What should we do about Murdoch?

It is understandable that people are fearful of Murdoch's power over the media, but there is no real justification for Vince Cable to intervene in News Corp's takeover of BSkyB.
David Elstein
6 October 2010

On the OurKingdom home page we have published a post from David Elstein on the Murdoch bid for all of BSkyB. Here is the full background paper and links - Thanks Guy! )

Three months ago, News Corporation (parent of News International, which owns four UK national newspapers and 39% of BSkyB) proposed buying the remaining shares it does not currently own in BSkyB, the UK’s biggest pay-TV operator. The BSkyB board rejected the offered price – 700p a share – as too low, and News Corp has yet to confirm to the European Commission (whose approval is required because of the size of the transaction and News Corp’s other European interests) that it intends to proceed. As soon as it does so, a clock starts ticking for Vince Cable, who – as Business Secretary – would have 25 days to make what might be his biggest decision since joining the coalition government.

This is whether he wants to use his powers under the 2003 Communications Act, which allow him to issue an intervention notice requiring Ofcom to assess the potential impact of the proposed News Corp deal on media plurality, especially news provision.

Murdoch is the most powerful player in British media, in the shape of 37% of national newspaper circulation (The Sun, News of the World, The Times, The Sunday Times) and that controlling stake in BSkyB. Those positions are what lie behind a series of recent calls for Cable to intervene, not least from sections of the media that feel threatened by the Murdoch empire (the BBC, Guardian Media Group, the Financial Times, and so on).

You can read the arguments for intervention in Will Hutton’s article in The Observer of September 12th, in a leader in the Financial Times on September 20th and in Marina Hyde’s blog in The Guardian on September 24th.  You can read counter-arguments – from perhaps unexpected sources – in Peter Preston’s Observer blog, also on September 12th (“Rupert Murdoch does need watching; but he’s hardly the Emperor Ming”) and Roy Greenslade’s Evening Standard article of September 22nd (“This is hardly a Berlusconi moment”).

Roy’s reference to Berlusconi was in response to some of the reporting of a confidential memorandum sent to Cable by Claire Enders, founder of the Enders Analysis consultancy, and distinguished participant in our PSB Symposium this summer. This memo – whose leaking clearly triggered the spate of articles – largely reproduced the contents of an earlier report from Enders Analysis, issued after BSkyB’s annual results were announced at the end of July. The lead author was Toby Syfret. 

Puzzlingly, six weeks earlier, Enders Analysis had circulated another note, written by Chris Goodall, dealing directly with the News Corp bid, and dated June 22nd, which concluded that the case for intervention “is not clear cut” and “our hesitant view is that Cable will not issue a public interest notice”.   

This note carefully went through the legal position, making clear that the only basis for intervention was where plurality was concerned (in practice, news provision), and that broader cross-media ownership concerns were not relevant. Goodall also emphasised that the legislation was primarily concerned with terrestrial broadcasting, not non-terrestrial, other than in “exceptional circumstances”.

The Syfret report (much longer than the Goodall note – the pair of them are, by the way, both excellent analysts) was dated August 4th. The front section, apart from a rogue footnote about telecoms revenues, is a straightforward analysis of Sky’s full year results, which reported total revenues of £5.912bn.

At the end of this analysis, Syfret offers his view of why News Corp was now bidding for the 60.9% of BSkyB not already owned. There are two obvious reasons: less exposure for News Corp to the ups and downs of advertising, and greater freedom to co-operate with other Group-owned satellite businesses in Europe; but also two less obvious ones: more freedom to invest in programme content (why a change of ownership would affect this is unclear), and extraction of synergies between BSkyB and the UK newspapers (the prospects for which are dealt with below).

The next section of the Syfret paper is almost identical to the first seven pages of the Claire Enders memorandum. Unfortunately, this means that the memorandum replicates the questionable assumptions and occasional errors in the paper, starting with the difficult issue of how comparable revenues are between different media organisations. For instance, what constitutes “pay-TV” revenue?

There are only three significant earners of revenue from TV subscriptions – BSkyB, Virgin Media and BT Vision. However, their customers pay for a wide variety of services alongside TV – mobile telephony, fixed line telephony, HD functionality, installations, multiple boxes, broadband, and so forth.  Their mix of services is also very different. Over 60% of Virgin Media’s customers take three or more services, but only 21% of BSkyB’s.  20% of Virgin Media’s revenue comes from mobile telephony, which actually has nothing to do with TV. Indeed, I would estimate that less than 50% of Virgin Media’s total income comes from TV subscriptions.

