It’s great military theater when two media barons go at it and the artillery fire between Silvio Berlusconi, Italian Prime Minister and head of Mediaset, and Rupert Murdoch, whose News Corp owns the Sky Italia satellite TV service, has just heated up a notch or two.

The European Commission (EC) ruled this week that Sky could bid for one non-pay-tv multiplex on Italy’s terrestrial platform much to the chagrin of Mediaset, the dominant player on that platform, who says it will appeal to the European Court of Justice, because the EC had previously ruled Sky could not go on that platform until 2012. The EC said the TV landscape in Italy has changed since its 2003 decision; what it didn’t say out loud is that it believes Berlusconi has too much control of the Italian TV market. 
The EC ruled in 2003 as the condition for allowing News Corp. to merge Stream and Telepiu creating Sky Italia that it could not expand onto terrestrial digital platforms until 2012 because of its pay-TV dominance. But a lot has changed since 2003, particularly that Mediaset has now become the dominant player on the terrestrial platform and competes with Sky on pay football that Sky had thought it would be able to keep to itself. 
There are 21 multiplexes on the terrestrial digital platform and 16 have already been assigned. The EC says Sky can bid on one multiplex frequency)which would give it one or two HD channels  and between four to eight non-HD channels. None of them, however, may be pay channels, so to make this work Sky has to up its advertising game and take away Euros that the terrestrial competitors, mostly Mediaset,  had been relying on. TV advertising is big money in Italy. 
In the meantime both Sky and Mediaset  have announced big price reductions for their entry-level packages. Sky’s had been at €39 monthly and it dropped that to €29 last month to get close to Mediaset’s €26. So then Mediaset announced it would have a special entry level fee of €14 through December – that’s a leaf out of Murdoch’s own playbook. 
Government decisions have played a big part in the Berlusconi-Murdoch battle. Berlusconi, of course, controls what the Italian state does with little appeal possible, so Murdoch has little choice but run to Brussels to get the EC to stop the excesses. The EC does not act quickly – Sky had asked for the change back in 2008 --  but at least it does act and the digital terrestrial decision is a prickly thorn that Mediaset doesn’t like. In Brussels the gossip is that Italian government officials had argued long and hard against the decision, and that Berlusconi himself spoke with EC president Jose Manuel Barroso. 
The Berlusconi-Murdoch business relationship seemed to start just fine back in 2003. Berlusconi’s government had not objected to Murdoch setting up Sky --  Berlusconi probably thought Murdoch would lose his shirt. But Murdoch understood a thing or two about pay TV via his UK Sky experience and he knew the key to success would be football crazy fans who would pay good money to watch  Italian Club A football.  Telepiu had paid €370 million for Italian Club A and B satellite rights which Murdoch inherited. The Sky game plan was to package those games into a €47 monthly package and it wasn’t too long before Sky Italia had near three million subscribers.
Berlusconi looked at that and he decided if Murdoch was making big money out of TV football then why shouldn’t he. Murdoch’s satellite rights didn’t preclude terrestrial digital rights although granting those rights needed some legislation. But when you’re the prime minister that’s no obstacle. Parliament passed a media law allowing the top three football teams (Berlusconi owned one of them) to sell their home games on the new terrestrial digital platform. In 2005 in what amounted to just about a midnight raid Mediaset did its deal with the football teams and offered Italians pay-for-view terrestrial digital coverage at just €3 each game via a smart card bought at newsstands. Sky had paid three times as much for its satellite rights than Berlusconi did for the digital platform, and the first Sky knew of the digital deal was when it read about in the morning newspaper and howl as it did the deal was done!
But Berlusconi still had a problem. Italians were reluctant to pay for the digital decoders. No problem, really, if you’re prime minister. Naturally, Parliament passed legislation that all terrestrial transmissions must be digital within a few years and to help meet that date the government will provide a subsidy of about 60% on the cost of decoder boxes, That subsidy back in 2005 was said to have been worth more than €100 million -- with Sky howling all the way to the EC. 
And so life went on – Mediaset did okay with its a la carte football games and Sky, that had feared major subscriber losses without football exclusivity, saw its subscriptions stay secure.  Berlusconi lost an election and things fell silent for a while. But in 2008 Berlusconi got reelected. The battle was joined again.
Before long Berlusconi was up to tricks. The government issued a decree doubling to 20% the VAT on satellite television subscriptions while Mediaset’s three terrestrial channels had no VAT charges.  Murdoch personally went to Rome to complain, Sky Italia took out newspaper ads telling its customers how unfair it was of the government to increase their costs in recessionary times, but the deed was done. Mr. Murdoch was by no means amused. 
Berlusconi still wasn’t done. His Mediaset and the state-run public broadcaster RAI which Berlusconi effectively controls, too, as prime minister, announced they were launching together a digital terrestrial service based on the British Freeview service and they hoped this would cut severely into Sky’s market share. And if that wasn’t enough hardball, Mediaset and RAI canceled their carriage deals with Sky Italia,  which meant Sky could no longer offer access to all of Italy’s terrestrial channels. 
And Mediaset did a deal with Telecom Italia to provide premium content, including football, to Telecom’s Alice Home IPTV Network that is already available in more than 500 Italian cities. The Mediaset content is basically the same it sells under its Mediaset Premium product, a card operated pay TV service delivered on the digital network. 
Murdoch couldn’t do much within Italy to hit back – Sky poached some Mediaset talent and even showed a film called Killing Silvio which Berlusconi’s spokesman said instigated “hatred against the prime minister.” But when some personal sex scandals hit Berlusconi then Murdoch was in his element and his newspapers around the world, headed by the august Times of London, made sure every lurid detail was heavily covered – even during big budget cuts the Times sent a second journalist to Italy to cover the scandals. It was getting real personal.
Sky Italia has some 4.7 million subscribers and whereas it has been making profits before it is now showing red figures. The past couple of quarters have been tough with the churn resulting in net losses. Mediaset’s pay TV operation has about 4.4 million customers, assuming some 2 million customers renew their smart cards  that expired at the end of June. Mediaset targets the lower end of the market while Sky  is up-market and is depending heavily on HD to finally reach its 6 million subscriber target.
The Italian TV regulator, about as independent as one can be in Italy, controls the bidding process and apparently its not just the money offered but also programming and other factors that decides who wins. In other words, no guarantee that if Sky bids the most it will get the frequency. If it doesn’t, expect another howl to Brussels.

http://followthemedia.com/bigbusiness/war22072010.htm
 

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[Formerly Italy at St Louis]