are usually in the vanguard with their very direct link to consumers,” says Biggam. And nothing beats having a direct and clear understanding of the value viewers place in television content.  And absolute nothing beats customers’ fear of losing their favorite TV.

Free-to-air broadcasters – including public broadcasters – are being priced out of television sports rights, pay TV operators and, now, mobile operators, paying huge sums. “Exclusivity,” says ross Biggam, “has become more important.”

Feeling the wrath of football fans forced to pay-per-view – and acutely aware of waning sponsor and advertising revenues – Bayern Munich General Manager Uli Hoeness suggested last week to Wirtschaftswoche (March 13) a €2 per month addition to the German TV license fee tax to put football back on free-to-air TV. Premiere has Bundesliga rights. The basic cable fee is about €25 per month. German households also pay the mandatory license fee tax of €18 per month. A great big stein of beer costs about €4.  Hoeness also said he might be willing to drop Bayern Munich ticket prices: “The man on the street is likely to be hit hardest by the global recession.”

With Mediset and News Corporation bidding up sports rights costs in Italy public broadcaster RAI is rethinking sports coverage.

So interesting are pay TV prospects telecoms offering broadband TV packages and salivating over mobile TV are looking at buying up sports rights. France Telecom, for its Orange unit, paid more than €200 million a year ago for French football rights to jumpstart its Orange Foot channel. Telecom advisors plead caution.

"A high investment in content is not a sensible business for telcos," said Exane BNP Parabas telecoms expert Antoine Pradayrol in a recent report (March 9). BT, he said, "cannot compete with the likes of BSkyB," he said.

The French competition office apparently agrees, ruling (March 9) that Orange Foot cannot be exclusively linked to France Telecom broadband subscribers.

Although the television share of advertising spending across Europe broadly has not fallen dramatically, at least not compared with the print sector, television broadcasters continue to talk about decoupling. “We’ve been exploring revenue alternatives to advertising for years,” says ACTs Biggam. Indeed, it has been on broadcasters minds for decades. Every economic downturn seems to raise the pitch. This period of financial uncertainty is different as broadband access rises and digital TV switches on offering consumers and advertisers a blinding array of choices. Media and advertising are no longer peas in the same pod.

Conventional wisdom holds that pay-TV – cable or satellite, primarily – is recession proof. Households may cut back on many expenditures but pay-TV subscriptions, being relatively inexpensive, may actually rise. And sports fans – the backbone of pay-TV - may give up expensive game tickets for watching at home.

A second opinion suggests satellite and cable TV subscriptions could be viewed as an easily discarded frivolous expense. Nobody will know which is which until first quarter figures are published. The biggest pay TV operators are far more likely to weather the economic storms. Strong brands with deep pockets are better positioned to keep the paying customers.

And there’s no bigger truth in media than “you get what you pay for.”