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The Sky bid: battle commences

No significant business decision at Sky has ever – ever – been taken without Rupert Murdoch's approval. So what difference might 100% ownership of Sky possibly entail?

lead Houston, TX, February 2017; Rupert Murdoch, Jerry Hall, and Lachlan Murdoch before Super Bowl LI commences at NRG Stadium. USA TODAY Network/Press Assocation. All rights reserved.The opponents of the bid by 21st Century Fox (or 21CF), controlled, through a 39% minority stake, by the Murdoch family trust (or MFT) for the 61% of Sky plc it does not already own (but which it effectively controls, also through a 39% stake) can celebrate: they have won their first skirmish.

As widely predicted (including here, “Rupert Returns”, on December 22), the Secretary of State for Culture, Media and Sport, Karen Bradley, has indicated that she is “minded” to issue what is called a “European Intervention Notice” (or EIN) in relation to the bid. This allows her to ask the relevant competition authorities (Ofcom and the Competition and Markets Authority, or CMA) to report on two public interest considerations: “the plurality ground” and “the broadcasting standards ground”, to see if there might be a negative impact.

It is important to remember that the threshold for intervention is low – “might”. Likewise, for Ofcom to recommend a full inquiry (which might take the CMA six months as opposed to their own six-week timetable for a preliminary assessment), the threshold of risk is still quite low, though higher than for the Secretary of State. However, it would only be if the CMA thought the risk of harm to plurality or standards was real and significant that it could recommend blocking the deal, or extracting concessions from the parties that would eliminate or ease those concerns.

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Ms Bradley sent an 8-page letter to the merger parties (21CF and Sky), published on the DCMS website on March 3, immediately after they informed her that they had submitted their proposal to the European Commission. The EU has the exclusive right to adjudicate on the economic implications of the bid, but carves out for the EU state most directly affected by a proposed merger the right to intervene, through an EIN, on public interest grounds. The parties had until Wednesday March 8 to submit reasons for not issuing an EIN, with a decision to be announced two days later. Sensibly, the parties acceded to her decision, allowing the review to go ahead.

In simple terms, what this means is that the EU competition authorities will rule on whether there are any behavioural dangers that might arise out of the deal – unfair trading, exploiting dominant positions in one sector or territory in another, predatory pricing, and so on – whilst the UK can only intervene on the very narrow grounds of plurality and standards. As the EU has already approved the three-way merger between Sky and its German and Italian equivalents, there seems no basis for it objecting to a change of ownership of the combined entity, especially as the prospective 100% owner is already the controlling 39% owner.

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How about the UK dimension? Effectively, Ms Bradley’s 8 pages revolve around one issue only: the ownership and operation of Sky News. How much difference to the quality of Sky News could 100% ownership by 21CF make, as opposed to the current 39%?

The last bid for this 61% of Sky was made in 2010/11 by what was then called News Corporation, but which has subsequently been divided into two separate companies with distinct groups of shareholders, 21CF and new NewsCorp. 21CF holds all the Murdoch entertainment interests, whilst new NewsCorp owns all the print and publishing assets (including The Sun, The Sun on Sunday, The Times and The Sunday Times in the UK, through a wholly owned subsidiary, News UK). One of the issues that regulators would need to assess is what difference this splitting of the assets makes, as compared with seven years ago.

The answer may be surprising: given that Murdoch – or rather, the MFT – controls both Sky (through 21CF) and the newspapers (through new NewsCorp) – the issue is not whether they are separate or combined as entities, but whether MFT’s own position across both businesses becomes unacceptable under UK plurality rules, either currently or if it were to own 100% of Sky.

What sometimes surprises outside observers of these media investigations is how vague and subjective the judgements can be that regulators (and ministers) apply. For instance, what is ‘control’? Is there any significant difference to the way Sky is run as between its first two years (when NewsCorp owned 100%), the following two years (when NewsCorp owned 50%) and the last 25 years (when NewsCorp and then 21CF owned 39%)? Obviously, there are differences in process, and in corporate governance terms, but in trying to come up with anything substantial Ofcom will need to do better than last time, when it floated the idea that 100% ownership would give the Murdochs more control over the appointment of the editor of Sky News. That is easily proven to be untrue: no editor of Sky News has ever been appointed without MFT approval.

As far as I could judge during my four years as Sky’s Head of Programming (in the 1990s), the Murdochs had complete operational control of Sky, down to scrutiny of every line of every annual budget, with just 39% ownership: but have never, during its nearly 30 years on air, ever tried to influence the content of Sky News, whatever percentage of Sky they owned. During my four years as Sky’s Head of Programming (in the 1990s), the Murdochs had complete operational control of Sky… with just 39% ownership: but have never, during its nearly 30 years on air, ever tried to influence the content of Sky News.