Syfret estimates that BSkyB accounts for 80% of pay-TV subscription revenues, but I think this is too high a figure, as it would imply that only 30% of Virgin Media’s £3.9bn of annual income comes from TV subscriptions.  BSkyB itself reports that only £4.761bn of its £5.912bn income is from domestic subscribers, and that will include charges for broadband, multiple set-top boxes and HD technology, which are add-ons to an underlying subscription. Moreover, whatever the actual BSkyB percentage that is attributable to TV channels may be, I expect it to decline in future years, as the company concentrates on driving up the percentage of customers taking non-TV services.

A key reason why BSkyB earns the largest proportion of narrowly-defined pay-TV revenues is that for years it was able to by-pass regulatory requirements to make available its movie and sports channels (where it had built up dominant positions) to competitor retailers like Virgin Media, Top-up TV and BT Vision.  It did this by either refusing to name any price, or by charging wholesale prices that left no room for any profit margin.  As a result, Virgin Media – for instance – sold these so-called “premium” channels to just 20% of its customer base, whereas 80% of BSkyB’s own customers subscribed to at least one of these channels. 

The recent pay-TV ruling by Ofcom (see my post on this) will in due course dilute BSkyB’s position, as BSkyB has probably maximized the proportion of its own customers that want premium channels, whereas its competitors are now incentivized to market them. Conversely, BSkyB will concentrate on selling non-TV services to its customers. So the suggestion from the Enders team that BSkyB will in due course earn 50% of what I define as pay-TV revenue seems far-fetched (not that it has any relevance to Vince Cable’s decision).

Syfret further confuses the picture by comparing the BBC with other media organisations. To begin with, he uses the BBC’s £3.6bn annual “spend” figure rather than the revenue amount that he cites for all the other 13 companies in his comparison. The BBC’s revenue is actually £4.8bn, but Syfret excludes all BBC Worldwide’s income, even though he includes programme sales in the equivalent ITV figures. Alternatively, if we go by “spend”, then the BBC is easily the biggest player around, even if we exclude what it spends on non-programme costs (44% of all its spend); this takes the £3.6bn figure down to £2bn, but that is still more than BSkyB’s £1.9bn, and also more than ITV, Channel 4 and Five put together. On this measure, Virgin Media would barely register at all, as it does not commission or produce any original content.

It is even questionable as to whether BSkyB “competes”, as Syfret asserts, with the BBC in any meaningful way. Presenters may occasionally move across from one to the other, and the odd day of golf coverage may change sides, but overwhelmingly the BBC and BSkyB do not compete for revenue, content, customers, management or talent. It is immaterial to both how big the other is (though BSkyB does complain about the BBC’s massive investment in web content, which it believes inhibits or damages similar investments by commercial organisations). Speculative projections as to the future growth of, respectively, licence fee income and “pay-TV” income (however defined) are simply designed to make a political point, not an economic one.

It follows that all the charts illustrating “UK TV revenue” need to be taken with a pinch of salt, as they so often compare non-comparables. Even the comparisons that are made obscure rather than reveal what is really important. Sky’s programme budget is overwhelmingly spent on content that terrestrial broadcasters either cannot licence (movies before they are released to free-to-air TV) or cannot schedule (full-length test matches and acres of football, including extensive build-up and post-match analysis) or cannot afford (Premiership football, for which no terrestrial channel has bid since 1993). 

Conversely, the programme budgets of the BBC, ITV, Channel 4 and Five are spent overwhelmingly on content that would do nothing to distinguish Sky channels from free-to-air channels. The terrestrial channels certainly compete with each other – for talent, for writers, for projects, for acquired series – but the most significant change that has happened in recent years is completely ignored by the terms of the Syfret analysis: the shift from the BBC having an income half ITV’s to having an income double ITV’s – indeed, an income £1bn more than ITV, Channel 4 and Five combined.

The Syfret note then goes on to analyze the position of News International in the newspaper market, but still includes further attempts to compare “consumer revenue” as between BSkyB, Virgin Media and BT Retail. This “definition” simply excludes “business revenue”, which just happens to be the area where BSkyB is weakest as compared with the other two. To be frank, this adds nothing to all the previous ways of measuring BSkyB’s position, which is undeniably strong. But the main purpose of this section of the note – which is reproduced verbatim as pages 9-15 of the Enders memorandum – is to make a case that News International’s 37% share of national newspaper circulation, when placed alongside BSkyB’s position in its market (however defined), justifies intervention.

Yet we already have explicit cross-media ownership rules, entrenched by the last Conservative government, which prevent anyone in Murdoch’s position from owning more than 20% of an ITV franchise. Indeed, the competition authorities go beyond that restriction, having forced BSkyB to sell down the 17.9% stake it acquired in ITV plc, in a dawn raid soon after ITV  had received (and, as it happens, rejected) a merger offer from Virgin Media. Even at the 17.9% level, the regulator ruled that undue commercial influence could be exercised in BSkyB’s favour. As an aside, I should point out that, despite Sky News being a direct competitor of ITN (which is 40% owned by ITV), the regulator rejected a “threat to editorial plurality” as being grounds for intervention.

