Stumbling Goliaths, dithering Davids: unpicking the mythology of the media mogul

openDemocracy’s ongoing media ownership debate has seen radical critics like Robert McChesney contend that a small gang of media moguls are rampaging unchecked across the global media landscape. But the evidence, says David Elstein, suggests otherwise. Media behemoths like News Corporation and Vivendi are fallible, vulnerable, and fettered by national regulation.

While the gang of three who dominate European media (Murdoch, Messier, Middelhoff) are hardly the relentlessly efficient Goliaths they appear in the demonology of the left to be, neither is there evidence that the smaller media providers, the ‘Davids’ ennobled by national mission but cosseted by regulation and cultural complacency, serve the consumer better.

As a result, argues Elstein, neither knee-jerk anti-shark arguments, which grant tycoons almost mystical power they do not possess, nor placing our faith in supposedly more honourable minnows and the nation-based regulation which supports them, are likely to provide the foundation for building viable global media businesses in the digital age.

The pitch

Mr M builds a successful business in his native country. He moves into broadcasting, including control of one of the two biggest pay-TV businesses in Europe. But his eyes are firmly set on the US. He buys a big Hollywood studio, with strong television assets. He takes up residence in New York, and is roundly criticised in his native country for being a dominant global player, disdaining local sensitivities.

Is “Mr M” Rupert Murdoch of News Corporation, originally from Australia, or Jean-Marie Messier of Vivendi Universal, originally from France? Does it matter? Are we re-writing the old sociology aphorism about French politics with moguls and nationals? (“There is more in common between two Deputies, one of whom is a socialist, than between two socialists, one of whom is a Deputy.”)

How does the fact that companies outside the US own three of the six major Hollywood studios affect our understanding of globalisation?

Evolution of a mogul: the dirty digger strikes gold

Founder of News Corporation Rupert Murdoch is, of course, an old hand at the media mogul game: he inherited a modest newspaper business in Adelaide from his father, and achieved dominance in that industry before expanding into television. By a series of astute purchases and launches, he achieved a similarly dominant position in UK newspapers.

In the US, he started in print, then bought a film studio at a good price, before challenging received wisdom by launching a fourth television network, named Fox after the studio (in which path he has since been followed by Warner and Paramount). A Fox news channel and a Fox cable channel were added to the mix.

He transformed the sports rights market, started a TV production business (Twentieth Television) that is now the industry leader, re-invented the economics of both station ownership and cable access, and even cheekily invited all the networks to follow the UK example, by giving up the lucrative but corrupting revenue from political advertising in exchange for guaranteeing politicians air-time.

Perhaps Murdoch’s most audacious business coup was the formation of BSkyB, currently the most valuable pay-TV business in Europe. But the origins of that company perhaps tell us something about why, despite the alarmism of many media analysts, Murdoch has been so unsuccessful in his various attempts to replicate that triumph across the world.

Sky’s the limit

When Sky Television was first launched in the early 1980’s, it was targeted at the pan-European advertising market. The idea was to persuade households across Europe to install a large enough dish to receive signals from a geo-stationary satellite. The satellite would beam pan-European programming to an audience attractive to the multinational companies advertising in the countries within the satellite’s footprint.

Three problems. First, the early dishes were large and expensive. Secondly, very little programming could command a consistent following across multiple territories.

Most importantly, the pan-European advertising market was a myth. Even multinationals tended to allocate advertising spend country by country.

Year after year, Sky Television lost money. The nail in the company’s coffin seemed to be the decision by some European governments to issue national licences for programme services delivered by high-powered satellites, that could target much smaller dishes.

Murdoch, who had turned to the Sky option after being effectively excluded by UK regulators from the advertising-funded commercial television system, failed to win such a licence in the UK. The successful consortium was called British Satellite Broadcasting, which included such blue chip companies as Pearson and Granada, and prepared to launch in 1990.

But by then a company based in Luxembourg, SES Astra, had come up with the idea of a medium-powered satellite, serving 60-centimetre dishes, relying on old-style PAL signals rather than the untried DMac system that BSB was required by UK regulators to deploy. British Telecom – breaking ranks with the other European state-owned telecoms monopolies, who wanted to prevent such technology being used for domestic broadcasting – licensed much of the capacity of the first Astra satellite, and sub-leased four channels to Murdoch.

