Fox/Sky, Murdoch and Comcast: winners and losers

On October 11th, the US cable giant Comcast acquires full control of Sky plc. For the first time since he launched Sky, Rupert Murdoch will have no say. But should we be careful what we wish for?

David Elstein
3 October 2018


Credit: Chris Radburn/PA Images, all rights reserved

Comcast was a late arrival at the Sky takeover party. Sky – the UK’s most valuable media enterprise – had been the subject of a bid by Rupert Murdoch’s News Corporation in 2010, trying to buy the 60.1% of shares in the company it did not already own.

That bid – fiercely opposed by those who judged the Murdochs to have too much control over British media – collapsed in the wake of a series of revelations about voice-mail hacking by News Corporation newspapers, and it would be a further six years before 21st Century Fox (which inherited the Sky stake when News Corp spun off its entertainment assets into a separate company) returned to the fray.

Murdoch's long history in UK satelitte TV

Murdoch first invested in satellite television in 1983/4, paying £5 million for a 65% stake in a venture called Satellite Television, which a former researcher of mine, Brian Haynes, had founded in 1980. The venture was renamed Sky, and spent several loss-making years targeting a pan-European audience, who needed large receiving dishes to pick up the broadcast signals. Then the launch of a different satellite system by a Luxembourg company (10%-owned by my then employers, Thames Television) enabled medium-sized dishes to receive a dozen or more channels. In February 1989 Murdoch launched a UK-based 4-channel service, including our first 24-hour news service, Sky News.

The struggle to persuade potential subscribers to buy dishes costing over £100 was compounded by the launch of an official British competitor, BSB (British Satellite Broadcasting, from which Murdoch had been specifically excluded), using a slightly smaller dish. As the rivals raced to sign up Hollywood movies and UK subscribers, they fell deeply into debt. The shareholders in BSB were relieved to find survival in the form of an equal merger with Sky, with the new company being named British Sky Broadcasting (or BSkyB).

Murdoch was expressly granted management control, and once the weekly combined losses of £10 million were converted into similar levels of profit, the old BSB shareholders pressed for a flotation. This would raise some fresh cash, but also allow them to sell out. It was a requirement of the float that News Corp reduce its holding to below 40%, to re-assure new shareholders in BSkyB that they were not just passengers in a Murdoch vehicle. I still have my commemorative medal from the float, dated December 8 1994 (I was Sky’s Head of Programming at the time).

Never mind the content, feel the marketing

Ever since, the possibility of recovering 100% ownership of a business he had created and helped flourish must have lurked within Murdoch’s master company, be it News Corp, as in the 2010 bid, or Fox, as in the 2016 bid.

No-one else had as close a knowledge of the company’s potential, as it spread its technical expertise, geographical reach and means of serving its customers. Telephony (both fixed line and mobile), broadband, cheaper and flexible subscription options, premium versions of technology and system navigation, “over-the-top” delivery of box sets, new territories such as Italy, Austria and Germany: the seamless expansion of the underlying platform and channel-packaging business has been an object lesson for all other media owners.

Sky has been gently mocked by the likes of Private Eye for its relative failure in delivering high quality original content to match its technological and marketing achievements. Yet it is easy to forget that origination is a low priority for pay-TV operators when there is so much acquired material available relatively cheaply: it took HBO 25 years to deliver its first notable originated drama series. Even if much of Sky’s origination, especially in entertainment, continues to be only modestly successful, this year’s crop of drama series has brought us the brilliant “Patrick Melrose” (virtually guaranteed to win Benedict Cumberbatch a BAFTA for best actor), the ingenious “Britannia” from the Butterworth brothers, and the exceptional “Babylon Berlin” from Sky Deutschland and Tom Tykwer.

The Americans are coming

It was not Sky’s “Originals” that attracted Comcast to Sky (nor, despite media coverage of an attractive but apocryphal tale, a taxi driver’s well-informed eulogy to Sky whilst driving Comcast boss Brian Roberts into London). The obvious strategic objective is to enlarge the non-US element in Comcast’s revenue flows from a narrow 9% to a satisfactory 25% in a single stroke. Sky’s wide European footprint is all new territory for Comcast, and 23 million subscribers a healthy platform for further growth.

