Cover Story: Canal + Murdoch = war

It looked like a dream deal for Rupert Murdoch. Hitch Sky to Canal Plus and corner the European market in pay TV. But he reckoned without the ambition of the French TV mogul Pierre Lescure...

THE WAY Pierre Lescure tells it, there was a distinct change in Rupert Murdoch's approach when he came to France in January to propose a merger of his British Sky Broadcasting with Canal Plus. "He was the first to think about it," says Lescure, who speaks English with a fair dose of Maurice Chevalier. The 53-year-old former TV producer and presenter, who has run Canal since 1994, smiles. "Before January, Rupert Murdoch always talked about coming to the Continent and taking the wheel. This is the first time that he talked about offering a stake in one of his jewels [in return]."

But, as with all of Murdoch's attempts so far to obtain a foothold in Continental Europe's fast growing pay-TV market, it was not to be.

Murdoch's proposal to merge News Corp's 40 per cent-controlled "jewel" BSkyB with Canal Plus foundered on a number of issues. There were the screams of protest from French politicians worried about an invasion of cheap imported programming on French TV screens. Murdoch's outspoken anti- European views and his impatience with government regulation in any form also grated with the Left-controlled French government. Murdoch may have wanted Paris but Paris didn't seem to want him.

For his part, Lescure set some tough conditions on a Canal-Sky merger too, notably that the new company would be under French control. The merger would have cost Murdoch dearly. Besides ceding management control, there were tax issues involved. After just three meetings, the deal was off. But the fact that it was Murdoch knocking on Canal's door says volumes about how strong the French pay-TV company has become.

"Two years ago we were a little afraid of Murdoch," confided a senior Canal Plus executive. "Now we are a force. We control 12 million subscriptions. Murdoch doesn't scare us anymore."

The European pay-TV market is set to grow from about 55 million subscribers at the end of 1998 to about 97 million by 2006, according to figures from Baskerville Communications. And with digital technology, the business is about more than just TV. Interactive services from weather to Internet access are part of the pay-TV picture. By 2003 there will be 29 million digital set-top boxes in Europe with a built-in modem, according to consultancy Datamonitor.

Murdoch runs a global media empire, and in the UK BSkyB has a virtual stranglehold on pay TV, but across the Channel, Murdoch is notable for his absence. Not that he hasn't been trying. But his frontal assaults on Germany and Italy have so far yielded little.

Meanwhile, Canal Plus boasts pay-TV operations in 11 European countries, and northern Africa. After three years of heavy costs to launch digital services, 1999 will see Canal break even on its French digital business and return to 1996 pre-digital cash flow levels of an estimated 4bn French francs (pounds 420m).

In the grand European plan, Lescure's only gap is in Germany, but even there Canal sells some of its thematic channels on the extensive cable network and holds a minority stake alongside Murdoch in VOX. Murdoch has said he could turn VOX into a pay-TV platform, but little has actually been done.

For the time being the powerful Kirch Group holds the upper hand in German pay TV. The ageing but very wily Leo Kirch is negotiating to take full control of the pay-TV operator Premiere from its partner, but erstwhile rival, the channel Bertelsmann. Bertelsmann, which also publishes newspapers and magazines and owns publishers Random House, seems to be pursuing an alternative strategy, moving quickly into online ventures with AOL, Barnes and Noble, and Lycos. It wants to keep its extensive free-TV business, which runs the RTL stable of channels, but may be prepared to surrender Premiere. Gaining control of Premiere will give Kirch the distinction of ruling Germany's pay-TV market which, contrary to its free-TV business, is under-developed.

Over the years, Murdoch and Canal Plus have both tried to gain pay-TV footholds in Germany. But the huge number of free-TV channels, plus local and European regulations that have limited the ability of the German players, namely Bertelsmann, Deutsche Telekom and Kirch, to work together, has made pay TV expensive to operate and has limited its growth.

Earlier this month Kirch reorganised and created stronger ties with Mediaset, the TV and advertising arm of Silvio Berlusconi's Fininvest. However, the new DM11bn (pounds 3.8bn) company which counts Saudi Prince Alwaleed bin Talal as an investor, does not include Kirch's loss-making digital pay- TV business DF1, nor its stake in Premiere. So some observers see Kirch looking for partners in pay TV.