Exploiting new regulatory provisions whereby national governments in the EU could not prevent cross-border broadcasting, Murdoch spiked BSB’s guns by transforming his old single-channel service into four streams of news, entertainment, movies and sport. BSB complained bitterly that government broadcasting policy was being undermined, but Murdoch’s friend Prime Minister Thatcher had no easy means of stopping Sky, even if she had wanted to.

There were still immense obstacles. A way had to be found to encrypt and decrypt PAL signals so that subscriptions could be charged and piracy of smart cards thwarted. These mechanisms – labelled “conditional access” – had to be linked to subscriber management systems of considerable sophistication.

Programming had to be sourced in the face of fierce bidding competition from BSB. Manufacturers had to be found for the hardware, retailers had to be motivated to sell it, and aerial installers had to learn new skills.

Most experts predicted multiple failure, but their pessimism turned out to be a blessing in disguise for Murdoch. The complacent UK broadcasting industry woke up too late. It had wrongly assumed that the unquestioned quality of four-channel regulated television at the price of a fixed licence fee would be an impenetrable barrier for this tacky upstart.

Still, Murdoch almost failed. News Corporation’s borrowings to support Sky took him to the edge of losing the company. But BSB’s shareholders, also haemorrhaging cash, had launched second but cracked first, initiating a 50:50 merger that gave Murdoch operating control of what became BSkyB (British Sky Broadcasting). Between them, the two companies had lost nearly £2 billion, with continuing weekly losses after merger running at £10 million.

Murdoch, with a largely Antipodean management team, turned the business round, still investing heavily in sports rights, but concentrating primarily on marketing the concept of choice. Vocal support from his newspaper empire was occasionally helpful (but also at times a hindrance).

The first public flotation came within four years of the merger, valuing the company at £4 billion (these days, the figure is £12 billion, and it rose above the £30 billion mark at the peak of the bull market). Murdoch had saved from their own ineptitude the very BSB shareholders who had so fiercely criticised him.

National success, global failure

But the unusual circumstances of his UK success misled Murdoch. First mover advantage, slow and arrogant competitors, over-reliance by them on regulatory privileges, their failure to address audience needs and their historic tendency to suppress the value of sports rights, the appeal of multi-channel choice and high-quality sports coverage, the targeting possible with niche channels: all these factors combined to create the conditions for Sky’s domination of the UK pay-TV market.

In the absence of such a combination elsewhere, all Murdoch’s attempts to clone BSkyB have failed – notably in the US (ASkyB), India (ISkyB) and Japan (JSkyB). Star in Hong Kong and Foxtel in Australia are still losing money. In one week in February 2002, Murdoch wrote off $3 billion across Germany, Italy and the US from failed or failing pay-TV broadcasting ventures.

Murdoch’s Eastern front: the quagmire

In most cases, the problems stemmed from launching against a strong or entrenched competitor. DirectTV had made the running in the US, and Murdoch’s successive attempts either to launch a separate system (ASkyB) with MCI/WorldComm, or to merge with the other players, such as Primestar and Echostar, or to buy DirectTV, have all come to nothing, with heavy losses incurred, and many enemies made.

A year of manoeuvring to persuade the owners of DirectTV to merge it with Murdoch’s satellite operations worldwide to create SkyGlobal ended when the Echostar boss, Charlie Ergen, aggravated by his previous dealings with Murdoch, mounted an audacious counter-bid that depended heavily on borrowings from those same owners.

The Echostar deal may yet founder on regulatory opposition to the narrowing of consumer choice, particularly for those beyond the reach of cable (opposition being orchestrated by News Corporation, oblivious to the irony that the same opposition had been nurtured by Ergen to frustrate a Murdoch/DirectTV merger). If the deal fails, though, it may not help Murdoch: it is now assumed that a management buy-out of the DirectTV business would ensue.

Echostar has found support from none other than Jean Marie Messier, the pugnacious chief executive of French conglomerate Vivendi-Universal, who had become a thorn in Murdoch’s side after Vivendi took over a large French shareholding in BSkyB (one of the original investors in BSB had been Chargeurs, which owned the distribution company Pathe).

Murdoch and Messier have at times attempted to collaborate, at one point exploring merging BSkyB with Canal+, the leading French pay-TV operator in which Vivendi owned a majority stake. French politicians and the highly-politicised French film industry baulked at such a prospect, and it rapidly receded. Instead, Messier decided to sell down his stake in BSkyB, thereby usefully weakening its share price as Vivendi invested instead in competition with News Corporation.

