The BBC's plan to co-launch several pay-TV channels has finally got the all-clear - but will it be allowed to succeed?

Click to follow
The Independent Online
Last week the Board of Governors of the BBC all but ratified a joint venture agreement with Flextech, which will see the introduction of as many as eight new pay-TV channels for broadcast on a subscription basis to as many as five million British homes. BBC Worldwide's Bob Phillis, who is in charge of the corporation's commercial activities, lobbied the Board extensively, and got broad approval for the plans. One or two details remain to be ironed out, according to senior sources at the BBC, but optimism runs high that the service will be up and running on schedule, sometime in mid-1997.

But just what are those "details"? No one at the top of BBC Worldwide wants to say. I wager they relate to three elements of the joint venture: its management structure, the programme licensing agreement under which BBC archive material will be made available for re-broadcast and the arrangements being contemplated for the raising of about pounds 140m over four years to meet development costs.

Let's take these in reverse order. Under the deal, the BBC makes its programming library available while the US-controlled pay-TV packager contributes management experience and, more importantly, the dosh.

The notoriously bitchy media community has been muttering for weeks that Flextech, which has never turned a profit, would have trouble raising the necessary cash. As was pointed out in this column a few weeks ago, there is no reason why banks wouldn't be happy to lend cash to Flextech, which has no debt and two stellar assets - a 20 per cent stake in Scottish Television, the ITV company, and a 25 per cent stake (soon to be 100 per cent) in two of the most popular non-Murdoch pay-TV channels, UK Gold and UK Living.

But raising debt isn't the preferred solution at Flextech, which has been looking seriously at two cash-raising options: selling the Scottish stake (worth more than pounds 100m) and launching a rights issue. The latter move, which would see existing shareholders asked to buy additional shares to avoid diluting their stakes, would obviously only be possible if Flextech's 51 per cent owner, the struggling US cable giant TCI, agrees. It has not yet done so. (TCI has troubles of its own. Its share price has plummeted, jeopardising the company's strategy of rewarding shareholders with an ever-appreciating market capitalisation instead of more traditional perks like, say, old-fashioned profits.)

To complicate matters, Flextech has agreed, as part of its BBC joint venture negotiations, to buy out the minority shareholders in UK Gold and UK Living. This means that Pearson Television and Cox Communications would trade their minority stakes for a small number of shares in Flextech. It remains to be seen whether Pearson and Cox would want to see a rights issue in the immediate future.

More problematic is the programme licensing agreement (PLA). Currently, the BBC has a PLA with UK Gold, the hits channel. This must be modified to allow the new joint venture channels to proceed. But isn't there a danger that UK Gold's success - it is on track to make pounds 4m this year and nearer pounds 8m next - will be jeopardised if its access to the BBC programme library is reduced? Won't Flextech/BBC risk cannibalising UK Gold's proven business when it launches Showcase, one of the proposed pay-TV channels? Certainly senior management at UK Gold are privately said to be worried about this.

And then there is the question of "management structure". Say those two words to a BBC executive and you'll get a three-inch thick strategy document, flow charts, and a convoluted, excited lesson from the BBC's Director General, John Birt. But you won't get a clear idea of how the Flextech/BBC joint venture is to operate. Crucially (and predictably), the BBC has rejected the best solution: a stand-alone company with a dedicated chief executive - a post Matthew Symonds, who helped negotiate the joint venture, had coveted. Instead, the two companies have opted for an operations manager, answerable to a board on which everyone and his cousin will sit. Big mistake.

Readers of this column (and this one, incidentally, is the last in the series), may recall that we have been broadly bullish on the Flextech/BBC deal. The financing arrangements will be worked out, given Flextech's basic strengths. There ought to be a way of striking a balance between the programming needs of UK Gold and the new pay-TV service. But the management structure is a cause for concern, if not an outright recipe for disaster.

For a start, the best programming in the world is worth nothing if it isn't piped into people's homes. Flextech/BBC will need to sew up carriage agreements with cable and satellite operators, on terms that make commercial sense. That work would be rendered far easier if a dedicated chief executive, with a proven track record and some management latitude, took up the challenge. The best candidates will probably stay away if the job is to be merely operational. Symonds has already ruled himself out (although some unkind wags suggest his unavailability for a top job with the joint venture was mutually agreed).

Some in the industry have suggested Bruce Steinberg, who runs UK Gold and Living, as a potential candidate, even if the job is deemed to be purely operational. But TCI insiders feel Steinberg many not be on the best of terms with executives of the controlling shareholder companies. "Bruce doesn't manage up very well," says one.

To attract the right person, Flextech/BBC ought to rethink the management structure. Launching new channels in challenging enough. Why saddle yourself, from the very start, with a handicap altogether of your own making?n