Despite continued regulatory restrictions that prevent consolidation, Germany’s cable industry has continued to make solid progress in an increasingly competitive and challenging market. Dieter Brockmeyer reports.

In April, the latest move of Germany’s so-called Level 3 operators, Kabel Deutschland (KDG), Unitymedia and Kabel BW, towards consolidation under a single roof was stopped by national antitrust watchdog the Bundeskartellamt, which made it clear that it would not be in favour of such a change.

The German cable industry has been here before. In 2004 the watchdog formally stopped Kabel Deutschland’s attempt to buy the other Level 3 (NE3) operators. Until the sell off by former owner, state telecom operator Deutsche Telekom, in the mid ’90s. The three companies had been a single unit. But the authority has continued to insist that the need for competition in NE3 is not up for discussion, while the operators claim that in the long-term profitability can only be achieved by consolidating the businesses. “Today competition is not created any more by regionally restricted cable operators,” KDG CEO Adrian von Hammerstein pointed out regarding the decision.

Despite the restrictions placed on it, cable in Germany is making some progress. All three major players have been able to grow their telephony and internet subscriber bases significantly. KDG more than doubled its telephony and internet base in 2008 to over 1.2 million. KDG now has nine million cable subscribers, of which about two million are digital. Unitymedia, which has 4.6 million subscribers, of which 925,000 are digital, announced 376,000 internet and 222,000 phone customers by the end of last year. The smallest of the three NE3 operators, Kabel BW, with 2.3 million subscribers, has said that about 20% of them are now digital, of which about 400,000 have subscribed to internet and/or phone services.

KDG, meanwhile, reported 846,000 subscribers for its pay-TV offer, while Unitymedia has signed up 485,000. Slowly, triple-play offers are making cable a serious competitor to the traditional internet and telephony providers.

Slow progress

However, it remains the case that digital TV is still making slow progress on German cable, although the first signs of a dramatic change can be seen. Over the past few years the overall number of subscribers to the large German cable networks has been declining  – KDG’s base has fallen from ten million to nine million subscribers today. There are a number of reasons for this. One is the emergence of Telecolumbus as another strong player in the cable market, formed from the merger of a number of the larger independent operators.

Telecolumbus is expected to have about four million subscribers in and around the KDG heartland of Berlin soon. The operator is investing heavily in digital, although with currently about 141,000 phone and/or internet  and 118,000 pay-TV subscribers, its base is not particularly strong yet. But as it achieves greater scale it will potentially be able to do deals with regional KDG clients.

This latter point highlights one of the problems facing the NE3 operators, especially KDG – the heritage of the former monopoly situation under Deutsche Telekom’s ownership. To speed up the growth of cable, smaller privately held regional companies were allowed to build up their own last-mile networks that took the channels supplied by Deutsche Telekom.

As a result the NE3 operators supplied a relatively small number of homes directly. After the Bundeskartelamt allowed consolidation, Kabel BW and Unitymedia were able to expand their direct customer base by acquiring smaller players. However, in the states of the former GDR, which are all within the territory of KDG, last-mile operators are larger and economically in a rather stronger position.

“They still may be tied to Kabel Deutschland in the analogue world. However, the more digital becomes accepted, the easier independence may become,” says one independent operator.

The large NE3 operators together reach about 15.9 million homes. Germany has about 35 million TV homes in total of which 53.5% were cable subscribers in 2007, or about 19 million homes. A further 42.7% received TV via satellite, of which 74% were digital at that point, almost all receiving signals via Astra, Eutelsat never having been able to establish a significant DTH presence in Germany. Terrestrial TV (now all digital) accounted for only 3.7% of homes. The absolute cable figure is difficult to establish because last-mile and NE3 operators count the same homes. Independent cable operators’ organisation FRK claims six million German cable homes belong to independent networks.

Remain independent

Operators that want to remain independent of the NE3 players do not need to develop their own content line-up. Eutelsat offers KabelKiosk, a ‘headend-in-the-sky’ platform with basic and pay-TV bouquets, and last year a new company associated with the FRK was launched to create a new digital platform of free-to-air channels. Operators can also use Premiere Star, the subsidiary of pay-TV platform Premiere that was created to provide a general basic pay-TV platform for satellite and cable (see sidebar). NE3 operator Unitymedia also operates a satellite subsidiary, Arena, which is struggling badly. The platform, which was launched three years ago when Unitymedia won the DFL premiere league football league rights from under Premiere’s nose, has declined dramatically to about 100,000 subscribers following the effective return of the rights to Premiere.

As well as overcoming the problems caused by fragmentation, cable has also had to deal with the development of IPTV as part of a triple- and quadruple-play offer by telecom providers. Deutsche Telekom, the largest German DSL operator, had about half a million IPTV subscribers at the end of last year, and Telekom board member Timotheus Höttges expects to double this figure in 2009. Other IPTV operators have been less successful. HanseNet, owned by Telecom Italia and offering its services under the Alice brand, is for sale.

Deutsche Telekom itself has built a strategy around the acquisition of IPTV rights to German premier league football rights. During the current season the incumbent telco is working with Premiere, a hangover from the rights battle that took place between Arena and Premiere. For the next period a deal has been signed with Constantin Media, formerly EM Sports Media and owner of the DSF free-to-air sports channel. “We were not dissatisfied with the Premiere partnership,” Christian Illek, marketing head at Telekom’s consumer unit T-Home, said in an interview. “It’s time to develop a distinctive proposition.” Until now, subscribers to T-Home’s Entertain soccer package got the same programme feed as Premiere’s sports subscribers.