The two men had also tried to merge their loss-making pay-TV ventures in Italy: Telepiu (owned by Canal+) and Stream (owned by News Corporation and Telecom Italia). Italian politicians and regulators blocked the move, and Murdoch was forced to sell Stream to Vivendi at a heavily discounted price, bringing to an end his repeated attempts to break into that market. He has tried many times to buy some or all of Berlusconi’s Mediaset – ironically, Letizia Moratti, the businesswoman recruited to lead his Italian ventures who subsequently departed amidst acrimony, is now a minister in Berlusconi’s government.

The German Solution?

Murdoch’s experiences in Germany have been no happier. As pay-TV emerged there in the 1990s, he courted all the different possible players – Leo Kirch, the septuagenarian tycoon behind KirchGruppe, owner of the biggest rights library; CLT, the Luxembourg-based broadcaster; and Canal+. Deals were signed, and then abandoned. When CLT and Kirch attempted to merge their nascent pay-TV propositions, EU regulators blocked them, leaving Kirch’s Premiere World holding the field (as well as film and sports rights expensively acquired during the period of intense competition).

Sadly, Kirch’s Premiere World has never overcome its inherent disadvantages and has consistently lost money. Its technology is weak, its consumer proposition unfocused, its relationship with subscribers uneven and its biggest problem unresolved: Germany already has extensive pay-TV basic tier provision through 85% cable penetration, and 18 free-to-air channels offering a wealth of the sport, films and US series that would otherwise be Premiere World’s particular attractions.

Even so, Murdoch has kept a close watch on the business, and agreed to a share swap between BSkyB and Premiere World, on condition that his stake in the German operation could be converted into cash at his call (or that he could take over the whole operation). After a succession of management changes, Premiere World, far from improving its fortunes, is threatening to bring down the whole Kirch empire.

Kirch cannot easily close it, as it is the only outlet for the expensive film and sports pay-TV rights he has acquired. His own bankers have warned that he is now a credit risk. BSkyB recently wrote off its whole £1 billion investment, whilst re-asserting its determination to secure as much cash for it as possible, even if this involved bankrupting Kirch: a real gun to the head. Small wonder Kirch has called Murdoch a shark.

Kirch is now trying to dispose of assets, but his is a private company with multiple and mysterious layers, and neither creditors nor potential purchasers can be sure which assets have been secured against which loans. Kirch is currently trying to offload his stake in Spanish broadcaster Telecinco to his long time collaborator Silvio Berlusconi, who as Italian prime minister is perfectly placed to use political power to defend his media business interests.

Kirch has also tried to sell television rights to the Football World Cup, and to Formula 1, bought at the top of the market from motor-racing tycoon Bernie Ecclestone: but the value of sports rights on television is in sharp decline as a result of the advertising recession and the financial fragility of many pay-TV platforms.

Inevitably, Murdoch’s re-involvement with Kirch is much-rumoured, and – on his side – much denied, despite seeking a meeting with the German Prime Minister Gerhard Schroeder at the height of the crisis. The German election looms: Kirch’s banking support comes largely from the Bavarian region where Schroeder’s main rival, Edmund Stoiber, has his power base.

So the Kirch crisis has assumed major political proportions. There is much talk of a “German solution” that will keep out Murdoch and his ‘aggressive’ business practices (like cutting prices and making his products more attractive to consumers).

Paying for world domination

If Murdoch succumbs to the temptation to take over Premiere World, he will have secured the only pay-TV operator in the richest and largest European market: but one that needs radical overhaul if it is to succeed at all, and which lacks the cultural flexibility to absorb a raft of English-speaking News Corporation executives to turn it around. The chances are that it would sink into the same mire as all the other pay-TV operations, save BSkyB.

Monsieur M.: an American in Paris?

At least Vivendi’s Messier has avoided the German quagmire. But his disparaging comments about French cultural protectionism – particularly shocking to the French in that he controls the main engine of film subsidies, Canal+ – suggests that in his determination to assimilate American business practices he may have gone entirely native, and be conceding too much to American interests.

Indeed, having bought Universal – which had acquired Europe’s leading film producer and distributor when it had taken over Polygram for its music assets – Messier has made no attempt to revive the Polygram Filmed Entertainment entity.

There has long been a clash between American free market beliefs (which effectively represent Hollywood’s demand that the US government repay past favours by pursuing its interests abroad) and European protectionism (which joins together instinctive political defence of national cultural life and the small producer’s fear of larger competitors). The stand-off at the last GATT negotiations – when the French claimed a “cultural exception” for the audio-visual industries – will be put to the test when talks begin in earnest on the General Agreement on Trade and Services in 2003.