BSkyB has also been forced finally to agree a reasonable wholesale price for its sports channels (though it is appealing the Ofcom decision).  In the past, Murdoch has been required by regulators to give up operational direction of London Weekend Television, where he was then a 15% shareholder; saw his consortium bidding for the UK high-powered satellite TV franchise rejected; and suffered a further rejection when his consortium bidding for Channel Five lost out, despite having – by common consent – the strongest application, and bidding what subsequently turned out to be the correct price for that franchise (the regulator eventually reduced the annual fee from the £22m that had won the franchise to the £2m that Murdoch thought was right).

So it is not the case – apart from the nodding through of the purchase of The Sunday Times – that Murdoch has been given an easy run by those in charge of competition policy (Marina Hyde is wrong to say that Mrs Thatcher had anything to do with Murdoch’s launch of Sky TV or its later merger with BSB to form BSkyB). The cross-media rules are there and, by comparison with the rest of our rather weak competition regime, they work (Jeremy Hunt, the new Secretary of State for Media, has just announced his plan to abolish local cross-media ownership rules, because they have proved too effective!).

Despite Goodall’s note having made clear that an intervention notice in relation to the News Corp bid can only – and even then, exceptionally, because it involves a non-terrestrial broadcaster – be issued because of plurality concerns, the Syfret paper (and so the Enders memorandum) cites much broader cross-media issues as grist to its mill.  It argues that the ability to subsidize newspaper losses would be enhanced if News Corp owned all of BSkyB. This is a particularly bizarre point, as News Corp’s dividends from its existing BSkyB stake already vastly exceed the losses incurred by the Murdoch newspapers in their worst-ever year.  Moreover, acquiring the BSkyB shares not currently owned would cost at least £7bn – or nearly 100 times more than the worst-ever losses by the newspapers – which is a funny way to go about supporting those losses.

Syfret also posits that full ownership of Sky would allow some additional subscription bundling, say between BSkyB and The Sun, to the possible “severe” detriment of newspaper competitors. Quite why Murdoch would do that is not clear: he does not even bundle, as he could today, The Times and The Wall Street Journal (one of the hypothetical combinations the paper mentions). 

The Syfret paper speculates that News Corp might return to freesheets, despite the debacle of The London Paper, which lost tens of millions, and despite Murdoch’s passionate current commitment to paid content.  The paper floats, and then drops, the idea of The Times emerging from behind its paywall, and then – despite concluding that the paywall strategy for The Times has failed so far and is likely to continue doing so – hypothesises a series of packaged newspaper offers combined with Sky, even though there is not the slightest evidence that this would have any consumer appeal or lead to any positive economic benefit for News Corp. 

The paper also imagines that merged newsrooms – The Times, The Sunday Times, The Sun, News of the World and Sky News – would give some competitive advantage.  As Murdoch has not merged the newsrooms of the papers he owns (indeed, there are documented cases of competitive scooping of each other’s stories) it is hard to see what possible incentive there would be for integrating a completely different medium. 

Syfret cites the example of the BBC’s combined use of television, radio and online. Is he suggesting that this should be broken up, as unfair to competitors lacking such multi-dimensionality?  Or is he confirming the many anecdotal accounts from BBC reporters that the requirement to serve so many outlets leaves them little time actually to do their basic job of finding things out? In any case, Syfret seems not to have read his colleague Goodall’s note on this point: “BSkyB and News International could integrate their news and editorial functions today without the proposed takeover”.

According to the Syfret paper, the transaction should be blocked because a series of outcomes are possible in the newspaper field, including contradictory ones, and owning all of BSkyB will increase the dividend flow from, and control of, BSkyB.  Yet all experience tells us that the beneficial impact for its newspapers of News Corp owning Sky News would be minimal, and that all the hypothetical bundling possibilities (including those already within News Corp’s power, but currently rejected) would simply be variations on the marketing and discounting clout News Corp already commands. Buying the rest of BSkyB would actually strain even Murdoch’s financial muscle in the short term. Incidentally, none of those urging Cable to intervene seems to think there is anything wrong about The Guardian being subsidized to the tune of hundreds of millions, first by the Manchester Evening News and more recently by Auto Trader and the proceeds from its sale.

The Enders memorandum effectively just adds three pages of argument to the thirteen pages of the Syfret paper. It re-runs the “stronger financial position” argument as if its inherent self-contradiction had not registered.  It even cites the free magazine distributed by BSkyB to its subscribers as evidence of potential damage to other publishers (I suspect that most Sky subscribers, like me, bin the magazine unopened, as it long ago abandoned its only useful feature, namely TV listings).

