Suddenly, life is getting tougher for the Murdoch media empire with challenges emerging in the US and Europe which strike at the heart of his new media strategy of building the size and profitability of his new main company, 21st Century Fox in film, in video content, online and distribution.
The first challenge is the surprise emergence of an auction for one of America’s biggest cable companies, Time Warner Cable. It will cost around $US38 billion in either cash and or shares. But two major players have signalled their interest as dealmakers. The first is Comcast – the biggest media company in the US worth $US130 billion, and Charter – much smaller and worth $US14 billion, but with Murdoch’s old foe, John Malone as a major shareholder.
Comcast also owns NBC Universal, giving it a similar proiile to Disney with TV, film and theme parks, but with a huge cable and growing telco businesses as well. Charter is a smaller all cable business, with a tiny telco arm.
Because of its size, Comcast would struggle to get competition approval for all of Time Warner, but it is suggested it could buy some bits of Time Warner Cable and leave the basic cable business to Charter and allow it to become one of the biggest players in the US industry, with a lot of debt involved – something that has never worried Mr Malone. US reports say it is possible Comcast and Charter could make a joint bid for Time Warner, which would almost certainly win.
The problem for Mr Murdoch and his empire is that at $US76 billion market value, it is only the 3rd or 4th biggest US media group behind the likes of Comcast and Disney. If Comcast manages to get a deal up it will have a larger distribution, production and content operation, allied with a rapidly growing telco arm.
Charter would expand and become a ranking player in the cable industry where more consolidation is tipped by analysts as the same pressures that are changing Free To Air TV, impact the subscription TV business (These pressures include the growing importance of online, video streaming and mobile video in all its forms).
21st Century Fox (where Murdoch wants to lift profits 50% in the next three years by expanding deeper into cable, especially expanding its Fox Sports business in America), would be left behind. To protect the company’s market position against the emergence the Malone-controlled Charter, and to counter the growth and clout of Comcast, 21st Century Fox may have to become a reluctant bidder for Time Warner Cable. That might curtail the ambition to grow its existing cable business, but would make the key Murdoch company a stronger operator in the huge and very profitable US market. But it would be a risky move.
A larger giant like Comcast might be able to negate the attractiveness of some of Fox’s key cable offerings in the Network News, FX and some of the sports channels being consolidated into a Fox Sports offering by paying less or getting better terms. If Murdoch had a presence in cable distribution and content production, it would give him more clout.
But there is reason for caution. Charter went bankrupt in 2009 because of too much debt, not enough customers and earnings. Mr Malone emerged as a 25% shareholder in a deal to buy the best bits of Charter from that collapse.
And cable companies are under pressure from the likes of Netflix and Apple, and no doubt Google and whatever is to come. But as Comcast shows, controlling all forms of distribution, from cable to wireless and superfast broadband makes it easier to fight back and clip fees and other revenue streams from the newcomers, while protecting their customer base.
It is for this very reason that Comcast has gone about building a integrated content (NBC/Universal), distribution and telco and services offering. The Murdoch empire has lagged behind as it has concentrated on content, which remains the main game, as the growth of video streaming sites such as Netflix testify. But even thought these new sites are growing rapidly, they don’t have the resources to provide an integrated offering – they have to buy content in from outside.
Smaller players such as Viacom (CBS/Paramount and MTV) and even Disney, have concentrated on content, whereas the giant telcos, such as AT&T and Verizon have expanded out of their base into distribution and increasingly, content.
Thursday there were reports that Charter is discussing the raising of $US25 billion to fund a push at Time Warner Cable, but that money will be short as Time Warner Cable has a market value of $38 billion and the management has made it clear it wants a premium bid. Seeing Charter is only valued at $US14 billion, it will have to ‘phone’ a friend. But Comcast can easily afford a premium offer.
Across the Atlantic and the Financial Times reported at the weekend that European Commission competition regulators are stepping up their inquiries into whether the current geographic boundaries to TV rights deals for sports and premium content, impact on competition.
In the end, the wisest thing Mr Murdoch could do would be to stand back and watch the rationalisation of the US cable industry continue without 21st century’s involvement. But that will mean falling further behind in the size stakes.
The probe is reported to have moved past the preliminary investigation stage into a more detail examination of the TV rights market. The FT reported this week.
"A formal European Commission investigation could smash open the country-by-country licensing that has dominated the sales of exclusive pay-TV content such as live football and newly-released movies, said people familiar with the case."
Of the two challenges, this is the more dangerous for the Murdoch clan. For years Rupert Murdoch has built individual pay TV empires around the world – in Australia, the US, UK and mainland Europe and Asia.
Europe is the most important with the 39% owned BSkyB a dominant player in the UK market (though now under challenge from BT). In Italy he has built Sky Italia to almost where it is a going concern, and hundreds of millions of euros are being spent in Germany to build a similar business with Sky Deutschland. Soccer, cricket and other sports, such as horse racing and minor sports, have formed the basis for the growth or Murdoch’s European Pay TV businesses.
BSkyB is the jewell for Murdoch (it was his biggest and best play in Pay TV), with a market value of more than $US21 billion, but it is the one most at risk from the EU investigation. If Murdoch bids for Time Warner to protect his US flank, he will not have the money to launch the still favoured takeover of BSkyB.
A European Commission ruling would no doubt be challenged, but the Murdoch empire would be the biggest loser in the short run from any move to water down exclusive geographic based sports and TV content deals. In the longer term it could help spark more sales across borders by sports fans and others, and lead to consolidation in the subscription TV business in Europe.
Given what is happening in Europe, the looming EU investigation and decision by around late 2014 will be even more reason for Murdoch and Fox to be an onlooker with Time Warner Cable. But you never know with him, it’s very unpredictable when it comes to wheeling and dealing.
