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Endemol, Italy’s TV Found a Big Brother In Pier Silvio Berlusconi

VideoAge conducted a no holds barred, 360-degree interview with the 40-year old Pier Silvio Berlusconi, vice-chairman of Italy’s Mediaset (chairman is Fedele Confalonieri, CEO is Giuliano Adreani) and son of Italy’s prime minister, Silvio.

This is a critical moment for Mediaset, and for the Italian television industry in general: The transition to digital terrestrial television, competition with Rupert Murdoch’s Sky Italia (both in terms of premium TV channels and the development of a new satellite TV platform), the acquisition of Endemol, the creation of new production companies and the goal of bringing daytime drama production costs down from the current 70,000 euro (U.S. $100,000) per hour to a more manageable level of 15,000 euro (on par with those of Argentina, which manages to sell its low-cost shows all over the world). All this compounded by an international financial crisis that is affecting advertising revenues, as well as increased competition, sure make for interesting times.

VideoAge International: More than 80 percent of Endemol’s revenues are generated from unscripted content. Is this a negative factor?
Pier Silvio Berlusconi: Not at all. On the contrary, it is a sign of strength. For a free-to-air TV network, unscripted programming represents a convenient way to balance costs and results.
VAI: Considering that Mediaset is one of Endemol’s main clients (investing about 150 million euro per year), would you say it represents the partner of record?
PSB: In terms of industry focus, we’d like Mediaset to become the partner of record in the future. At the moment, though, a key partner doesn’t exist for Endemol.
VAI: Strategically speaking, it’s understandable to try and recoup some of the program investments with Endemol in the form of a profit sharing arrangement. However, as far as synergy is concerned, the advantages are not yet clear.
PSB: For us, synergy comes from the fact that Mediaset will develop and launch new formats that Endemol
can subsequently sell internationally. Basically, Mediaset can become a programming source for Endemol.
VAI: How would you describe the future of Endemol?
PSB: Great. Content is key at the world level and Endemol represents a strategic investment that is perfect for Mediaset. Even though it is a difficult world, this was a challenge we eagerly undertook.
VAI: Does Endemol’s acquisition of Southern Star indicate some form of strategy?
PSB: It is part of Endemol’s development mandates, which consist of development of new formats and the acquisition of content companies.
VAI: Can you describe Mediaset’s two new divisions: Media Vivere and Med2?
PSB: Media Vivere is a production company formed in a 50-50 partnership with Endemol Italia, with the purpose of producing long drama series.
Med2 is a production unit formed by two of our divisions: [recently acquired] Tao2 and Medusa, with the purpose of developing new TV series from popular Medusa theatrical movies and new movies from Tao2’s successful TV series.
VAI: Is Mediaset pulling its TV networks out of Rupert Murdoch’s Sky Italia satellite platform?
PSB: Our signals, even on satellite, have always been free. Whether or not to be in the Sky [Italia] bouquet has never been our choice. What we planned is a way to make sure that, with the advent of digital television, our free terrestrial TV channels can be watched by all, particularly by viewers in areas in which the digital terrestrial TV signal
is missing for technical reasons.
For this purpose, a consortium was formed among Mediaset, RAI and La7 to create Tivú Sat, a new satellite TV platform that [carries] all the members’ free TV channels. It has a service purpose, not a commercial one.
As soon as Tivú Sat became operational [in August 2009], the partners scrambled their free TV channels. This was in order to assure that our territorial rights were protected. To those viewers in the Italian territory who wish to receive all free channels, Tivú Sat provides descramblers [smart-cards] at no charge.
VAI: How many digital TV channels do you envision for the future?
PSB: Difficult to say at this stage. We believe that no more than 30 to 35 channels totally funded by advertising can survive. As far as “pay” is concerned, the market will say.

Tivú Sat

Tivú Sat (www.tivu.tv) is a Rome-based consortium formed by Mediaset (48.25 percent ownership), Italian state broadcaster RAI (48.25 percent) and Italy’s telephone operator Telecom Italia (3.5 percent through its Telecom Italia Media division). The chairman is RAI’s Luca Balestrieri and CEO is Mediaset’s Alberto Sigismondi.