Yet another complete irrelevancy is citing BSkyB’s CEO as planning to build a “more durable” business. This is taken as threatening to strengthen BSkyB’s already strong position in the UK pay-TV market, “by reducing the company’s exposure to cyclical advertising revenues”. Advertising constitutes barely 5% of BSkyB’s revenues, and the CEO would be following this course whether or not News Corp owned the whole company – how this statement could justify an intervention on news plurality grounds is mystifying.

The memorandum mischievously suggests that a consolidation of ownership might affect Sky News editorially: yet Goodall decisively dismissed this in his note – “Sky News will still be subject to rules on impartiality so the concern that it might simply turn into a clone of Fox News will not be a stated reason for Cable to intervene”. 

Lord Puttnam, a long-standing Murdoch critic, claimed to The Guardian that Sky News had never previously been under sole News Corp ownership, so there was still some unspecified editorial danger in the takeover – forgetting that Sky News, having been created by Murdoch, was under sole News Corp control for two years before Sky merged with BSB. Another critic, Henry Porter, in a companion article to Will Hutton’s Observer piece, even threw in the complaint that Murdoch had supported the Iraq war – which The Oberver had also supported!

The Enders memorandum also suggests that News Corp newspapers might boycott services competing with Sky’s. Yet there has been absolutely no evidence of that for 22 years, even though News Corp has always been theoretically able to act this way. Occasionally, The Sun – and even The Times – will give unusual prominence to something on Sky: but my own experience from running Sky programming for four years was that it was hard to get any particular attention. Newspaper editors understood that they were serving a broad audience, only a minority of which were Sky subscribers. 

The memorandum argues that BSkyB is “in principle opposed to all regulations affecting its operations”. This is a somewhat lurid exaggeration. BSkyB embraces impartiality rules, rules relating to advertising sales and content, taste and decency rules, classification of movies, and requirements for fair and non-discriminatory access to its regulated satellite platform, where even the electronic programme guide is regulated. It accepts must-carry rules for public service broadcasters (it was actually Mark Thompson in his MacTaggart lecture who suggested amending them). 

BSkyB is certainly a tough competitor (as I learned, painfully, during my five years on the board of Virgin Media). It objected – understandably – when the Competition Commission ruled that it must give up the 17.9% stake in ITV it had acquired, pointing out that the 2003 Communications Act seemed explicitly to permit it to own up to 20% of ITV. The Commission – in my view, correctly – turned down the objection, on the grounds that other competition issues had to be taken into account. 

Again, BSkyB is appealing the recent decision by Ofcom imposing regulated wholesale pricing of its sports channels, but that is primarily on the grounds (which even Ofcom acknowledges may be successful) that the intervention was based on a previously unused and somewhat ambiguous clause in the 2003 Communications Act, rather than under normal competition law.

Of course, BSkyB resents what it sees as being punished for the success it has achieved as a result of the huge financial risks News Corp took in launching its satellite service, at a time when inevitable failure was widely predicted by the wise and the good. It fights its corner vigorously, throwing millions into legal and consultancy advice in battling adverse rulings: something which gives even the most assiduous regulator pause. But that is not grounds for Vince Cable to use his carefully defined intervention powers.

These only apply where plurality of news is threatened.  On that score, the Enders memorandum offers one further argument: the fact that Sky News bids for news contracts against ITN when they are put out to tender by the likes of ITV, Channel 4, Five and commercial radio.  As Sky News already does this – and it is hard to understand why there should be any objection, other than from ITN – it is impossible to see how the proposed News Corp deal is relevant.

The irony here is that Murdoch enlarged – at a cost of hundreds of millions of pounds – the provision of TV news in the UK, which had previously been the exclusive province of a comfortable duopoly. Sky News is still not profitable, not least because the BBC chose to use further hundreds of millions of pounds, this time of public money, offering a 24-hour news channel. However, there is every indication that its strong reputation, its award-winning record and its brand-enhancing output would be sustained under sole News Corp ownership.

It can scarcely be News Corp’s fault that ITN has been starved of investment and is burdened with a worrying pension fund deficit. If ITN closed, would we call for BBC news to be split up – say, between TV, radio and online – so as to re-establish plurality? The ultimate paradox is that, if fears about news plurality were deemed to be a reason to block the transaction, Murdoch could simply use his existing voting power at BSkyB to close down a loss-making operation. How would that help news plurality?

I understand why people are fearful of Murdoch, as of any super-powerful media mogul. I support cross-media ownership rules, and wish our competition regime were more effective (the purchase of 17.9% of ITV would not have lasted six weeks in Germany, compared with three years here). But I believe that mistaken application of rules undermines the general effectiveness of our competition approach, unsatisfactory as it is. 

I am sorry that the admirable Enders team has assembled such an unconvincing and off-the-point set of arguments.  Adopting them would do nothing to enhance Vince Cable’s reputation, let alone our ability to manage the Murdoch phenomenon.  

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