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Drawing A Bead On B Sky B

International Business: BRITAIN


Regulators and rivals are griping about its dominance

In just two years, satellite broadcaster British Sky Broadcasting Group PLC has taken the telly by storm. As viewers flock to sign up for its soccer games and movies, BSkyB revenues and profits have zoomed, and the stock has more than doubled since its global offering at the end of 1994. Already dominant in British television, the company is preparing to cement its lead by introducing digital TV next year. It is also taking on the Continent through a linkup with German media baron Leo Kirch.

But the media steamroller is suddenly hitting speed bumps. Regulators and competitors in Britain and across the Channel are growing alarmed at what they consider overly aggressive business practices. Rupert Murdoch's Sydney-based News Corp.'s effort to raise $1 billion backed by its 40% stake in BSkyB has caused a hiccup in the stock price. And though Murdoch and Labor leader Tony Blair are pals now, a victorious Labor government after next May's likely election might challenge BSkyB's supremacy, not to mention its favorable tax status.

MOVIE PIPELINE. BSkyB's influence is indeed formidable. Under Chief Executive Sam Chisholm, a bluff New Zealander, Sky has used satellite and other technology to follow the Murdoch formula of giving viewers what they want: sports and films. Sky has a near lock on British television premieres of Hollywood blockbusters. It also dominates sports programming, especially in Europe's top spectator sport, soccer. Sky recently extended its exclusive rights to broadcast English Premier League games with a four-year, $998 million deal. Other broadcasters are mostly reduced to showing highlights.

Now, Sky is pioneering pay-per-view. Last March, 650,000 viewers bought its broadcast of the Mike Tyson-Frank Bruno boxing match, Britain's first pay-per-view event. "Murdoch has sewn up the market," says Derek Terrington, a media analyst at brokerage Teather & Greenwood. Its boldness has been richly rewarded. For the year ended in June, 1996, net profits were up some 70%, to $376 million, on revenues of $1.6 billion. At $16.5 billion, BSkyB's market capitalization dwarfs the $6.9 billion of venerable media conglomerate Pearson.

Nor has the empire-building stopped. Sky is funding a risky and expensive foray into digital television that would expand the roughly 40 channels it now offers to 200. It is also moving to fill the big hole in Murdoch's global media coverage--Continental Europe. Earlier this year, Sky struck a deal to take a 49% stake in DF1, the Kirch Group's German digital TV startup. The venture is said to be moving slowly, but if it clicks, it will give Sky a foothold in Europe's richest media market.

No wonder Sky and Murdoch are objects of fear and loathing among competitors and the publications outside Murdoch's media stable. "Within a few years, the whole of British broadcasting will be under [Murdoch's] control," warned a recent commentary in the Independent newspaper. According to the regulatory Independent Television Commission, Sky's share of the British TV market was only 4.3% in 1995. But it held an 89% share of the subscription TV market, where the money is. Subscribers to Sky's satellite and cable services grew by 900,000, to 5.5 million, in the 1996 fiscal year.

The industry's next big worry is the decoder boxes being ordered for Sky's digital service. If these boxes are built to proprietary standards, Labor fears, viewers won't be able to receive any non-Sky digital programming.

But Labor must tread cautiously when dealing with Sky and other Murdoch interests. Murdoch newspapers, especially the tabloid The Sun, are widely credited with swinging the last general election, in 1992, to the Tories. Blair has gone all-out to court Murdoch's favor--even flying to a 1995 conference of Murdoch managers in Australia. The Sun, in turn, gushed over Blair's address to this fall's Labor Party conference at Blackpool. "Speech of his life enough to win power," read one headline.

Yet the truce could shatter quickly after a Labor win. The party might punish the media baron who has been instrumental in keeping the Tories in power for the past 17 years. Labor could revise the Broadcasting Act, and Sky is also vulnerable on taxes. As a satellite broadcaster, it's exempt from the substantial taxes levied on terrestial broadcasters. Some rivals have been lobbying for all British broadcasters to be taxed the same. Nick Ward, an analyst at Credit Lyonnais Laing, calculates that such treatment would have chopped $200 million off Sky's profits this year.

Regulators, too, are increasingly questioning Sky's Bigfoot status. On Oct. 22, Britain's Director General of Communications, Don Cruikshank, scotched a promotional tie-in between Sky and phone giant British Telecommunications, calling it "discriminatory." And Britain's Office of Fair Trading is mediating between Sky and cable operators, who allege that Sky is using its dominant position to gouge them for programming.

Such regulatory challenges are in part why Sky shares have fallen 14% since Oct. 21 (chart). Another reason is Murdoch's effort to raise $1 billion for his News Corp. parent company. The preferred securities would be exchangeable, after a period of years, for BSkyB shares. Skeptical investors dumped Sky stock in part because they thought Murdoch was betting that the shares had hit a peak. "If Murdoch wants to sell something, do you want to buy it?" says one analyst.

Disgruntled shareholders alone are not about to curb Murdoch's ambition. But the rising chorus of criticism from regulators, plus the potential threat of a less friendly new government, could slow BSkyB's light-speed momentum. Although Sky still looks strong, it no longer looks all-powerful.By Stanley Reed, with Julia Flynn, in London, and David Woodruff in BonnReturn to top

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