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[15.02.2006] Digital Take Off

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After suffering through a recession and consolidation, the European pay-TV market may finally flourish.

April 2004

By Janet Stilson

As the old saying goes, 'The only sure thing in life is change,' and this certainly has been the case in Europe€™s pay-TV market in the past couple of years. Consolidation and recession have forced the reconfiguration of platforms and their offerings.

'Most of those countries have been through quite a bit of turmoil, and there have been a number of issues that have impacted their pay-TV business,' says Michael Grindon, the president of Sony Pictures Television International, which operates channels in a number of European territories. 'The economic downturn has impacted disposable consumer income,' he continues. 'In a lot of countries, there are legal requirements that make it very difficult for some of those platforms to compete effectively. The issue of piracy has been a big problem in Italy and an issue in Spain as well.' And finally, as Grindon points out, pay-TV platforms have to compete against some very successful free-TV broadcasters.

There€™s no doubt it€™s a tough market out there. But several companies are navigating their way through that maze of difficulties. A combination of smarts, talent and creativity has helped some of the platforms overcome problems that seemed insurmountable.

Italy seems to have successfully solved its pay-TV piracy difficulties under the watchful eye of several Rupert Murdoch veterans. Spain, which had served as a fight ring for two fierce direct-to-home rivals, Vía Digital and Canal Satélite Digital, has been dramatically changed following their merger, resulting in a tough situation for several channels.

Germany€™s Premiere, which spent years just trying to find a stable group of owners, is now about to turn a profit under the steady hand of its CEO, Georg Kofler.

In France, Canal+ Group€™s CanalSatellite and Numéricâble platforms are already sporting black ink as well as launching new initiatives with telephone companies, despite tumultuous change at the top of their parent company, Vivendi Universal.

In England, BSkyB may still stand out as a shining success among the world€™s DTH platforms, but it is under new leadership that faces challenges from investors as well as competitors who are growing stronger.

Perhaps nowhere in Europe has the entire television business been so changed by the merger of two platforms as it has in Spain. When Vía Digital and Canal Satélite Digital merged last July, becoming Digital+, the only channels they had in common were MTV, Eurosport and Fox Kids, says Pablo Romero, who is the director of programming for Digital+. 'Overall, we had around 100 channels for a territory that had around 1.8 million pay-TV subscribers, and that€™s a synonym for misery,' he says.

Currently, Digital+ offers subscribers a package of about 70 channels, plus pay per view. Several channels that were carried on the two predecessor platforms lost their berths, and some were shut down.

'The national channel providers and producers, which [focused on the pay-TV market] are now, in some cases, in very big trouble,' says one source. 'When you rely on one lonely market, you€™re very vulnerable. The first victims were the independent channels, the second ones were the national channels only focused on Spain, and the last victims were the international channels.'

But narrowing down the channel choices was only part of the strategy. Digital+ relaunched a multiplex of Canal+-branded channels. Movie services were regrouped under two names, Cinemanía (an established brand that was refocused with more movies) and DCine. Beyond programming, the company also had to deal with government restrictions. For example, it had to transmit signals from both of the satellites the previous platforms had used, the Astra and Hispasat birds. And its subscription fees were frozen.

While those situations are complex, Digital+ is attempting to set right the impossible DTH situation that existed before, when Vía Digital and Canal Satélite Digital were competitors. 'After ten years, the pay-TV subscriber base in Spain was still limited,' recalls Jerôme Lafond, the general manager of the Barcelona-based consultancy So the platforms 'had to downsize their business. And they were competing for major football rights. It was absolutely suicide for both sides.'

Romero says the platform has a few top challenges on its hands. ARPU (average revenue per subscriber) is improving€”up 15.5 percent in the fourth quarter of 2003 compared with the previous quarter, to ¤43.5 a month, according to financial statements of the Digital+ owner Sogecable. But it needs to increase even more.

There€™s also an effort to reduce churn, which Romero will only say is a 'two-digit number,' but which others characterize as 'high.' And there€™s also the need to increase the subscriber base, which at the end of 2003 was about the same number brought in by the two predecessor platforms combined.

Once programming costs are further rationalized and a more aggressive marketing campaign is launched, Digital+ will be looking for new channels, says Romero. There€™s a need for women€™s channels and lifestyle services like HGTV, he says. In the meantime, it€™s a waiting game for those left on the outside.

CanalSatellite and Numericable
While there€™s been a flurry of news over the last couple of years about corporate shakeups at Vivendi Universal and its impending marriage to NBC, its multichannel platforms in France have quietly turned in profitable performances.