It became operational on July 31, 2009 at the technical cost of one million euro, with each channel renting (and individually paying) for transponder space from the same Eutelsat’s satellite that carries Rupert Murdoch’s Sky Italia TV services. Tivú Sat is not a money-making operation and is billed as a public service for Italian viewers who, for various reasons, cannot receive the digital terrestrial TV signal (about three million TVHH). Furthermore, it is explained that Tivú Sat has been rendered necessary in order to protect rights-holders from other satellite carriers’ spillovers.

Annual maintenance costs for Tivú Sat are shared among the channels bundled, at about 20,000 euro per year per channel, for a total annual cost of 440,000 euro, which will increase with the adding of more channels.
At present, Tivú Sat bundles a total of 22 (soon to be 27) free TV channels that are received through a dish-antenna, and costs users 150 euro (US$ 200) with a decoder that costs an additional 100 euro. The latter charge includes a “smart-card” which allows the descrambling of all Tivú Sat’s partners’ free TV channels.
Mediaset’s free digital channels are Iris (films), MediaShopping and Boing (children’s programming), in addition to its three general-interest flagship stations (Canale 5, Rete 4 and Italia 1). Plus, starting in early 2010, it will include Italia 2, a teen version of its Italia 1.

RAI’s free TV channels are its three general-interest flagship stations: Rai-1, Rai-2 and Rai-3, plus Rai New 24, RaiSport, Rai Storia, Rai Gulp (for children) and the newly launched Rai-4.

Telecom Italia Media’s channels are La7 and MTV. The rest of the free channels on Tivú Sat are provided by BBC World News, France 24 and other Italian and international operators, such as K2-Kids TV from the San Marino-based Digital TV Channels Italy.

At the end of last July, all satellite-delivered free terrestrial channels from Tivú Sat partners were scrambled at certain times (at the discretion of the channels) with the Nagravision system. This meant that viewers who received these channels through Sky Italia’s NDS encoding could no longer watch them without a Tivú Sat converter (even though they can use the same dish antenna).

It is expected that in the future, the Tivú Sat platform will also carry all of Mediaset’s premium TV channels, which are now only available on terrestrial digital television (and thus received with a regular aerial and a digital decoder if not in possession of a digital TV set).

Mediaset’s own premium channels are: Cinema, Calcio 24 (football), Joi, Joi+1, Mya, Mya+1, Steel+1 and Hiro. This year, Mediaset’s premium channels are expected to generate sales of 500 million euro (up from 400 million euro in 2008) from its 3.5 million subscribers and is estimated to break even in 2010.
RAI’s premium channels are those under the RAI Sat banner (Extra, Premium, Cinema World, Yo-Yo and Smash Girls), which are now only available on terrestrial digital television, since being pulled out of Rupert Murdoch’s Sky Italia.

Digital Terrestrial Television

Now, if you think the above is complicated, wait until we explain how Mediaset was able to gain channel capacity for its TV networks.

Mediaset owns three analog TV networks (Canale 5, Rete 4 and Italia 1), two DVB-T (DVB-T1 and DVB-T2) and one DVB-H (TV on mobile phones). The DVB-H channel is rented to Telecom Italia and Vodafone for their own use.

Mediaset’s DVB-H network is derived from the analog frequencies of an ex-TelePiú TV network that Mediaset has digitalized. This ex-TelePiú network was acquired by Tarak Ben Ammar, which entitled him to own frequencies for a digital network (with each analog network, owners are entitled to frequencies for a digital network). Ben Ammar kept the frequencies for his own digital network (D-Free) and sold Mediaset the analog ones (which Mediaset then digitalized for DVB-H). Since Mediaset cannot own more than three analog networks, those frequencies acquired from Ben Ammar had to be digitalized.

Mediaset’s two DVB-T networks (DVB-T1, DVB-T2) were created by acquiring various frequencies on the open market (including frequencies from ReteMia).

Therefore, currently, Mediaset operates with two DVB-T networks and one DVB-H.
After the analog switch off in 2012, Mediaset will have (in the view of Italian trade publication Millecanali that VideoAge consulted for this story):

Two new DVB-T networks converted from two of its three analog networks (Canale 5, Rete-4 and Italia-1).
The two already existing DVB-T networks (DVB-T1 and DVB-T2).

