Brexit Could Be Rotten, Like Johnny Rotten

Michael Hedges March 30, 2017 - Follow on Twitter

There have been rumbles, off and on for some time, concerning the effect of Brexit on the UK’s media sector. Brexit is, for those sleeping soundly for the last couple of years, is the popular handle for the process of the UK leaving the European Union (EU). It began officially this week and will be negotiated over the next two years, perhaps longer.

This for many, the media sector included, means a period of uncertainty while the divorcing parties stare at each other across long conference tables weighted by important documents. From publishers and broadcasters to ad agencies, production houses and media buyers the effects could be good, bad or something in between. More than the details, it’s uncertainty that gives shivers to executives.

Europe’s biggest media house is Bertelsmann SE, based in Germany. It owns or primarily controls broadcaster RTL Group, book publisher Penguin Random House, magazine publisher Gruner+Jahr and music publisher and right manager BMG. Through RTL Group it owns TV producer FremantleMedia Group, one of the world’s largest, based in London.

Brexit uncertainties looming large, Bertelsmann lawyers, accountants and executives are conducting a “full impact analysis,” said chief executive Thomas Rabe, quoted by Bloomberg (March 28). The concern is its intellectual property business, based in London, and taxes. "We’d like to continue to invest in the UK, but… that’s subject to the cost of business in the UK not increasing.” He’s also looking for “open markets and access to a skilled workforce.”

Any decision by the Bertelsmann crew on a full or partial decamp from the UK will come toward the end of the year. Nobody knows exactly where - or if - issues significant to the media sector broadly sit on the great Brexit negotiators to-do list.

UK broadcasters and publishers are welded to their local markets. The BBC isn’t going anywhere. Neither is the Daily Mail. Production houses and content distributors, like Freemantle Media and BBC Worldwide, benefit from EU rules giving priority - not to forget subsidies - to European audiovisual works. When the UK ceases to be European that market access will certainly change.

US-based 21st Century Fox put forth a bid last year to acquire shares in satellite and pay-TV operator Sky plc it does not already own. Several observers suggested the biggest reason was the pre-Brexit devaluation of the GBP, saving the company about US$2.5 billion over the last bid, from related company News Corporation, which was withdrawn in light of the famous phone hacking scandal. Alas, UK media secretary Karen Bradley referred the new deal to regulator OFCOM for review even though 21st Century Fox/News Corporation principal Rupert Murdoch is considered close to prime minister Theresa May and considered a Brexit supporter. That might not help when the deal goes before the European Commission (EC) for anti-trust examination as Sky plc owns Italian, German and Austrian subsidiaries. The EC will likely notify in a couple of weeks (April 7) whether or not further examination is necessary.

EC rules on country of origin will almost certainly hamper, on Brexit, broadcasters holding or obtaining UK licenses for channels targeting EU Member States. Modern Times Group (MTG), domiciled in Sweden, has taken advantage of this provision for several years though recently the company has been shedding non-Scandinavian channels. The Audiovisual Media Services Directive (AVMS), within which resides country of origin rules for television, is currently under review. An expected change would place online video channels - think YouTube - under Digital Single Market rules and protections, at least for those within the single market.

Publicly traded ITV plc operates several UK television channels as well as production house ITV Studios, which produces for broadcasters allover the world, often through subsidiaries in various countries. At the end of February the company released 2016 financials and business was up largely through ITV Studios. The 3% year on year drop in ad revenues was due to “wider political and economic uncertainty,” meaning Brexit, said chief executive Adam Crozier, quoted by Business Insider (February 28). ITV exited its UTV Irish assets last June.

Advertising people are, as usual, of several minds on Brexit. There’s business when times are good and when times are bad, just like stock brokers. Uncertainty is, they say, really unpleasant. “We are seeing generally slow growth, with little inflation, despite what's happening with Brexit,” said the oft-quotable WPP chief executive Martin Sorrell to the Financial Times (March 3). “That means therefore a focus on costs, and that all ends up with more caution.” WPP shares were thereafter punished.

“Our priority is that UK advertising remains open to the global talent that drives our first class output,” said UK Advertising Association chief executive Stephen Woodford, quoted by Campaign Live (March 29). "Advertising can play a pivotal role in selling the UK to the world as we move into Brexit negotiations and beyond, and we’ll be pushing government to support that potential in its upcoming industrial strategy."

The UK music industry - from songwriters and performers to music publishers and concert promoters - are uncertain about free movement of labor, access to EU markets, currency exchange rates and, of course, copyright rules. “In particular how it may affect the balance of arguments in the crucial Transfer of Value discussions that are now going on in Europe,” said CISAC chief executive Gadi Oron, quoted by Billboard (March 29).

“Getting it wrong probably means a return to punk rock,” said umbrella music trade organization UK Music chief executive Jo Dipple.

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