Italy power shift gives Murdoch leg up

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ROME -- Italy is starting to look like most of the rest of the world for News Corp. chairman Rupert Murdoch: fertile territory ripe for conquest.

For years, the lucrative Italian television market had been the personal playground of billionaire media kingpin Silvio Berlusconi, who commanded the airwaves from his dual perch as the head of broadcasting giant Mediaset and as the country's prime minister.

But a series of events starting with Berlusconi's razor-thin defeat to Romano Prodi in April and continuing with the passage of a new media law designed to control Mediaset's power have opened the door for Murdoch's Italian subsidiary, Sky-Italia, to gain a major foothold in the formerly impenetrable market. And Murdoch is making the most of it.

The new media law takes several steps that weaken Mediaset: from a cap that limits single advertisers to 45% of the total market -- a level which virtually cuts off growth for Mediaset, which is already near that level -- to a rule that will force both Mediaset and state broadcaster RAI to each switch one of their entrenched analog networks to a digital signal by early 2009.

Analysis from IT Media predicts the changes will cost Mediaset some €103 million ($136 million), more than any other broadcaster. And who will benefit the most? IT Media says that is Sky-Italia, which should see some €28 million ($37 million) added to its bottom line thanks to the changes.

"There's no doubt that the current situation favors Sky-Italia and it hurts Mediaset," an IT Media spokesman said in an interview. "What is less clear is whether it really gives Sky-Italia an upper hand since Mediaset is just so much bigger and more entrenched."

But it's significant that the current situation even allows for such speculation. As recently as last year, Mediaset's position seemed untouchable, while Murdoch's Sky-Italia was little more than an afterthought in a television sector dominated by Mediaset and RAI.

Now, 2007 seems set to see a clash of two of the world's most powerful media titans.

The increasing friction between the two tycoons is evident. The pair were once close, dining together and singing each other's praises at Berlusconi's Emerald Coast mansion, Villa Certosa, on the island of Sardinia as recently as 2004. But more recently, Murdoch has been courting the favor of new Prime Minister Prodi, lunching with the former European Commission president in the lead-up to April's pivotal vote.

During that period, Sky-Italia began to cast itself as a viable and less subjective alternative to Mediaset and RAI, which were at that time both controlled -- either directly or indirectly -- by Berlusconi. After his victory, Prodi gave Sky-Italia an exclusive interview, opining that only on Sky-Italia could he receive the fair treatment he desired.

All of that was rubbing salt in the electoral wounds for Berlusconi, who once hailed Murdoch as a "friend" and "genius of business."

"Now, what comes next?" a bitter Berlusconi asked. "A new alliance between Murdoch and Prodi? And to think that Murdoch was once considered a conservative."

Murdoch gained his foothold in Italy earlier this decade through an avenue even he didn't want.

At the time, Italy had two satellite broadcasters: Murdoch's Stream and Telepiu, a unit of France's Tele+. Both were operating in the red thanks to costly advertising battles and a plague of pirated signals that allowed millions of Italians to receive the programming for free.

Murdoch wanted out and tried to sell Stream to Telepiu. But that deal hit a regulatory snag, and when Tele+ restructured, Murdoch offered to take the larger but money-losing Telepiu off its hands at a discounted rate -- and Sky-Italia was born.

The company is now approaching 4 million paying subscribers, and the talk of Italian financial markets is that a Sky-Italia IPO could be in the works for this year.

While Berlusconi was prime minister, things were tougher for Sky-Italia: The government sponsored a program of subsidies for television decoders that predominantly benefited Mediaset. And the Berlusconi-controlled company broke Sky-Italia's lucrative hold on on-demand broadcasts for Serie A soccer matches with little regulatory trouble.

"The turn-around for Sky is really astonishing," Hildebrandt and Ferrar investment bankers chief economist Javier Noriega said. "It was a money-losing sector weighed down by outdated laws and a powerful rival in Mediaset. And now it's making major profits and is healthy with good growth prospects."

To be sure, Berlusconi still has weapons in his arsenal. Mediaset is still by far Italy's largest private broadcaster, and because of Berlusconi's other media holdings -- a major news magazine, a large daily newspaper, an advertising company and a major film distributor -- the company has synergies available that rivals can only fantasize about.

Furthermore, Mediaset is still available on traditional platforms, which means it can reach almost all of Italy's 22 million households, while Sky-Italia is limited to its fast-growing but still relatively small subscriber base.

And while Mediaset no longer enjoys the political protection it had while Berlusconi was in office, the 70-year-old Milan native still heads parliament's largest opposition party and has been able to keep Prodi off balance through a constant stream of attacks that distract the government from focusing on what it would like, such as further reforms to the media sector. But most analysts agree that, despite all that, things seem on the verge of becoming very interesting.
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