The Battle of Britain

For Richard Branson and James Murdoch, it's a war of attrition in telly programming

It's a blood feud that has Britain's tabloids in a predictable lather. On one side is flamboyant showman Sir Richard Branson of Virgin fame. On the other is the world's most powerful media baron's son, James Murdoch, the 34-year-old heir apparent to Rupert. They're slugging it out over Britain's increasingly competitive TV market.

Murdoch's British Sky Broadcasting Group (BSY) plc satellite-TV company has been the heavyweight in the country since the early 1990s. But last year, Branson and private equity investors combined a pair of bankrupt cable companies and merged them with Sir Richard's wireless provider. The new company, Virgin Media Inc. (VMED), rolled out a low-cost package of TV, Web, and phone services, and the battle was joined. The latest flareup came in March when Murdoch & Co. said Virgin would have to pay more to carry popular Sky entertainment and news channels. "Sky clearly decided to take the gloves off," says media analyst Claire Enders.

Murdoch is playing rough because there's not a lot of room to grow in the 26 million home-TV market. The British are buying set-top boxes to get over-the-air digital signals from broadcaster Freeview. Against that backdrop, the smaller Virgin lost cable subscribers in its most recent quarter, while Sky has cut some prices to reach its goal of 10 million subscribers by 2010, up from 8.3 million today. "To grow," says Enders, "Murdoch knows he has to take share from cable."

The opening salvo came last year when Virgin decided to bid for the right to air Premier League soccer games, which Sky has carried for years. Sky prevailed but was forced to pay more for fewer games. Not long after that, Murdoch, aware that Virgin was keen to buy commercial broadcaster ITV PLC, outbid his rival, acquiring a 17.9% stake for a pricey $1.8 billion. It was a blow for Virgin, which wanted ITV's library of old TV shows to lure subscribers.

Branson, ever the provocateur, called for an antitrust investigation and labeled the acquisition "a blatant attempt to distort competition." Murdoch, who favors a more restrained public posture than Branson, dispatched his public relations minions to fire back: "Sir Richard seems to believe he and his partners have a unique right to acquire ITV."

British regulators arestudying whether the Sky acquisition merits punitive action, but fewbelieve the deal will be scotched. Besides, Sky already may have hobbled its rival when last year it slashed by 85% the rates Sky pays to carry channels owned by Virgin. "It was a take-it-or-leave-it deal," says Virgin CEO Stephen A. Burch, who says the cash-strapped company was forced to accept the offer because it had commitments to advertisers.

BRINKMANSHIPNow the two companies may be headed to court. Branson's people say Sky wants to double what it charges Virgin to carry five Sky channels, which include hits like The Simpsons and 24. Sky, which is required to offer the channels to all competitors, says it has spent more to get better programming and simply wants to be paid. "We're asking a fair price for a bigger and better package of channels," says Jeremy Darroch, Sky's chief financial officer, who adds that the fee increase amounted to only 19% when you strip out new digital services Virgin can decline. Talks broke down late last month, with Virgin threatening to sue Sky for abusing its market power. Meanwhile, Sky took the channels down and offered to set up a channel of missed shows for Virgin defectors.

A veteran executive at Comcast Corp. (CMCSA), Burch is used to media brinkmanship. "But [in the U.S.] someone usually gives in," he says. "I didn't see any give the last time I talked with James." Nor, apparently, did Sir Richard. He called Murdoch recently but didn't hear back.

Before it's here, it's on the Bloomberg Terminal.