Just as importantly, Comcast saw an announced deal between Fox and Disney in the US as threatening, but difficult to break up (mostly because Disney could offer the Murdochs Disney stock as an attractive way of delaying tax obligations, whereas Comcast could only offer immediately-taxable cash). Intervening in Fox’s bid to buy all of Sky – where regulatory hostility to the Murdochs was causing endless delays – seemed a much neater and easier way of limiting the growth of Disney. Comcast played a smart hand, quickly countering every Fox move without attracting any hostile comment (indeed, many Murdoch critics welcomed the cable company’s intervention).

But why is Murdoch now bidding farewell to his most formidable media triumph? Perhaps at the age of 87 he could sense that his ability to shape its future was limited: indeed, he had already agreed the sale of most of the Fox entertainment assets to Disney, including whatever stake in Sky – 39% or 100% – he could bring to the deal.

The simplest answer is probably the correct one: price. The pundits were keen to tell us that, in the one-day auction for Sky mounted by the UK Takeover Panel to resolve the bidding war, it was Disney and not Fox that was calling the shots. Yet it is not credible that Disney’s CEO, Bob Iger, would have ignored input from the man who knew more about the target business than anyone else: Rupert Murdoch. And the final bid from Fox – below £15-75, the prevailing market price on the Friday before the weekend shoot-out – perhaps tells us that the Fox strategy that weekend was to keep the auction alive, but not win it at too high a price: and hope to induce Comcast to make a final, irresistible bid.

A significant overbid

It is hard to regard the winning offer from Comcast as anything but a significant overbid: that is certainly what the US market concluded as soon as trading started on the Monday, with Comcast shares dropping 6%. £17-28 per share is a staggering premium to the £9 at which Sky shares were trading last November (when I recommended them to openDemocracy readers as an obvious bargain). In practice, much of the benefit has been accrued by “arb” investors, mostly US-based, who have either built up their portfolio since 2010, or piled in since 2016. Some 40% of Sky shares were held by these funds: roughly the same as the Fox holding. Dozens of Sky staff, holding share options, will now become millionaires or multi-millionaires (perhaps weakening the desire of some key employees to stay on under the new owners).

Although there was brief speculation that Fox might choose not to sell its Sky shares to Comcast, that never seemed a credible scenario. £11.6 billion from Comcast, to add to the £5 billion paid to News Corp when it sold its minority holdings in the Sky Deutschland and Sky Italia to Sky four years ago, represents an exceptional return on the relatively modest investments made by Murdoch’s companies in its European satellite ventures over 35 years (even if at one point in 1992 they came close to endangering the entire empire).

Murdoch is also aware that he will never really be thanked by the UK for delivering a dominant, state-of-the-art European media business to this country, creating tens of thousands of jobs and huge consumer benefit, nor for creating a highly-esteemed 24-hour television news service (which his critics bizarrely imagine he could not wait to subvert, despite spending 30 years not doing so). Sometimes you just have to fold your cards, collect your winnings, and move on.

Be careful what you wish for

Yet those who spent so much time, effort and argument trying to prevent, or at least, delay, Murdoch becoming the 100% owner of Sky News may come to regret their seeming victory. The prospects for Comcast to achieve the cost savings and synergies spelled out in its bid document (and appraised by the ever-vigilant Enders Analysis team in this note) seem to me remote.

There is virtually no overlap between the two businesses (though a certain amount of “best practice” learning may take place). Certainly, the £230 million of promised annual cost savings will not come from merging corporate head offices, which are in different continents. Even the large Comcast subsidiary, NBCUniversal, is highly unlikely to move from Oxford Street to Osterley (when NBCU bought Sparrowhawk Media, which I chaired, a few years ago, only the cheapest staff and office space were let go, despite my offering to tell NBCU how to save tens of millions a year in its wasteful practices).

