Murdoch And BT - The Real Story

As I observed only a few days ago, there have been calls for BT’s Openreach operation to be sold off, notably from disgraced former Tory Party co-chairman Grant “Spiv” Shapps, coming hard on the heels of sniping from the Murdoch press. We know that BT is a challenger to Sky, in which the Murdoch empire holds a 39% stake and has tried to secure the remaining 61%, but the reality is there is more to it than that.

While Sky retains most of the rights to the English Premier League, it had to substantially increase its offer in the last bidding round - and solely because of competition from BT. And BT has now secured rights to Champions League and Europa League. Live football is the major driver of revenue for pay-to-view channels in the UK. Sky had been the only kid on the sports rights block. Now all has changed. Rupe won’t like that.

The Murdochs have no problem with a level playing field: they just have a track record of appearing to like it to be tilted in their favour. Sky’s only real experience with free and fair competition, the fight with BSB, cost them an awful lot of money. Far more satisfying would have been the victory over OnDigital (later ITV Digital) where the latter was sunk principally by a tsunami of forged smart cards - which abstracted its revenue.

As the Guardian later told, “Evidence in the hands of the Guardian suggests that a former Scotland Yard commander who represents two of Rupert Murdoch's companies provided funds to a website that enabled counterfeiters to produce forged smart cards used to defraud ITV Digital, a principal rival in the pay TV market … Ray Adams, who is the head of security at NDS, a company controlled by Mr Murdoch's News Corporation, had a working relationship with the website, which has now been closed down and whose founder, Lee Gibling, has gone missing”. BT will be wise to that kind of thing.

All of which leads in to where we are now, and the re-entry into the arena of James Murdoch, who had previously left the battlefield after the phone hacking revelations, closure of the now-defunct Screws, and the subsequent failure to pursue that 61% of Sky that the Murdochs do not own. The Australian Financial Review has, as might be expected, been taking a keen interest, and shed some light on what may be going on.

Under the heading “Why James Murdoch is returning to BSkyB”, Leila Abboud has explained “Sky, which is 39-per cent owned by Murdoch's 21st Century Fox, is still growing in terms of revenue and profit. On Friday, it said it added 205,000 customers in its key British operation during its fiscal second quarter, the strongest growth in that period for a decade”, which sounds pretty good. But then comes a caution.

“More people are signing up to the company's cheaper packages such as video streaming service Now TV, so average revenue per user in Britain remained flat as it has been for more than a year” [my emphasis]. Furthermore, “Sky last year bought out the parts of its German and Italian units it didn't already own and added broadband services and new set-top boxes in effort to boost growth. That's depressed Sky's operating margin, and competition from Mediaset in Italy is particularly fierce”.

So what is Sky going to do to counter these downward forces on its revenue growth? “Sky argues that profitability in Britain will get a boost from Q, a set-top box it will start selling in February from between £42 and £85 ($85-$170) a month. (That's more than twice the cost of its basic Sky+ package). The company also plans to enter the mobile market later this year”. That explains the two-pronged attack mounted by the Murdoch press.

Getting viewers to sign up for a set-top box that costs at least £42 a month (more than £500 a year), when they can get a whole range of channels for £145.50 a year - the cost of a TV licence - at a time of potential economic uncertainty is what market analysts might call “challenging”. But if the organisation which benefits from that £145.50 a year - the BBC - could in some way be hobbled, the challenge might be reduced somewhat.

Note also that Sky plans to enter the mobile market. It will accomplish this via agreement with the owners of O2 - currently Telefónica - and is apparently keen on a tie-up of that provider with Three owners Hutchison Whampoa. BT, meanwhile, has just finalised its takeover of mobile operator EE. Thus the battle lines are drawn in another part of the telecommunications marketplace.

And that is why the Murdoch media machine is beginning its campaign against BT - to destabilise a by now well-established and entrenched competitor.

But one question remains: what of the rumours that the Murdochs will return for that remaining 61% of Sky that they do not yet own? James Murdoch, as the AFR has noted, “said in December Sky's current ownership position wasn't permanent”. Should the Murdoch clan buy or sell? Sky’s share price has been rising, which has resulted in a market value of over £18 billion right now.

That, though, ignores one factor: Rupert Murdoch did not get where he is today without being a vindictive SOB. He was denied that 61% of Sky in 2011, despite moving to close the Screws, and the efforts of the Tory-led Government to assist him. He will almost certainly come again, now that he has got a Government which is desperate to do his bidding, rather than have another go at Time Warner in the USA.

How the Murdochs will make this work is very straightforward: Sky’s flat revenues have to be transformed. And that happens not merely by offering mobile services and set-top boxes, but also by hobbling the competition. The circle is squared by having the BBC diminished and the assault on BT ramped up. For this, the Murdoch’s press and PR machine will, as ever, be deployed in support.

This is the reality of where Rupert and James Murdoch are at right now. And there are few politicians who would willingly place themselves in their path.