Canal+ Group, which houses CanalSatellite, is expected to post an operating profit when the 2003 financials are released on March 17€”the first time it€™s been profitable since 1996. One key reason for the improved performance is the divestiture of some international pay-TV platforms. And yet the platform on its home turf in France, CanalSatellite, reached profitability in 2000, and its cable sister Numéricâble was profitable on an EBITDA basis in 2002.

CanalSatellite increased its subscriber base 9 percent in 2003, to 2.8 million customers, and Numéricâble had 4-percent growth, to 423,000 subscribers. CanalSatellite€™s churn rate, at 9 percent, is one of the lowest in the world. And yet, despite those successes, the platforms are certainly not without their challenges. Unlike many other markets in Europe, the DTH business in France has not consolidated. And CanalSatellite€™s rival, Télévision Par Satelite, is a solid competitor.

Isabelle Parize, the executive VP of distribution for the Canal+ Group, says that there are no merger discussions between the two DTH platforms. But a merger is the subject of constant debate by industry observers, who say the competition has led to price cuts that make the financial situation more difficult for the two rivals.

One of Parize€™s most recent initiatives involves offering the Canal+ premium channel and CanalSatellite€™s package of TV channels over phone lines, using ADSL technology. Canal+ Group signed agreements with three telcos at the end of last year: France Telecom, LDCom and Cegetel. The TV services will be added in 20 markets during 2004, with Marseilles debuting first, this month (March), closely followed by Paris.

'Canal+ Group€™s objective is to get its programs and content to viewers irrespective of the technology used, to the extent it makes business sense,' Parize explains. Because the DTH service has successfully penetrated rural areas, it€™s in the urban markets that Canal+ stands the most to gain from ADSL. And interestingly, some of the markets where it€™s allied with the telcos are also home to Numéricâble.

While that telco initiative is certainly notable, one of the biggest changes within Canal+ Group involves its management. With the exception of the executive VP in charge of sports and thematic channels, Michel Denisot, the six executive vice presidents who help make up the management committee are new additions from over the last three years, with Parize holding her position the longest among them, since 2001.

While Parize doesn€™t reveal any plans for channel additions, CanalSatellite struck a deal with Discovery Networks International at the end of last year for the launch of two channels. The first, Discovery Channel, launches in September, and another still-undisclosed DNI service will make its debut in April 2005. That deal is particularly significant because gaining access to France has been a Holy Grail for the network group for many years.

'One of the big accomplishments we had last year was signing a deal with Canal+,' says Dawn McCall, the president of Discovery Networks International. 'France was really our last major hole worldwide. We€™re very excited about that; I think France will be a great market for us, and Canal+ will be a great partner for us. We have danced many times but never quite got to the altar! This time we actually made it!'

Sky Italia
Outside of Vivendi Universal€™s decision to rationalize its international platform holdings, one of the most significant factors driving change among European DTH platforms is News Corp.€™s tenacity in trying to gain traction on the Continent. Those two energy forces have been at work in Italy, when Vivendi Universal sold off Telepiù, and the platform was merged with its rival Stream into SKY Italia€”a joint venture of News Corp. and Telecom Italia.

'It€™s now one of the largest platforms in Europe outside of the U.K.,' notes Marco Frazier, who is the director of affiliate sales and distribution of ESPN Classic Sports Europe, and a veteran of the Italian channel group Sitcom Spa.

Some six months after its relaunch last summer, SKY Italia had 2.5 million subscribers, and has set a goal of three million by the end of this year. But Rupert Murdoch has even higher expectations. 'BSkyB in England achieved seven million subscribers in 15 years. Here in Italy I would like to take half the time, let€™s say about seven and a half years,' Murdoch was quoted as saying in an article that appeared in the Corriere Della Sera in February.

The results so far are certainly noteworthy. According to the company€™s spokesman Tullio Camiglieri, the merged platform has outpaced the sub count of the two previous Italian platforms combined€”although the math is a little complex. Sources say about 50,000 to 70,000 households subscribed to both platforms in order to get all available Premiere League soccer matches, which were split between the two.

But perhaps even more significant than the overall subscriber number is the fact that '95 percent of our subscribers have at least one premium offer and not only the basic,' according to Camiglieri, who adds that the majority of customers only took basic before.

The SKY Italia ramp-up has involved importing veterans of News Corp. platforms from around the world. Perhaps the most notable one is its CEO, Tom Mockridge, a New Zealander who counts among his multiple News Corp. roles a stint heading Foxtel in one of the most historically difficult pay-TV markets on Earth, Australia.

One of SKY Italia€™s biggest challenges involved snuffing out Italy€™s pay-TV piracy problem, with an estimated two million households receiving pirated signals. Just before the merger, Telepiù household equipment was switched to News Corp.€™s NDS technology. 'Logistically, that was an enormous challenge,' notes Laurence Dawkin-Jones, vice president of affiliate sales, EMEA, for Discovery Networks International.