One existing DVB-H network from the ex-TelePiú analog frequencies (acquired from Ben Ammar).
It is also possible that Mediaset and RAI could make a bid for digitalizing their third analog network (both organizations operate three analog networks). These frequencies have to be used for DVB-T by 2012. If that occurs, Mediaset (and RAI as well) will end up owning six digital frequencies. Each DVB-T network can carry up to seven TV channels, therefore Mediaset will ultimately be able to operate with a total of 42 digital channels.

For now, however, in order to get channel space for all of its digital offerings, Mediaset has to rent space from D-Free. Similarly, D-Free rents its mux to other channels on Mediaset’s premium platform, like the two from NBC-Universal and three from Disney.

Legally speaking, up until the 2012 switch off, Mediaset is obligated to rent up to 40 percent of some of its channels to third parties. Similarly, though, Mediaset can rent capacity from other DVB-T operators, which, in effect, balances out.

The Murdoch Factor

It’s clear that Italy, Inc. is ready to end Rupert Murdoch’s Sky Italia satellite TV monopoly in the country with a three-prong attack: increasing the sales tax on Sky Italia’s subscriptions (from 10 percent to 20 percent. Mediaset Premium opted to pay the sales tax difference itself), de-facto pulling out all of Mediaset’s and RAI’s TV channels from Sky and competing with its own “Made in Italy” satellite platform that is, from the start, a money-losing proposition. Plus, reduction by law of Sky Italia’s advertising minutes and not granting the satellite platform rights to Medusa’s (Mediaset) and RaiCinema’s popular movies.

The competition between Italy, Inc. and Murdoch is such that RAI refused the 50 million euro per year (for a period of seven years) that Sky Italia offered for RaiSat premium channels.

So far, Murdoch has been fighting back by using all of his press power to attack Silvio Berlusconi, who controls Mediaset and, who, as Italy’s Prime Minister, rules over state-owned RAI. However, he has other options:

First, he might bring competition to the digital terrestrial (DTT) level by potentially acquiring (but not before 2011) frequencies like those of the three TV networks that Telecom Italia has reportedly decided to sell through Merryl Lynch for an estimated 800 million euro (US$ 1.1 billion). These would give Murdoch some 21 digital terrestrial channels. By renting space from third parties, he could even reach 40 DTT channels, enough to compete with both Mediaset and RAI on their own turf. In the short term, Murdoch could buy Tivú Sat decoders to give away for free to his Sky Italia subscribers so that they can continuously receive RAI and Mediaset TV channels.

Second, he might lower Sky’s basic subscription fee and increase the number of basic channels. This could also be seen as a strategic maneuver, since, with its 4.8 million subscribers, Sky Italia has quickly reached maturity with slow growth and increasing churn (with peaks of 15 percent). Such a move would present strong competition for Italy, Inc.’s Tivú Sat and an incentive for reducing its churn.

Third, Murdoch could really revolutionize the Italian TV sector and turn the whole enchilada upside down by substituting Sky’s satellite decoders with IPTV set-top boxes. Italy, Inc. doesn’t put any faith in the IPTV technology because of spotty broadband coverage, but with a combination of low-bit open IPTV set-top boxes and a good mix of broadband services (DSL, Wi-Fi and cable), Murdoch could end up dominating the Italian TV market. In this respect, an accord with a telecom company (a scenario encouraged by the Italian Telecommunication Authority) to expand broadband coverage and benefit from the data part of the triple-play that IPTV offers is easily envisionable for Murdoch.

In this respect, the concern of Italy, Inc. is understandable. Traditionally, Murdoch plays by his own rules, politically, socially and economically. The rapid growth of Sky Italia surprised even his allies in the country and surely scared off his Italian business competitors and politicians alike. It should be noted that, in 2008, after just a few short years, Sky Italia became the third TV operator in Italy in terms of annual revenues, with RAI reaching 2,723 million euro (license-fee and advertising), Sky Italia 2,640 million euro (subscription fee, premium charges and advertising) and Mediaset 2,531 million euro (advertising and some premium charges).