Ironically, Constantin Media is now controlled by Leo Kirch, whose media empire controlled ProSiebenSat.1 and Premiere until it was forced into insolvency, and who signed a deal with the DFL last year giving him the rights to resell national premium football rights to domestic TV, a deal that was later quashed by the antitrust watchdog.

“For the coming season our subscribers will fully benefit from the potential of IPTV – in HD, live, on-demand and interactive. The fan will become his own programme executive and it will all be free of advertising,” Illek said. Deutsche Telekom’s initiative could boost HDTV, which has not proved to be particularly popular in Germany to date. On the cable side in particular, NE3 operators so far have only one or two HD channels in their bouquet – Anixe HD or the HD feed of the Franco-German culture channel Arte. Neither is the HD line-up on Astra particularly compelling.

Wolfgang Elsäßer, managing director of SES-Astra in Germany, is promising a rapid change by the end of this year. The German public broadcasters ARD and ZDF, which still have massive market power in the country, have booked 12 feeds on Astra for HDTV services. Both networks say they are planning a rollout of HD services from next year. The big commercial free-to-air broadcast players, ProSiebenSat.1 Media and RTL Germany, are strangely silent in public about HD, however, which could indicate that they are planning something on the quiet. “Whenever there is an absence of rumours about a certain issue in the market, something is being bottled up,” says one managing director of a small TV channel. “I predict that the public players along with the large commercial competitors will take some coordinated action to foster HD.”

Premiere’s CEO Mark Williams has also recently told an analyst conference that the pay-TV operator is going to increase the number of HD channels in its bouquet to up to five by the end of this year. Although Premiere was one of the pioneers of HD in Germany, it originally launched its HD serviice with three channels, only two of which remain in its portfolio.

Economic crisis

While cable and IPTV are gaining momentum, the global economic crisis is having an impact on the German media business. The advertising-funded commercial broadcasters face huge losses, the depth of which cannot yet fully be predicted. The public broadcasters also predict licence fee revenues will shrink by up to ?400m as a result of increasing unemployment.

Some projects have already been cancelled. Spiegel TV is believed to have decided not to proceed with its planned sports channel. A small independent project for a free-to-air health channel, DGF, has been downsized to an internet stream. Another independent free-to-air channel, Tier.TV, will be transformed into a pay service. Germany remains the European country with the highest availability of free-to-air services, but consolidation is likely here as well.

The crisis could provide the opportunity for Premiere to market its low-cost pay-TV platform for distributors and channel providers. While there is scepticism about its viability, the technical platforms of the cable operator and Premiere are becoming more aligned. KDG has announced that in future it will use NDS encryption for new services such as video-on-demand, while retaining Nagra for existing services (at least for now). Premiere also uses NDS encryption.

One option for NE3 operators could therefore be to give up their own basic pay services and take them from Premiere (or whatever the future branding of the latter’s low-cost platform will be).  For the operators and channel providers this model could have some appeal based on lower operational costs and one single partner to negotiate carriage deals with. However, the concept is unlikely to win widespread support as operators have already invested heavily in their own pay-TV bouquets. In addition, the Kartellamt may not be in favour, and the German cable market remains complex, with the independent operators unlikely to form a consensus and Eutelsat trying to increase its footprint in Germany by marketing its services to cable. And both cable and DTH face competition from Deutsche Telekom.

Sidebar: News Corp’s new broom at Premiere

A minor earthquake occurred in the German media landscape last year when, in the wake of News Corp’s acquisition of a 24.9% stake, Michael Börnicke, the CEO of German pay-TV platform Premiere, was fired and replaced by News Corp insider Mark Williams.

The new News Corp broom immediately set about sweeping away the former regime. Only Carsten Schmidt survived from the previous management team, placed in charge of negotiating the new round of DFL premier league football rights, which were finalised last fall. Most of the management positions were filled by Murdoch-approved personnel from Sky Italia, where Williams had already performed a successful turnaround some years previously.

The next shock was the downward restating of Premiere’s subscriber figures by almost a million to about 2.5 million, resulting in a dramatic decline in the company’s stock price. Meanwhile, a capital increase was executed, bringing €411m into the company’s purse and increasing Murdoch’s stake to just over 30%.

Premiere succeeded in securing the crucial football pay-TV rights for the coming seasons. Instead of selling the subsidiary platform Premiere Star, the parent company moved to buy back the minority stakes sold under Börnicke to a number of partners including channel operators. In the future, Premiere Star will perform a key role in the overall Premiere strategy, according to Williams. What this means is already becoming clear. Premiere is working on introducing a basic package for cable and satellite, increasing the number of so-called partner channels. Among other things, this means that Discovery Networks will lose its exclusive status for the channels already on the platform: Discovery Channel, Animal Planet and Discovery Geschichte. Negotiations between Discovery and Premiere ongoing. At the end of April the first new channel to join the platform, a new history channel by German production house Spiegel TV, was announced.

Premiere has said it will entirely revamp the packaging and pricing model, making it easier to understand. Some observers are sceptical, believing that the steps now being taken are too late, arguing that the window of opportunity has closed. Big cable operators have launched their own packages quite successfully into the market. Williams is continuing to reform the company and has raised the possibility of re-branding the entire platform. Media reports suggest that new names are currently being tested, with Sky Deutschland now likely to be adopted. The new name may be introduced along with new package and pricing options this summer.