Lescure's comment on Germany is that he hopes Kirch can revive DF1 so Canal Plus can sell him their thematic channels.

Locked out of Germany at least for the time being, Murdoch earlier this year made a run at Italy. In a thinly veiled attempt to look more European, he hired the former head of the Italian state broadcaster, Letizia Moratti, and announced a deal with Telecom Italia to develop its fledgling pay- TV business, which was suffering against its rival, Tele+, which is controlled by Canal Plus.

As it turned out, the deal with Telecom Italia was more Murdoch bravado than substance. Italian politicians, wary of allowing Italian TV to fall into foreign hands, also moved quickly. A new cap on the number of football games a pay-TV operator can control was put into place, leaving Murdoch little ammunition against the dominant player Tele+. Shortly after this fiasco, Murdoch came calling in Paris.

Lescure undoubtedly matches Murdoch with the extent of his ambition. Each controls a different end of the spectrum - Lescure has Europe, not the world, while for Murdoch the situation is reversed. Canal Plus is a big name in France, but Lescure wants to be taken seriously by the English- speaking world. When he was first invited to the Allen & Co annual gathering of the world's media elite at Sun Valley, where the likes of Barry Diller, John Malone, Jeffrey Katzenberg and Murdoch himself rub shoulders, Lescure was thrilled. One senior TV executive who knows him well says: "Pierre loves all that." For Lescure, the man who once dated French film icon Catherine Deneuve and counts Gerard Depardieu as a good friend, Sun Valley is access to the Anglo-Saxon world.

Canal Plus is fast developing outside of France, where nearly half of its subscription base now lies (see chart). Its core channel, called Canal+, has been up and running since November 1984 and mixes exclusive sports, movies and entertainment, much of it locally produced. The company holds exclusive pay rights to French football league games until 2001. Under its government licence, Canal Plus puts 20 per cent of its revenues into acquiring film rights, and has traditionally invested in 90 per cent of the films made in France. The company also has invested in 30 different thematic channels, from a documentary channel, Planete, to a 1950s US cult TV channel, Jimmy, named after James Dean and Jimmy Hendrix. Twenty- two of these channels have been developed with the former international arm of Tele-Communications Inc (TCI). Canal also owns about a third of Eurosport. Many of the Canal channels are localised and exported to the company's non-French services.

Canal Plus was quicker to introduce digital television than Sky. Partly this was due to competitive pressure in France from a rival service called TPS, controlled by TF1. Since launching its CanalSatellite digital service in April 1996 Canal Plus has signed up 1.2 million subscribers in France. TPS counts about 610,000 subscribers. But Canal Plus's roots - and for the time being its profits - are in its flagship terrestrial service. Today 75 per cent of its 4.5 million French subscribers pay 179FF (pounds 19) a month to receive just the one-channel service. In other European countries, Canal Plus has tried to replicate the French model, with varying degrees of success. But all of its non- French operations are set to break even over the next three years (see chart).

In Spain, with publishing powerhouse the Prisa Group, Canal Plus has had a rough time juggling shifting government rules that form the background to on-again, off-again merger talks with its rival, Via Digital, controlled by the former state-owned telecom operator Telefonica.

Early in 1997 Canal Plus achieved a real coup by acquiring its biggest pay-TV competitor NetHold - owners of the FilmNet film channel - from the luxury goods company Richemont. Although some said the price tag was high, the deal extended Canal's presence in several key markets, namely Scandinavia and the Benelux countries, and gave Canal a minority stake in Tele+.

That same year Canal Plus also did a little horse trading with Kirch, selling Kirch its stake in Premiere, and buying Kirch's 45 per cent stake in Tele+, thereby giving it control of the Italian pay-TV operator.

Last year Vivendi, the water-to-media group formerly known as Compagnie Generale des Eaux, took direct control of Canal Plus when it increased its stake in the advertising group Havas, which has a large stake in Canal Plus. At the time observers wondered if Lescure's powers would be undermined by Vivendi's aggressive and driven CEO, Jean-Marie Messier.

