As power plays go, they don't come more dramatic than BSkyB's acquisition last night of a near 20 per cent stake in ITV. In every respect, it was classic Murdoch - bold, audacious, visionary, anti-competitive and with the usual two fingers up at the sensitivities of regulators. This was Rupert once again making plain who rules the roost in the British media landscape.
By paying a full 135p a share, Sky has blown other mooted bidders, including NTL, the cable operator, and RTL, Europe's largest broadcaster, out of the water. Even if they could afford to match the price, there would be no point, for they wouldn't be able to consolidate and integrate the company with Sky sitting there as such a big shareholder.
City analysts were warmly congratulating James Murdoch, Sky's chief executive, on his move during last night's conference call, yet the person who perhaps merits the greatest plaudits is Anthony Bolton at Fidelity, previously ITV's biggest shareholder and a long-standing critic of the ITV board. He's now out of it at a price he could scarcely have dreamt of ever seeing again just a few days ago. Other shareholders can only look on and weep, for with the prop of an outright bid now removed, the price will plummet on Monday.
Sky itself is barred by broadcasting rules from bidding outright. Yet it was perfectly entitled to buy the near 20 per cent it did. This was no spoiler, James Murdoch insisted last night.
Others found it hard to see it in any other light, notwithstanding Mr Murdoch's insistence that he sees great long-term value in ITV and intends to be supportive of the company in developing its business. To have the thick end of £1bn of capital tied up in a largely passive investment, at a minimum bottom-line cost of £13m a year netting off dividends from ITV, would not in most people's books look a sensible use of money, particularly in a media goliath which has previously been so scathing about the merits of free to air TV.
Yet it is a little bit more than just a blocking move. As regular readers will know, I've been sceptical about the merits of NTL's attempt to merge with ITV. I couldn't see the point of it and I doubted that NTL management was up to the challenge of the ITV turnaround that needs to be performed. In reported comments, James Murdoch seemed to share these views. He had little to fear for his own business from an NTL/ITV tie-up.
So why go to such expense to prevent it? The answer lies in the speed with which the media landscape is changing. Nobody truly knows where the value is going to lie and it may pay to hedge your bets. The success achieved by Freeview in multi-channel TV has come as a surprise and a shock to Sky, considerably limiting its scope for further growth. Suddenly, free to air doesn't look so obsolete.
I'm not sure Rupert Murdoch by himself could ever have got away with this move. Darth Vader strikes again, crushing all before him, would have been the universal reaction outside his own media channels. It shouldn't be allowed, everyone would say. Yet his son, James, has given Sky a warmer, more acceptable, and less combative image. He's widely liked and trusted. Ministers and regulators will be inclined to believe him when he says he wants to support and encourage ITV. This shouldn't be allowed to disguise the underlying reality. The Murdochs already have far too much power within UK media. This adds another very considerable chunk. Will the politicians try to stop them? They are all too terrified of Rupert's influence to try, especially now with Cameron and Brown vying for his vote.
Mind-boggling growth in derivatives
There were some mind-boggling numbers published by the Bank for International Settlements yesterday on the growth in derivative markets. The volume of over-the-counter derivatives traded rose by a quarter in the first half of this year to $370 trillion, driven primarily by rapid growth in credit default swaps and interest rate derivatives.
The details of this story needn't bother us here; it is rather its implications which I want to examine. There are two views on derivatives. One depicts them as little more than a fee-earning devise, a form of snake oil that unscrupulous investment bankers sell to an innocent world not primarily for the sake of general economic advancement, but only further to boost the bonus pool.
Worse, some see the explosion of trading in financial instruments as a giant ponzi scheme which makes it impossible any longer to see and know where risk truly lies. It only requires a big default, they warn, to spark a domino effect and for the whole edifice to come tumbling down. The problem with these doomsday predictions is that they fail to account for why such financial instruments have become so popular. If these were dangerous and dishonest medicines peddled by carpet baggers, they would very rapidly be exposed as such and nobody would buy them.
The reason derivatives sell is that they provide a way of spreading and hedging risk. Far from increasing the risks in the financial system, in fact they dissipate it, greatly adding to both macro and microeconomic stability.The growth in these markets is thus not just good for London financiers and house prices in Belgravia, but for global economic stability too.
What are they doing to the structure of money as a whole? The link between the growth in derivative trading and the supply of money in the global economy may be a tenuous one, but I suspect that the sharp increase in the latter has at least in some part been instructed by the growth in the former. It must have been a source of some amusement to Milton Friedman, the high priest of monetarism, to see in the twilight of his life the debate about monetary aggregates being resumed with such passion. Bizarrely, his death this week coincided with a number of keynote speeches by central bankers on the growth of money and its implications.
For those of us of a certain age, monetarism is still something of a dirty word, for it is associated with the disastrous experiment in monetary targeting pursued in the early years of the Thatcher government. It was impossible not to believe that the accompanying recession, with more than 3 million out of work and another factory closing almost daily, was not in some way connected.
Under Nigel Lawson, the policy was switched from one of internal monetary targeting to that of targeting the exchange rate. In time this proved equally disastrous, sparking first an unsustainable boom, and then an all-encompassing bust. It was only after Britain was forced out of the ERM that the inflation targeting which has become the bedrock of today's macroeconomic stability was introduced.
Yet central bankers wholly ignore growth in the monetary aggregates at the peril. Inflation is after all only a factor of too much money chasing too few goods and services. Only this week, Mervyn King, Governor of the Bank of England, said that "rapid growth in all money and credit will lead in the end either to higher inflation in goods and services or to higher asset prices that will increase demand that will itself lead to higher inflation".
He added the rider that the growth in money might also be accommodated by a change in the speed with which it is turned over. Ever since the first attempts were made to measure the growth in monetary aggregates, this has always been their major drawback. The size of the money supply, as well as the conclusions that can be drawn from its behaviour, depend crucially on how it is measured. Virtually all the measures devised seem to have little short-term correlation with inflation.
This has led Ben Bernanke, chairman of the US Federal Reserve, to question their usefulness as a macroeconomic indicator. In Britain, much of the present increase in broad money is occurring in the financial sector outside the sort of institutions that would normally be a source of pressure on asset prices.
Could this be at least in part the growing cash balances churned by pension funds, insurers and others in derivative transactions? And if it is, does it have any implications for inflation and interest rates? Sadly, the man who might once have provided the answer, Milton Friedman, is no longer with us.Reuse content