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Clearly, 100% control of a company allows you to dispense with some of the governance mechanisms that are required when there are outside shareholders, and especially when the company is listed on a stock exchange. These include appointing independent directors to the board, issuing regular financial reports according to stock exchange requirements and ensuring that a position of effective control is not abused to the detriment of the outside shareholders. 100% control also allows you to consolidate the activities of the subsidiary with the parent company, which has significant tax and accounting advantages.

But none of this seems relevant to the first issue raised in the Bradley letter: the statutory need for there to be a “sufficient plurality of persons with control” of media enterprises. It so happens that there is no legal definition of “sufficient”, but we know from the last report on media plurality conducted by Ofcom that their only concern at that time over the current number of “persons with control” was the absence of internal plurality at the BBC, which is overwhelmingly (by a factor of 10) the dominant supplier of news consumed by UK adults. Even before the split between 21CF and new NewsCorp, the MFT position was not considered a threat to media plurality. Sky and News UK between them account for less than 10% of UK news consumption.

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How could the displacement of the tens of thousands of shareholders (none with more than a small percentage of the total) constituting the 61% of Sky not owned by 21CF constitute a reduction in plurality of “persons with control” over media enterprises, so as to render it suddenly “insufficient”? They exercise no control individually, and no meaningful control collectively. Note that the purchase of Channel 5 by Richard Desmond (which unquestionably reduced the number of “persons with control” over media enterprises, in eliminating RTL from the UK scene) was not subject to any kind of inquiry; nor, indeed, was the purchase by News UK of Virgin Radio and TalkSport, representing about 2% of the UK radio market.

In 2010, Ofcom tried to construct a theory that 100% control was qualitatively different from complete operational control. This led me to describe their position as the “Ofcom paradox”, whereby if Murdoch had managed to buy 39% of every national newspaper, and thereby secured operational control, Ofcom would have regarded the outcome as of no significance, as all those enterprises would continue to trade under their previous names. Under such a scenario, Murdoch would control the editorial output of 100% of our national newspapers, but Ofcom would see no reduction in media plurality and therefore no grounds for intervention. So blinkered was the Ofcom approach that it attributed none of the 39% of Sky owned by NewsCorp to the “before” calculation of shares of consumption of news, but attributed all 100% to the “after” calculation.

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Does the existence of outside shareholders, and a group of independent non-executive directors, currently constrain 21CF’s control of Sky News? The only evidence we have is from the last bid, when those very directors actually invited Murdoch to abandon Sky News in order to facilitate his take-over. As it turned out, the MFT’s refusal to close down a service into which it has pumped at least £500 million over the years, and its willingness to engage in a lengthy negotiation with Ofcom over a stand-alone structure for Sky News, meant that the last deal was not quite closed by the time the Milly Dowler revelations led NewsCorp to drop its bid. In short, the Murdochs were far more committed to Sky News as a service than the independent directors.

The Bradley letter is coy to the point of naivety about the MFT’s control of both 21CF and new NewsCorp, describing its 39% holding in each as “potentially giving it control in the form of material influence”. Let’s not beat about the bush: Murdoch has complete operational control over both. Other than in the brief period after the merger in 1990 between Sky and BSB, to form BSkyB, no director of Sky, NewsCorp or 21CF has ever been appointed without Murdoch’s agreement.

Even less credible is the notion that, because the MFT owns 39% of 21CF, and 21CF owns 39% of Sky, the MFT only “owns” about 15% of Sky! Once you have operational control of 21CF, then it is the whole of 21CF’s stake in Sky that you exercise, not 15%!

Nor is there any question, as the letter speculates, as to whether the MFT “already has a degree of influence over Sky, which may or may not give it control in the form of material influence”. Murdoch invented Sky, saw it through its years of losses where it nearly brought down his empire, steered it through the merger with BSB which gave him express operational control in a 50:50 deal, and retained that control when the flotation of BSkyB (allowing the exit of the old BSB shareholders) required him to reduce his stake to below 40%. No business decision of any significance at Sky has ever – ever – been taken in nearly 30 years without his approval.

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So what difference might 100% ownership of Sky possibly entail? The Bradley letter floats several ideas that have been put to the DCMS. All of them, however, depend upon three unsustainable hypotheses.

