Mathew Horsman

New enemies in pay-TV battle

In the incestuous world of the media, where co-operation between companies in one market is often matched by full-blown competition in another, alliance can turn to animosity virtually overnight. Is that what is happening between John Malone, the US cable TV baron, and Rupert Murdoch, the newspapers-to-TV magnate who currently dominates the pay-TV industry in the UK?

Consider the effects of a joint venture being planned by the BBC and Flextech, Malone's 51-per-cent-owned cable and satellite programme packager. By choosing Flextech rather than Murdoch's BSkyB as its UK partner, the BBC may have started a real war between the two titans, and the fallout could be considerable.

The BBC and Flextech want to launch as many as eight subscription channels, offering arts, entertainment, education, documentaries, sport, pop music (Radio One on TV), lifestyle and Catch-Up TV, a up-to-date repeats channel for those of us who are unable to watch our favourite programmes at their scheduled times. All of this is going to cost as much as pounds 200m to develop, with Flextech putting up the money and the BBC the programmes.

BSkyB, which already broadcasts the bulk of pay-TV programming in the UK, also wanted the BBC business. Sam Chisholm, chief executive of Sky, saw that quality repeats from the enormous BBC library, along with fresh programming stamped with the Beeb's imprimatur, would help drive subscriptions to satellite and cable television, thus boosting profits.

There is still the likelihood, of course, that BSkyB will carry the new BBC-Flextech services as part of its multi-channel package. Any sponsor of a new pay-TV service will want to tap the 4 million dish subscribers already on Sky's books. But Chisholm wanted a piece of the action, and is sure to have been disappointed with the BBC's decision to side with Flextech.

Now for some of the implications. Take a deep breath here, for the range of intricate, intertwined interests among the major media players makes head-throbbing reading. First, Flextech already distributes eight of its 13 pay-TV services via BSkyB's multichannel package. As well, BSkyB and Flextech are both shareholders in the UK version of the Playboy channel. Flextech's parent company, Malone's TCI, has a 27 per cent stake in Telewest, the UK's largest cable operator, which has a long-term supply agreement with - you guessed it, BSkyB.

OK, another deep breath. TCI owns 11 per cent of Time Warner, which it inherited when the US media juggernaut bought Ted Turner's company, which owns news network CNN. Time Warner, which has major cable operations in the US, decided last month not to carry Rupert Murdoch's 24-hour news channel.

Until recently, it looked as if Murdoch and Malone had agreed to an uneasy truce. In the UK, that took the form of carriage agreements between Flextech and Sky, and a long-term supply agreement between Sky and Telewest.

The truce looks like breaking. The first sign of that came early last week, when Telewest revealed that it was refusing to carry the seven new pay-TV services being launched by Granada Sky Broadcasting, the joint venture between Granada and BSkyB, until the carrier had a chance to canvass its subscribers. The industry saw this as a direct challenge to Sky, possibly with the tacit support of TCI.

Then came the confirmation that Flextech had been chosen over BSkyB for the BBC deal. Flextech and its parent, TCI, apparently rebuffed suggestions from BSkyB that the deal be a three-way one. Clearly, TCI seems ready to compete in the pay-TV market head on with Murdoch. TCI and Flextech downplay suggestions that there is any animosity at all between them and Sky. But there is no doubting their resolve to be a major pay-TV player here.

The challenge in the UK will be in marked contrast to the two companies' arrangements in other markets. In South America, for example, Murdoch's News Corporation and a subsidiary of TCI are working side by side to develop digital TV. Welcome to the new, convoluted world of global media: best of friends where it suits; rivals elsewhere. Watch Sky fight back.

Can there finally be a resolution in sight for Videotron, the Canadian cable operator desperate to dump its UK cable holdings? The auction of the company's UK franchises, including west London, has dragged on interminably, with a slew of companies - including Deutsche Telekom - in and out of the frame. Now, it appears, the contest is down to just two bidders: Bell Cablemedia and International Cabletel, both of them UK cable operators.

Bell is offering shares while Cabletel has suggested a mix of shares and cash. By all accounts, Videotron, which had hoped to get cash only, is leaning toward accepting the Cabletel offer.

A small matter, you may think. But no: the deal is likely to spark the next round of consolidation in the UK cable market. If Bell doesn't get Videotron, you must ask how committed it remains to the UK. Hence the speculation that market leader Telewest could make an offer for Bell Cablemedia after the Videotron situation is clarified. Thereafter, the long-mooted merger of numbers one and two in the market, Telewest and Nynex CableComms, could finally materialise.

The industry might finally get the clarity that it has long sought. A major cable operator - which the combination of Telewest, Bell Cablemedia and Nynex would certainly be - would have the heft to drive penetration rates, market services more effectively, and perhaps even muster the financial might to develop attractive programming in competition to the market- leading BSkyB.