Murdoch's British Sky Is Looking Brighter

His clever bid for a new digital TV franchise buoys BSkyB

If Rupert Murdoch and his sidekick British Sky Broadcasting Chief Executive Sam Chisholm are anything, they're resourceful. Last fall, Sky's stock price was being pummeled by regulatory fears, slowing satellite sales, and financial worries, but the duo have now found a neat exit from the jam. Joining with two other local media heavyweights, they made a high-profile bid for a franchise in Digital Terrestrial Television (DTT), a broadcasting technology that the government has been promoting.

The move looks like a very clever ploy for Murdoch. It hedges his bets for the Digital Age rather cheaply and makes partners of two other big suppliers of programming, Carlton Communications PLC and Granada Group PLC. If DTT pans out, it could well increase the market share of Sky, a supplier of programming by satellite and cable 40% owned by Murdoch's News Corp. The new technology is aimed at the roughly 75% of British homes that don't have those services.

The partnership has also brought a deluge of favorable publicity. The markets applauded the pact, in part because it could curb rising programming costs. Sky's stock is up about 11% following the Jan. 31 announcement and roughly 35% above a recent low last December. Sky reported pretax profits of $224 million for the six months ended Dec. 31, up 26% from the year before.

You would think the government and the press might be worried about such a powerful combination, but the politicians have waxed ecstatic. Even the press organs that Murdoch doesn't own have praised the consortium, called British Digital Broadcasting, for a project that could make digital available for everyone. Only the cable industry, which is likely to be hurt, has reservations. The BBC has in effect endorsed the Sky bid with a programming commitment.

One reason for the favorable reaction: DTT is being praised as a way of preserving the BBC and other free television in the Digital Age. As the system is envisaged, the BBC and other free broadcasters would get about half the 30 or so DTT channels. If they win the bid, Sky and its partners would get the rest for pay TV. Signals would come in through an ordinary home aerial and be decoded through a box on the set.

None of this will happen unless somebody pays to get DTT off the ground. The Sky group is promising to invest up to $495 million. Much of the money is likely to go toward subsidizing the prices of the set-top boxes. The BBC and other broadcasters will be asked to contribute financing, and money for digital may come from British Telecommunications and other companies interested in interactive features.

The politicians are also relieved that Murdoch is opting for a system that will leave space for other broadcasters. In the runup to Sky's launch of its own digital-satellite service, there has been near-paranoia that Murdoch would use decoder-box technology to lock up the market. Sky's satellite box will likely be upgradable for DTT and vice versa. "This appears to remove fear that BSkyB might be tempted to operate a proprietary box," says Geoff Hoon, a Labor Member of Parliament.

NO SURE THING. Murdoch could still wind up with tremendous control. The movies and sports programming Sky is bringing to the consortium are more attractive than that offered by its partners. Sky will have the three "premium" channels, while the others will have basic ones. Sky will also likely have the biggest say over design of the boxes and management of subscribers.

Even so, DTT is not a sure winning ticket for Sky's future. Some experts question whether the system itself, with its limited number of channels, is a major improvement over cable. Nor is it certain that the TV regulators will award the DTT franchises to the Sky group. Still, the only opposition comes from Digital Television Network, controlled by International CableTel, Britain's third-largest cable operator. Its application has been weakened by the loss of two expected backers, including France's Canal Plus.

Certainly, British viewers are going to encounter a cluttered market. Cable operators are working on their own digital system, and Sky is planning its own 200-channel satellite service. But Murdoch and the Sky team seem masters of reading the markets and cutting deals. They have a good shot at gaining a hefty slice of whatever broadcasting media prevail.

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