Big Brother

Over the course of its 15-year history, Endemol (the name derived from the surnames of its two founders, Joop van den Ende and John de Mol) evolved through three major events: The creation of the successful Big Brother reality show format in 1999, the sale to Spain’s Telefonica for an astonishing 5.5 billion euro (US$ 7.5 billion) in an all share deal in 2000, and its 2007 sale by Telefonica for 2.63 billion euro to EDAM Acquisition Holding I, a consortium comprised of Mediacinco, GS Capital and Cyrte Fund (each owning 33.3 percent). This 2007 acquisition was of the 75 percent owned by Telefonica. In 2005, Telefonica placed 25 percent of Endemol on the stock market (over 31 million shares). At that time, Endemol was valued at only 1.6 billion euro (a paper loss of 4.3 billion in less than five years) with the floating stock traded at 12.8 euro. Subsequently, the consortium launched a tender offer for the remaining 25 percent.

Perhaps it was this drastic devaluation that persuaded Telefonica to sell Endemol. It had several suitors, including Televisa, Haim Saban, risk capital companies T.H. Lee and Apax Partners, and Stephane Courbit, head of Endemol France (with Bernard Arnault and De Agostini Group).

Endemol France was run as a separate entity and reportedly accounted for 25 percent of Endemol’s value. However, Endemol France was not included in the 2005 IPO because of a dispute between Courbit and the parent company. Now Courbit is out of Endemol and the brand name is still owned by the parent company.
For the consortium, the whole Endemol operation ended up costing 3.4 billion euro (paying 24.64 euro a share for the floating stock) and was financed with 1.4 billion euro in cash and two billion euro in loans with each partner investing 466 million euro, plus 155 million euro each for development.

Based in Holland, Endemol has 80 companies in 26 countries and generates up to 80 percent of its sales from unscripted programs. Under Telefonica, Endemol’s revenues increased steadily, reaching 900 million euro in 2005; 1,117.4 million euro in 2006 and 1,256.3 million euro in 2007. Under new ownership, revenues climbed to 1,301 million euro in 2008 with an EBITDA of 221 million euro.

Based in Spain, Mediacinco Cartera is owned by Mediaset (25 percent) and Gestavision Telecinco (75 percent). Gestavision Telecinco, which operates Spain’s commercial network, Telecinco, is 51 percent owned by Mediaset. Since Mediaset’s share of Endemol was acquired through its Mediacinco holding, there has been no impact on Mediaset balance sheet.

GS Capital Partners is part of Goldman Sachs, while the Cyrte Fund is owned by John de Mol.
Founder de Mol doesn’t have an executive role. He has had a joint production venture with Endemol through Talpa TV, the company he launched after leaving Endemol in 2003.

In effect, with two “silent” or investing partners, Mediaset is the de facto leading partner. Furthermore, through its various TV networks, including Telecinco in Spain, Mediaset serves as Endemol’s main client with an investment in the order of 150 million euro per year. Mediaset’s main Endemol show is Big Brother (Il Grande Fratello). However, Endemol also serves Mediaset’s competitors in Italy (RAI broadcasts Affari Tuoi, the Italian version of Deal or No Deal), with RAI investing about 30 million euro per year. Those two shows were also aired in Spain, with Gran Hermano and ¡Allá tú! on Telecinco and One vs. 100 (Uno Contra 100) on A3.

Currently, in Spain, Endemol has Big Brother on Telecinco, Floor Filler (Fama a Bailar) on Cuatro, Strictly Dancing (Mira Quien Baila) on TVE1, and others, for a total of seven shows. In Italy, between Mediaset and RAI, Endemol currently has five shows on air.

With Endemol under the consortium’s ownership, the group’s top management is now:
Ynon Kreiz, chairman and CEO (former Fox Kids Europe chief). Marco Bassetti, president (founder of Aran in Rome, Italy, and acquired by Endemol in 1997). Tom Toumazis, Chief Commercial Officer (former executive vp and managing director of Disney ABC-ESPN Television EMEA and Canada). Jan Peter Kersten, CFO (he has been with Endemol since the year 2000). Paul Römer, Chief Creative Officer.

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