Berlusconi vs. Murdoch: Porn as a Pawn

Rules that limit adult programming are just one way Italian regulators are helping Silvio and hurting Rupert

By Carol Matlack

Two contestants battling over a jackpot worth billions. Political intrigue and a dash of X-rated spice. Nope, it's not a reality show. It's a clash between media titans Rupert Murdoch and Silvio Berlusconi for supremacy in Italian TV.

The brawl pits Murdoch's satellite pay-TV outfit Sky Italia against Mediaset, the country's dominant private broadcaster, founded by Berlusconi long before he became Prime Minister. Since its launch in 2003, Sky Italia has become a formidable rival, offering everything from Hollywood blockbusters and sports to porn.

Lately, Sky Italia has been struggling. Although it has more than 4.7 million subscribers and controls about 90% of the Italian pay-TV business, the company on Feb. 2 said that during the fourth quarter it lost $30 million and shed 63,000 customers, its first-ever net subscriber loss.

Regulators are adding to Sky Italia's woes. Last year the Berlusconi government doubled the value-added tax on pay TV. That raised the cost of a Sky Italia subscription by 10% but didn't affect Mediaset's over-the-air service. Starting this winter, regulators plan to cut the ads allowed on pay TV from a maximum of 18% of airtime to 12% in 2012. Broadcast channels such as Mediaset's, meanwhile, will be permitted to boost ads to 20% of airtime from 18%. Regulators say broadcasters need advertising more than pay-TV providers because they don't get subscription fees. And in January the government said it would ban adult programming between 7 a.m. and 11 p.m. to keep children from seeing porn. Sky is Italy's biggest purveyor of X-rated TV, reaping $62 million a year from such fare.

The avalanche of new regulations has Sky Italia crying foul. The company says its parental controls keep kids away from adult programming. And the ad limits would squeeze the company's fastest-growing revenue source, Sky Italia Vice-President Andrea Scrosati told reporters in Rome on Jan. 26, after testifying against the restrictions before a parliamentary committee. "There was no need to interfere in the classic process of supply and demand."

LURID REPORTING

The two camps have been sparring for months. Berlusconi has accused the Times of London, owned by Murdoch's News Corp. (NWS), of lurid reporting on his private life in retaliation for the pay-TV tax hike. "Unfortunately with the VAT episode there was a breakdown in relations with the Sky group," the Prime Minister said on a Mediaset channel last summer. Berlusconi remains Mediaset's controlling shareholder, though he has handed over management to his son. In September, Sky Italia sued Mediaset after it refused to accept Sky's advertising. An Italian court in October ruled that Mediaset had violated competition laws to help Mediaset Premium, a pay-TV business it launched in 2005. Mediaset didn't respond to requests for comment.

Mediaset Premium may be Sky Italia's biggest problem. The service added some 700,000 viewers last year, says Claudio Aspesi, an analyst with Bernstein Research. Mediaset Premium used to concentrate on pay-per-view soccer but now offers broader programming, including the Disney Channel (DIS)and big-studio films. "They have found ways to fight back," Aspesi says. With few ads and no porn channels, Mediaset Premium won't suffer much from the recent rule changes.

Could Murdoch still win? He has potential allies, including ESPN and the Discovery Channel, which run programming on Sky Italia and will be hurt by the ad limits. And Berlusconi can't rule forever. But James Walston, a political scientist at the American University of Rome, says the odds favor Mediaset. "Berlusconi is fighting from an entrenched position," he says. "Murdoch will have to fight through European regulators and the Italian courts. That could take a decade."

With Steve Scherer in Rome

Matlack is BusinessWeek's Paris bureau chief.

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