The first is that 100% ownership would give the MFT more control over the editorial content of Sky News than the present complete operational control, which would be used to “Foxify” its output (the Bradley letter more indirectly  refers to whether 21CF shows “a genuine commitment to broadcasting standards in other countries”). The second is that, if they wanted to, the Murdochs could influence the content of Sky News in the same way as they can influence the content of The Times or The Sun. The third is that the impartiality rules all Ofcom licensees are obliged to observe might be undermined by manipulating the news agenda.

The only ‘evidence’ I have ever heard in relation to the first notion comes from openDemocracy’s old friend, Professor Steve Barnett, of the University of Westminster, who recounts Murdoch telling him, some years ago, that he would have liked to have made Sky News more like Fox news, but that “his people” would not let him. I don’t know if Murdoch was gently spoofing Steve, but I do know that there have never been any “people” at Sky who were in a position to frustrate any of Murdoch’s wishes. Sky News has an almost impeccable record as a broadcaster, and has won innumerable awards. Fox News – which is actually available in the UK – is barely watched here and is far less respected. Murdoch is not a fool. He is not going to swap a valued asset for damaged goods, ever.

Indeed, it may well be that it was at Fox News, under its formidable founder, Roger Ailes, that Murdoch found his ability to exercise control was – uniquely – limited. Now that Ailes has been forced out – under threat of multiple lawsuits for sexual harassment, but bearing a very fat cheque – it is possible that Fox News may become less raucous and combative, which is certainly what Murdoch’s children who are active in the business would wish.

If he had wanted to offer a clone of Fox News to replace Sky News, Murdoch has had nearly 30 years to do so: but has declined the opportunity. There is not the slightest reason to imagine that this proposed transaction would change his mind.

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The second hypothesis is that the MFT could influence the content of Sky News in the same way as they might influence the content of the UK newspapers it controls. The problem with that notion is that it is illegal to do so. Strict impartiality rules apply to all news broadcasters licensed by Ofcom. Unless Ofcom is prepared to say that these rules are unenforceable, or that it is an ineffective regulator, this hypothesis must fail.

In its previous report in 2010, Ofcom raised the possibility that the impartiality rules might be subverted by manipulating the news agenda for Sky News. But that possibility must surely also apply to all news broadcasters, as there is no universally agreed, or ‘objective’, news agenda. ITV News, Channel 4 News, BBC News, Al Jazeera News, Sky News, RT News and Fox News (amongst the many news broadcasters in the UK), not to mention Virgin Radio and TalkSport Radio (both owned by News UK and therefore controlled by the MFT) have different news agendas. Who is to say which, if any, is ‘wrong’ or ‘right’ (or, indeed, ‘left’)? Either they are compliant with UK legal requirements, or they are not, in which case they will be issued with warnings by Ofcom and eventually lose their licence. It surely cannot be a reason to block a transaction that Ofcom believes the impartiality rules are too vague to enforce

Again, it is important to apply a reality check: what evidence is there from the last 29 years that the MFT has influenced, or tried to influence, the content or news agenda of Sky News, whilst having complete operational control over the service? If there is none, why should 100% ownership make any difference? It is puzzling that Ms Bradley should give any credence to this completely speculative and unsupported hypothesizing, especially when its effect is implicitly to doubt her department’s ability, and that of the regulator it sponsors, to carry out their statutory duties.

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The issue of broadcasting standards, and the ability of 21CF to meet them, has slightly more substance. Unfortunately, the thrust of the minister’s letter is partially undermined by a basic error. It states that 21CF is “the successor company to News Corporation, which owned the News of the World at a time when illegal activities relating to the phone hacking scandal were carried out”. In fact, at best 21CF is ‘a’ successor company; but more accurately, new NewsCorp is the successor to old NewsCorp in owning News UK, which remains the publisher of the Murdoch newspapers. The only connection in operational terms was in the person of James Murdoch, who was CEO of News UK during the “denial” phase of phone-hacking, as well as being chairman of Sky for some of that time.

The Bradley letter correctly and properly rehearses the harsh criticisms of James that the Commons Media Committee made in its report on phone-hacking and that Ofcom issued at the time that it carried out a “fit and proper person” test of Sky as a holder of broadcast licences. Ofcom actually stopped short of a negative finding on the issue as such. James’ stepping down as chairman of Sky may have played its part in that decision, but it was notable that Ofcom did not – as far as is known – run a new “fit and proper person” test when he returned to the chairmanship some years later. Clearly, James’ role as CEO of 21CF is part of the scrutiny that Ofcom is being invited to undertake: it is even conceivable that Ofcom, in its report, might imply that approval of the transaction would be dependent upon him stepping down from one or other position. I will address that prospect a little later.