Hollywood has made clear that while it may tolerate broadcast quotas in “old” media, it will not do so for “new” media such as pay-per-view, whether delivered by satellite, cable or a telephone line. Messier’s recent attack on the French cultural exception suggests that Universal is part of the US side of the negotiation, despite its putatively French ownership.

Some French observers admire Messier for responding to the globalisation challenge by taking on Hollywood in its own backyard. Others deplore the gaping hole he seems to have left in traditional defences, and his adoption of the English language along with his American thinking.

He would no doubt argue that there is little point in being a “national champion” if it precludes attacking the US market (the various European ventures of Canal+ have patchy records) – and the best way to attack is to be there, a sentiment strongly shared by the other major European M, cigar-puffing CEO of Bertelsmann, Thomas Middelhoff.

Bertelsmann envies the access to the capital markets the US giants enjoy, and Middelhoff is determined to end Bertelsmann’s historic private ownership status within two years. But to do that he too must adopt US business practices (like making and reporting consistent profits), as well as build out from the company’s strong German base.

So is Bertelsmann (or Vivendi) succumbing to globalisation pressures or responding to them? Is the fiasco in the German market down to cosy business practices, poor management or adverse market conditions? Surely what we are seeing with Kirch is as much a failure of a narrow national strategy as Murdoch’s ills in Germany, Italy and so many other territories are a failure (so far) of an undifferentiated global strategy.

Liberty’s far-sighted Mr M.

Nor is Murdoch alone in his blemished recent track record. The European cable conglomerate, UPC, has suffered crippling losses, and has effectively been sold at a huge discount to another Mr M, John Malone of Liberty Media, the most far-sighted cable executive in the US. Malone has also been active in the negotiations to rescue the heavily over-extended cable company NTL, no doubt with a view to eventually merging it with the other large UK cable operator, Telewest, in which he holds a 25% stake.

Leo Kirch likens Murdoch to a shark, always dangerous, always on the move. By contrast, Malone is a swamp alligator, content to lie secreted in the mud, to let the prey come to him. He is notoriously reluctant to leave his Denver base, least of all to travel overseas. Yet in the last two years, having made a vast fortune from building, buying and selling cable systems in the US, he has become the biggest single force in European cable. He also owns significant stakes in News Corporation and AOL/Time Warner.

His latest move has been to bid £3 billion to buy six cable systems from Deutsche Telekom (which needs the cash); though he has threatened to walk away from the deal if German regulators continue to insist he expensively upgrade those systems.

Yet Malone – unlike Murdoch – has never shown any interest in the newspapers that attract so much political attention. Nor is he intent on thrusting US content down the pipes he is buying. He simply calculates asset values and market trends. Yes, he is a symptom of globalisation: but no more so than capitalism is generally. If he is a threat to consumers in any single market, because he has acquired a dominant position, local regulators will tackle him.

The counter-productivity of the national solution

After all, EU and national regulators are much less interested in “national champions” than politicians tend to be. Monopolies of any nationality are suspect. Yet ironically, their interventions in the name of preserving competition in markets have often had counter-productive effects.

EU and national regulators prevented BSkyB from joining what is now ITVDigital, so crucially weakening that company; prevented Kirch and Bertelsmann from merging their pay-TV interests, so leaving Kirch to struggle on alone when Bertelsmann switched its attack to free TV; and prevented Telepiu and Stream from merging, so leaving Telepiu a free hand when Stream folded its cards. Indeed, one of the few instances where regulators did not intervene – the much-criticised failure to prevent the Sky/BSB merger – has led to the single largest success story in Europe.

The political response from Europe – most notably from the European Parliament – to the challenge of US dominance has been a mixture of quotas, subsidies and support for state broadcasters. The extent to which this has benefited the European consumer is an open argument: but in terms of building strongly based businesses, there must be a question mark over the protectionist instinct. Even the commercial companies that have grown up within the regulatory embrace – Granada, Carlton, TF1 – have made little impact on the international scene.

The current circling of German media assets by predators like Malone and Murdoch is scarcely testimony to the virtues of “national solutions”. But we should not assume that if they are successful in acquiring assets they would necessarily be doing their own shareholders a favour, or consolidating their stranglehold on global media: ask the investors in NTL or UPC.

The global media game is far more complex than a simple David and Goliath story. Readers should beware of glib pronouncements on the relentless forward march of the media moguls, but keep one eye on Mr Malone nevertheless.