Murdoch Takes a Pragmatic View of the European Media Scene: The Satellite TV Business is Good and Free Tabloids Hurt Paid-For Newspapers

Philip Stone February 6, 2005

Say whatever you like about Rupert Murdoch but one thing is clear – he understands the traditional newspaper/broadcast/satellite business better than anyone else, so when he passes judgment on the European media scene, as he has just done, media professionals should take note.

As News International announced its half-year net income of $1 billion and that it expected annual profit growth in 2005 to reach perhaps as high as 20%, Murdoch, on a telephone conference call, gave this view of the European media scene:

• Newspaper publishers need to devise strategies to limit the financial damage caused by free tabloids. There is no doubt that as a direct result of the free tabloids that established paid-for titles are losing circulation with added strains on profits. Part of the competing strategy could well be to produce one’s own free tabloids.

• The satellite television business is a good business to be in. British BSkyB, of which News International owns 34.5%, goes from one strength to another and is approaching 8 million subscribers. 

• He sees no reason why satellite broadcasters and terrestrial digital broadcasters cannot both be successful in the same market, citing specifically the BSkyB and Freeview competition in the UK. . He says that in Italy, where Sky Italia, has lost its football exclusivity for the top league’s games and now faces football competition from Prime Minister Silvio Berlusconi’s Mediaset digital terrestrial network “the competition is minimal and should not be a major factor for years.” Analysts, however, are not so convinced, and worry about Sky Italia’s mounting losses.

News International Chairman
Rupert Murdoch

Owning 175 newspapers from the UK to the US to Australia, Murdoch has few peers in understanding the dynamics of that industry. So when he says that the free tabloid has become an impediment to growth for the paid-for titles then that is surely confirmation for all the warning flags that have been raised.

Murdoch himself has paid-for tabloids in his blood. Many people do not remember that when he made his entrance on the American scene starting in the early 1970s, having already bought up leading tabloids and broadsheets in the UK, that he did it by buying tabloid newspapers in such cities as New York, Boston, Chicago and his first, in San Antonio, Texas. He then proceeded to make them as spicy as he could, bringing in Australian and British editors who had that experience in their own markets.

In those days the “established” US media considered Murdoch no better than a pariah to be shunned. Some 30 years later, with a media empire in the US that includes the Fox movie studio, the Fox television network, the Fox cable news channel which leads the market, and yes, still the owner of the New York Post tabloid, the 73-year-old American, formerly Australian, citizen is the world’s pre-eminent media mogul.

When he looks at the UK market where he owns the Times (which he allowed to go “compact” last year,) the Sunday Times (the leading broadsheet Sunday paper), the News of the World (a racy Sunday-only tabloid circulation leader) and the Sun (leading daily tabloid) he sees an overall 4% circulation loss in 2004.

On the other hand, the free Metro tabloid in London has seen its readership increase since its launch in 1999 from about 100,000 daily to about 1 million today. Murdoch’s analysis is that the majority of Metro’s readership never used to read a newspaper before Metro came on the scene.  But he does also believe that the Sun (daily circulation: 3.3 million) may have lost 30,000 – 40,000 readers to the Metro, and other UK national newspapers also had losses which all add up to make the Metro so successful.

“The trend for free papers is to break into a modest profit but, more seriously, to damage existing newspapers. We're watching it very keenly," Murdoch warned. He also does not believe that readers of a free tabloid will graduate, as they grow older, to pay for their newspaper. If he is right then the New York Times Company’s ’ announced strategy for buying into Metro Boston to aid its Boston Globe unit goes out the window.

Metro in London is published by Associated Newspapers, which besides publishing the Daily Mail tabloid nationally also publishes London’s only evening newspaper, the tabloid Evening Standard. The Standard, however, has become very vulnerable over the past year with its circulation dropping by some 8% to 370,000. There are rumors in the market that three publishers –one of them Murdoch – are considering producing a competitive free evening tabloid.

In the UK, BskyB satellite had a great Christmas quarter. Its viewership is now up to more than 7.6 million and it is targeting 8 million by the end of the year. But it is facing increased competition from the Freeview Digital Platform which also had a great Christmas quarter and now has more than 5 million subscribers after just over two years of operation. Some observers believe Freeview could overtake Sky with 10 million viewers by the end of the year.

Sky has exclusive sports coverage, first-run movies, and a much larger mufti-channel offering than Freeview, but it involves the viewer buying and installing a satellite dish and paying a monthly fee. With Freeview the viewer just buys a digital set-top box for about €70 and that’s it.

But Murdoch says he is not concerned that Freeview’s success will cut into BskyB’s business. “ We treat it as a demonstration of the hunger for multichannel TV – once they taste it we will be able to offer them something really worthwhile,” he said.

But the BSkyB business is not a matter of just answering the phone to take orders. The marketing cost for each added subscriber increased by 11% from  £207 a year ago to £230 today.

Freeview depends on advertising supported free channels, but does not have the exclusive sports coverage for which BskyB has paid top dollar. Murdoch’s view, basically, is that it is the programming, not the platform, that will gain viewers and that is why BskyB believes it will have 10 million subscribers within five years.

But if programming is the key, then there could well be clouds over his Italian satellite business, although he dismisses any such talk. Sky Italia has been growing its business via its exclusive rights to the top Italian football league through the 2006 season.

But in what amounted to almost a midnight raid, Prime Minister Silvio Berlusconi’s Mediaset empire, which is building a terrestrial digital platform, obtained terrestrial digital rights to the league’s top three teams  -- he owns one of them -- and started offering in January games for just €3 each via a smart card which can be bought at newspaper kiosks, in comparison to Sky Italia’s monthly contract of some €47 a month.

Murdoch said it was only “propaganda” that Mediaset was having an effect on Sky Italia’s business. “No matter how much noise you may be hearing, competition is minimal and should not be a major factor for years,” he said.

Be that as it may, Sky Italia’s Q4 loss rose to $105 million – above budget – although Murdoch said he expected the business to break even by the end of 2005.

As for the more traditional television media, Murdoch said that contrary to German media reports, he had no plans to buy ProSeibenSat.1, Germany’s top commercial broadcaster.