... Sky and Virgin skirmish is heading towards No 10

by Colin Grimshaw, Media Week 27-Feb-07

The spat being played out very publicly between Sky and Virgin Media - its essence is the amount that each platform pays for airing the other's content - has become increasingly acrimonious. But there is a much bigger endgame at stake and this skirmish marks only the start of a battle whose resolution is likely to end up at the Government's door.

Relations between the two have deteriorated since Sky trumped Virgin's
bid for ITV by taking a pre-emptive stake in a broadcaster that Sky had
previously only shown contempt for. In the dirty world of corporate

raiding, such Machiavellian scheming is commonplace. Yet when egos the

size of Keith Rupert Murdoch and Richard Branson come into play, you
knew that neither would let it rest at that.

Branson referred Sky's raid to the Office of Fair Trading and boasted of
doing to BSkyB what he did, through his Virgin Atlantic airline, to
British Airways. Sky retaliated by cutting £25m off the annual
amount it pays Virgin for airing its Flextech channels and, allegedly,
attempting to extract from Virgin double the amount it had previously
charged for the cable rights to Sky "basic" channels, including Sky One
and Sky News. Sky took the unusual step of placing ads aimed at Virgin
customers, warning of the imminent loss of these channels.

This loss is really about Sky One - would Virgin viewers really miss Sky
Two and Three, or even Sky News when they already have BBC News 24? And
really about two shows - Lost and 24.

Yet, Virgin's pay-TV proposition would be considerably devalued without
these shows and Sky knows it has the winning hand in this poker game.
Sky is risking the loss of £60m in annual carriage and advertising
income if Virgin pulls the channels. To regain this, Sky would need to
lure around 150,000 subscribers away from Virgin, and it may think this
is achievable.

So might Virgin, given its public squealing over the issue. But then,
Virgin's motive is to raise the temperature of the dispute, portraying
it as a David to Sky's anti-competitive Goliath in the hope that when
Murdoch ally Tony Blair leaves office, it may receive a fairer hearing
under a new regime.

The downside of this strategy is that OFT investigations can take years
- and the pace of change in media could leave Virgin out of the race
before any adjudication is made.

Colin Grimshaw is the deputy editor of Media Week.