Week in review: Endemol and Telefonica's fear factor

(Originally published in Total Content + Media earlier today.)

Among the noteworthy M&A deals this week in the media industry—they included online advertising companies snapped up by Microsoft, WPP and AOL and Thomson finalising its deal to buy Reuters—Telefonica finally offloaded its 75% stake in Endemol to the tune of €2.6 billion.

It sounds like a nice sum, except for the fact that the Spanish telco had actually bought the stake in the TV production company in 2000 for €5.5 billion.

The consortium of successful buyers was led by Endemol’s founder, John de Mol and his investment vehicle Cyrte Fund, and included the Italian media giant Mediaset as well as Goldman Sachs.

"John de Mol did a great deal," one executive from a major broadcaster, told me this week. "He’s basically bought back his company for almost half of what he sold it for a few years ago! We should all try to do that.”

Putting aside the obvious waste of money in buying Endemol at a high and selling it for a low, one has to ask whether Telefonica would have ever been able to capitalise on its asset.

Endemol has been hugely successful in its traditional market of TV, producing franchises in largely in non-scripted formats: shows like Big Brother, Deal or No Deal and Fear Factor now grace millions of TV sets in dozens of countries.

But it’s also been setting the pace in new markets, too, developing mobile-only programming, games and products for other new formats like IPTV. Endemol has made some interesting progress here, signing distribution deals not just with Telefonica properties like mobile operator O2 but with a number of other distributors (mobile and otherwise). And it partners with a number of content companies to develop the products themselves.

Now it may not be your particular cup of tea, but a recent product, a mobile-only TV programme called Get Close To…Sugababes, was done in partnership with Universal Music, appeared exclusively on the O2 network, and really works to push the idea of how to use a small, short mobile format in a compelling way not just for the viewer, but also as part of the programme itself.

In the mobile space alone, Endemol claims that mobile users have downloaded 10 million minutes of Endemol-produced content, and that one million people have streamed endemol shows on their phones.

But all this still didn’t seem to be enough to make Endemol a compelling asset for Telefonica to keep, or to raise its price above what the telco had paid in 2000.

To be fair, Telefonica did try to work some convergence magic on Endemol over the last seven years. This apparently was why the telco didn’t sell it sooner. According to a source, Telefonica had actually wanted to sell off Endemol as far back as 2005 but held off after it bought mobile phone operator O2.

“They didn’t want to upset the relationship between the two,” he said, referring to the deal Endemol had struck with the mobile operator to run text voting for programmes like Big Brother, a lucrative mobile data deal for O2.

“Telefonica seemed to do the right thing buying Endemol,” said the executive. “They just did it at the wrong time.”

Looking to the future, early days under its new owners might be rocky for Endemol. From the moment the deal was announced, there were reports that the company would lose some key executives. Stephane Courbit, the chairman and founder of Endemol France, who was one of the unsuccessful bidders, said he would leave if John de Mol returned to the helm. And the chief creative officer and chairman of Endemol UK, Peter Bazalgette is also rumoured to be eyeing up the exit.

Mediaset, the Berlusconi-owned Italian media conglomerate, may have less time for new projects like mobile TV and IPTV as previous owner Telefonica did. Mediaset has been quick to release a statement saying that Endemol will retain its editorial independence, but this wouldn’t rule out trying to shape the production company’s product line up to better fit with its own media assets.

And Goldman Sachs could stay on the sidelines as a pure financial punter, but it too wouldn’t be in this deal if it didn’t think it could make some money out of it at some point. Perhaps those bankers know something that Telefonica did not.

The week in review: Fast moves

This was last Friday's week in review from the web site...

The week kicked off with an interesting series of M&A news items coming out of Italy. Swiss incumbent operator Swisscom has made a €3.7bn bid for Milan-based Fastweb, the triple play pioneer. It’s an interesting move from the usually staid Helvetic republic. Swisscom has itself been trying to make a business out of IPTV, not terribly successfully: after many technical hiccups, it launched its own Microsoft-powered service a year behind schedule. The company now says it has picked up some 30,000 users since launching the service in November. But a tie-up with Fastweb could inject Swisscom with some expertise from a veteran of the IPTV/triple play model. And it could mark the establishment of one of the first international IPTV players in Europe.

That is if Mediaset decides to sit back after all. The Silvio Berlusconi-owned concern, which is Italy’s largest media company encompassing television, film and publishing, is also reportedly interested in Fastweb. Although the company denied such interest, late Thursday another report emerged that seemed to say Mediaset wouldn’t rule anything out as far as Fastweb was concerned. Mediaset is also figuring very strongly in speculation about possible buyers for TV production company Endemol, which seems to finally, finally be getting ready for a sale by majority-owners Telefonica.

The executives that ruled out a Fastweb buy said that Mediaset wanted to focus its attentions on an Endemol bid, but I can see that if private equity houses and others start to look like more credible Endemol buyers, perhaps Mediaset might just pick itself up and look for a more local buy like Fastweb. In any case, both Endemol and Fastweb would add bows to Mediaset’s strings, albeit of entirely different tones.

On the subject of dominant media companies, ITV, the UK’s largest commercial broadcaster, had to take another big step down in interactive TV this week, as it formally lost its broadcast slot for its currently suspended ITV Play channel. ITV Play had been under major scrutiny by regulators for irregular accounting in its various interactive, money-based games. The issue of how consumers are charged for premium rate interactive TV phone lines, used not only for games like the ones on ITV Play but for all those popular voting-based shows like Big Brother and Pop Idol, is still not resolved and could have very far ranging repercussions in the industry, considering how popular the participation format has become.

In the UK, it’s not just the commercial broadcasters getting heat from regulators, though. The BBC said that it would suspend its BBC Jam educational web site from 20 March after complaints from educational companies that the site was putting commercial education publishers at an unfair disadvantage because of the BBC’s market dominance. It’s crazy that a non-profit company like the BBC can get in trouble for creating a good educational site—I’d always thought that the less profit-motivated educational tools are, the better.

The suspension of BBC Jam was also interesting because it’s one of the first instances in which the BBC has been taken to task for potentially stifling competition amongst commercial organisations. This is the same issue that is at the heart of other new initiatives that the BBC would like to pursue, such as its iPlayer, which some have said could put other content companies at an unfair disadvantage in the market. We should watch this space to see how this plays out.

Viacom this week took their dispute with YouTube one step further by filing a $1bn lawsuit for copyright infringement. Viacom’s argument is that Google’s YouTube has profited enormously from the traffic they’ve had over the site from people who come to view clips from programmes owned by Viacom—these include shows from Comedy Central, Nickelodeon and MTV among others. And, the argument continues, despite Viacom’s request earlier this month for YouTube to remove some 100,000 clips from the site, other clips continue to be posted and YouTube is not doing enough to stop the problem at the gate.

Various pundits think that the suit is more posturing than anything else, and that there might be a settlement out of court in the end. The outspoken Internet entrepreneur Mark Cuban, who himself is subpoenaing YouTube for the names of people who upload unauthorised clips from movies made by his production company, pointed out in his blog that whether or not Viacom settles or goes through with the suit, it will be a win-win situation, since at most the legal fees could be around $10 million but a settlement would be much more substantial, and certainly a $1bn award would be even more substantial than that. And in any case the company will most likely come out with an agreement not unlike the ones struck between YouTube and music companies. The upshot will be more proactive filtering from YouTube and/or legitimate content posts from Viacom itself.

I think that other companies may well follow in Viacom’s shoes, but just as many will continue to strike deals with this video giant, until the next virally popular service comes along.