However, when Lescure perceived a threat to CanalSatellite, which Canal Plus owns with partners, French producer Pathe and US giant Time Warner, Messier was quick to pitch in. When Canal Plus's rival TF1 began purchasing shares in Pathe, Lescure and Vivendi stepped in, buying nearly 30 per cent of Pathe's shares. TF1 maintains it was only making a friendly alliance with Pathe, but it also controls TPS, CanalSatellite's rival. Lescure was not about to have his rival so close to "the heart" of CanalSatellite.

Before taking the top job at Canal Plus, Lescure was the programming director. His ambition is to make Canal Plus a "major" in the Hollywood sense of the word. His first experience with the Hollywood set cost Canal Plus more than $25m (pounds 15m) as his partners, Carolco, crashed and burned in the mid-1990s through budget mismanagement. It was an expensive lesson. Lescure's 17 per cent shareholding in that deal gave him no voice and nowadays it is an equal partnership or nothing.

That is the structure of the year-old movie deal he has with Warner Brothers, the first fruit of which - a film called Message in a Bottle starring Kevin Costner - opens in Europe this summer.

Lescure says that all the elements are in position to build a full-scale global company. His power in France in particular, and Europe in general, may be providing the foundation, but it is also holding him back.

"All we need to decide is the architecture of the house," says Lescure. But if he wants a room with a view of the whole world, then France's most powerful TV mogul will have to put all his focus into projects outside his homeland, especially in North America. Canal Plus has had some success selling its pay-TV technology into the US market, but programming is Lescure's probable best building block to the English-speaking world. Recently Lescure decided to group together his production, TV rights and distribution assets into a re-vamped company called Canal Plus Images, which will float on the market in the next 18 months.

But although great programming is the way forward for Lescure's global ambition, it will be his political skills which will be tested. The Australian- born Murdoch started off as just as much an outsider in America, and eventually had to become a legal US citizen to dodge US media laws. Pierre Lescure could never be so obvious (his countrymen would souffle him), but somehow or other, he'll find the appropriate key to open the New World door.

The Coup That Gave Canal Plus to M Lescure

THE STORY goes that Pierre Lescure, who was working as a news director at public station Antenna 2, took barely five minutes to accept the post of programme director at the newly founded Canal Plus. The request came in late 1983 from Canal Plus founder Andre Rousselet, then a top executive at Havas, who had a vision and the right political connections (he was a golfing buddy of former French President Francois Mitterand) to get a license to run a channel to compete against France's three government- owned channels.

Rousselet wanted to set up an HBO-like pay TV movie channel but French law prevents airing movies on Friday and Saturday nights, to protect French cinema. So Lescure mixed movies with live sports coverage, documentaries and musical events. He also spearheaded the development of home-grown programming, from cartoons made by Canal's own studios to the popular Les Guignols, a satirical look at society and politics that uses sophisticated puppets to poke fun at everyone from French politicians to the heads of Canal Plus's rivals. Lescure himself has a puppet. When the company acquired Nethold, Les Guignols ran a sketch with Lescure describing Canal's "simple" structure; he kept climbing higher and higher - on to his desk, up an elevator - to add pieces to the organisational chart, until finally he was floating in a spaceship saying: "See, it's all very simple and clear."

Lescure became COO of Canal Plus in 1986. By late 1993 and early 1994 Rousselet was fighting with his main shareholder Havas over a consolidation of its stake with another shareholder Compagnie Generale des Eaux.

It was part of the first steps toward creating the multi-media group now called Vivendi, but Rousselet felt that his power at Canal was being stripped away.

Rousselet resigned and Lescure was named CEO in February 1994.

Pierre Lescure:

Born July 1945

October 1982 news director Antenna 2

November 1983 Joined Canal Plus as programme director

May 1986 COO of Canal Plus

February 1994 chairman and CEO Canal Plus

Lescure is president of the Paris St-Germain football club (in which Canal Plus

owns a stake) and he is chairman of Canal Plus's film subsidiary Studio Canal