Ofcom has injected another ingredient into the mix (though the Bradley letter, saying it “encloses” the details, does not actually publish them): namely, a survey across ten years of the weaker compliance record of 21CF’s own services, most notably the international version of Fox News, as compared with that of Sky (most notably, Sky News).

This is, of course, a legitimate point, and one that raises a question about foreign ownership of UK media more broadly. Given the very different standards that apply in the US with regard to “undue prominence” (where commercial products are regularly featured on programmes in a way that is forbidden in the UK) and “due impartiality” (where a number of US cable news services clearly tilt either to the left or the right in a way that is unacceptable in the UK), it would be an open question whether a media owner used to US practice could successfully adapt to UK requirements.

But that is not a question that has ever been put to Viacom (when it acquired Channel 5 without any sign of an Ofcom intervention), or CBS, or CNN, or any other non-UK media owner in relation to their US outlets. The judgement must surely be how they operate channels actually licensed in the UK by Ofcom, which are typically their international feeds.

Here, there is no doubt that Fox News has several times fallen foul of Ofcom’s broadcasting code, mostly for breaches of due impartiality, sometimes for replacing advertising breaks in the US feed with quasi-commercial features which Ofcom finds in breach of its code. It is wholly unsurprising that the compliance record of Fox News is worse than that of Sky News, whose output is finely tuned to the UK and its regulatory environment.

But it is mildly absurd to project from that comparison the prospect of any deterioration in the record of Sky News should 21CF take 100% control of Sky: it is pure supposition, whereas the actual performance of Sky News under the control of the MFT, whether with 100% ownership, 50% ownership or 39% ownership by the companies it controls is available for examination over nearly three decades. Even if any weight could be attached to the supposition, it would be a huge stretch to say that, because the compliance record of Sky News might deteriorate at some point, the transaction should be blocked. In any case, Ofcom has plenty of sanctions to hand if it finds a service non-compliant, including removal of its licence. The BBC has committed much more serious breaches of the Ofcom broadcasting code than Fox News has – and been heavily fined for doing so – but has still been allowed to launch new services.

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How about James’ past failings in dealing with the phone-hacking scandal? As the Bradley letter states, time has passed. If he is acceptable to Ofcom as chairman of Sky (which appears to be the case), why would he be unacceptable as CEO of 21CF? In six weeks’ time, we will find out what Ofcom’s view is.

The most significant difference between 2010/11 and the current proposed transaction is not the split of old NewsCorp into two separate entities; or the passage of time since phone-hacking; or the dramatically changing media landscape that puts so much emphasis on scale; or even the likely caution with which Ofcom will conduct its review compared with 2010’s error-strewn exercise.

The difference that will matter is what the Murdochs have learned since last time. Then, they were sucked into a lengthy and bad-tempered negotiation with Ofcom, in the hope of avoiding a lengthy full inquiry by the Competition Commission (the forerunner to the CMA) that might have derailed the transaction’s timetable. This time, they have allowed plenty of time for Ofcom to do its worst, and then allow a grown-up regulator – the CMA – to adjudicate on the matter, in the belief that the media plurality objections will fail, and the broadcasting standards issue will be deemed too theoretical. They do not expect to close the deal till the end of 2017. This time, they have allowed plenty of time for Ofcom to do its worst… in the belief that the media plurality objections will fail, and the broadcasting standards issue will be deemed too theoretical. They do not expect to close the deal till the end of 2017.

They will not make the mistake of negotiating with Ofcom: last time, a formula was found for spinning off Sky News which would have had disastrous consequences for that excellent service. This time, I expect the Murdochs will take a much tougher line, should push come to shove.

They can legitimately say that they invented Sky News, nurtured Sky News, invested in Sky News and have sustained huge losses in maintaining its high production and editorial standards: so if UK regulators and politicians want to look that gift horse in the mouth, and demand that it be removed from their control, then they can offer to dispose of it (but without the brand name). In the absence of a buyer, they would reluctantly have to close the channel – thereby, as it happens, allowing the cash offer to the 61% to be sweetened in order to close the deal.

Of course, none of this will be said, or even hinted at, unless and until the moment should come. It would be a strange system that produced an outcome which damaged media plurality in the name of protecting it: but at least those who believe that the influence of the Murdochs over UK media is too large, and needs to be diminished, will derive some satisfaction.

About the author

David Elstein is Chairman of openDemocracy's Board. He is also Chairman of the Broadcasting Policy Group. 

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