Nor will NBCU’s distribution strength add more than a modest premium to whatever return Sky expects on its investment in origination. The sheer lack of credibility of the £230 million figure helps explain why so many Comcast shareholders sold their holdings as soon as the deal was announced.

There is, of course, an obvious way for Comcast to save at least £50 million a year in one swoop: the closure of Sky News. Against this, the Enders Analysis note points to the voluntary undertakings given by Comcast to the Takeover Panel: to maintain the brand and culture, broad level of expenditure, and editorial independence of Sky News, for at least 10 years.

These undertaking are extensive, and defined as legally binding (though not quite as extensive and binding as the contractual undertakings Fox had offered the Secretary of State if it had taken full control of Sky). The problem arises should they be breached: what are the penalties? When Kraft gave the Takeover Panel undertakings in advance of buying Cadbury, it breached them almost immediately, receiving in return nothing more than a slap on the wrist. Comcast needs nothing from the Takeover Panel in the future, and has some form in not complying with regulatory obligations in the US.

Comcast’s collection of news channels

In any case, “closing” Sky News may be the least subtle way of slicing the banana. As from October 11th, Comcast will be wholly or partly responsible for three of the most prominent news channels on the Sky platform: Sky News, CNBC and Euronews. CNBC is a US business news channel, which is re-broadcast live to many other territories around the world. It has very little overlap with the other two.

Sky News is overwhelmingly focused on the UK audience. It is hard to imagine that it has much relevance to non-English-speaking audiences (such as Sky’s millions of customers in Italy, Austria and Germany). As for Euronews (channel 508 on the Sky system), Comcast’s NBCU bought 25% of the business (for $30m) only a year ago. A majority of the shares are owned by an Egyptian billionaire, with the remainder held by some 20 public broadcasters from Europe and the Arab world. Euronews claims 52 million daily users, employs 500 journalists, and broadcasts in 12 languages.

NBCU’s international news services are overseen by a familiar UK figure: Deborah Turness, the one-time editor of ITV News (and deputy editor of Channel 5 News when I was running that channel) who was snapped up by NBC some years ago. The redoubtable John Ryley, long-time editor of Sky News, will presumably in future report to her in operational terms.

It is not difficult to imagine NBCU in due course buying out the Egyptian Sawiris family’s majority holding in Euronews, as a prelude to rationalising any overlap between that service and Sky News (or indeed extending the practice of using the same person to file international reports for both its European services and NBC). At that point Euronews’ CEO, Michael Peters would presumably also report to Ms Turness.

Comcast’s undertakings with regard to Sky News are detailed, and include a supervisory structure with an independent chairman, along with the pledge to maintain editorial independence. However, independence in selection of stories, running orders and even staff is not incompatible with a wholesale change of direction for Sky News. For instance, if Euronews were re-branded as Sky News, and run with no less in the way of resources as Sky News currently enjoys, whilst still enjoying editorial independence (from whom? Brian Roberts?), could anyone say that the Takeover Panel undertakings had been decisively breached? And if so, what penalty would follow?

Objectively, reversing last year’s Euronews transaction (even at a loss) is an easier exercise than consolidating ownership and then extracting duplicated costs from some form of combination with Sky News. Perhaps Comcast will simply bite the bullet, perpetuate the luxury of running Sky News as part of the cost of doing business, and admit to its shareholders that it not only overpaid for Sky but cannot take the necessary steps to deliver the promised compensatory savings. And perhaps not.

Rupert Murdoch repeatedly declined to close Sky News, when doing so would have eased his way to outright ownership of Sky, and even when a majority of independent directors of Sky invited him to do so. The endless delays imposed on his acquisition timetable, in both 2010 and 2016, in order to satisfy regulators and ministers that Sky News would be protected by cast-iron guarantees under his full ownership, led to that first bid collapsing and an opportunity to be gazumped the second time by a rival with no particular interest in news (let alone a deep-pocketed passion for it). It would be sad if those who had campaigned so tirelessly to block Murdoch’s bids, in the name of media plurality, were to see the nature – and perhaps even the future – of Sky News endangered by their efforts.

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