SKY Italia also launched an aggressive marketing campaign to support the platform€™s new combined identity. Sources say that SKY Italia indicates the marketing was effective, but that some consumers are taking a long time to act on their decision to subscribe to the new service.

To make the offer more palatable, SKY Italia has made it much easier for people to get the equipment they need to subscribe, and the combined platform carries more program networks than either platform carried before. But not every established channel in Italy has a berth on the new service. Hallmark is now out of the picture, as are some news and travel channels, while some services within the News Corp. family, such as National Geographic Channel Italia, have been added, as were three Discovery services. Other channels, including some from RAI, were re-branded. And the platform has an expanded selection of children€™s services.

Clearly, SKY Italia has plenty of work ahead. Sources say that its churn rate is still quite high, at 15 to 18 percent, although Camiglieri denies that that€™s the case. Breakeven is still a distant goal. Its operating losses in the second quarter amounted to $106 million, according to News Corp. documents.

British Sky Broadcasting
SKY Italia need only cast its gaze westward at BSkyB to see what the big boys can do. In the six months that ended December 31, BSkyB showed an operating profit before goodwill and exceptional items of 84 percent, or £283 million (¤425 million), compared with the same time period in 2002. And its total revenue increased 17 percent, to £1.8 billion (¤2.7 billion).

That was certainly good news for the platform€™s new CEO, James Murdoch, who is following a tough act. His predecessor, Tony Ball, 'was incredibly successful at driving growth and delivering targets to the City,' says one U.K. observer. 'There€™s been disquiet in the City about [Murdoch€™s] appointment, and he€™s been very active to appease their concerns.'

Several sources say that one of the most difficult challenges that Murdoch and his lieutenants face is how to keep the subscriber growth up at the same time as they increase the average revenue per subscriber. 'Sky is throwing off cash now and has tremendous growth, but they€™re not being treated like a mature business by the stock market,' which expects even more growth from the company, says Theresa Wise, a partner of Accenture€™s media and entertainment practice based in London.

BSkyB€™s current ARPU level, £369 (¤554) per year, isn€™t quite at the £400 target. Its entertainment channel, Sky One, has faced some ratings erosion over the last year. What€™s more, there is the possibility that in the future, Britain€™s media regulator, Ofcom, will force BSkyB to separate its distribution platform and programming businesses. 'There€™s the expectation they€™ll have to address that in the next few years, and it may be a factor in how BSkyB is changing now,' says one source.

At the same time, the platform faces rivals that are collecting strength. Wise notes that ntl, a cable multiple system operator (MSO), is out of financial restructuring and Telewest is about to complete a restructuring. Some observers predict that the two will merge within a year. Their ability to offer a triple play of video, telephony and high-speed Internet access, as well as on-demand content, could be more threatening€”despite BSkyB€™s alliance with British Telecom on broadband service, and its interactive capabilities and digital video-recorder service Sky+.

Of increasing note to both the cable platforms and BSkyB is the growth of Freeview, the digital terrestrial television service owned by BSkyB, Crown Castle International and the BBC. Entirely based on advertising revenue, without subscription fees, the platform, with 30 TV and 20 radio channels, is about to hit two million subscribers. 'It€™s selling like hotcakes,' says Wise.

Dawn Airey, the managing director of Sky Networks, a subsidiary of BSkyB, is keeping an eye on Freeview. 'We do have an involvement in Freeview€”we have three channels there and we can see that the platform could present an opportunity,' says Airey. 'Whilst we€™re not saying, €˜Yes we€™re going to do it,€™ we€™re not saying €˜No,€™ either. We€™re watching as the platform and its profile grow. If it actually hits a certain critical mass and it makes sense, then we€™re certainly open to considering doing something slightly more substantial than we are currently doing.'

At the moment, Freeview targets a different audience than the Sky platform does. 'Its audience profile is slightly older€”it€™s more in tune with the BBC profile,' explains Airey. 'I think a lot of people are buying it simply as a gift. The boxes are cheap and they give you multichannel television. A lot of them are being bought as the second set-top box for kids€™ bedrooms where they can get CBBC and CBeebies [the BBC€™s children€™s services]. Some people buy it because they want more choice but they don€™t want to pay for it, or can€™t afford to pay for it. For us what€™s good is it shows there is an appetite for multichannel television. And if you like Freeview, then why not get the real thing and come to Sky!'

Other platforms in Europe would feel lucky to have BSkyB€™s challenges€”along with its profits. But certainly Germany€™s Premiere has less reason than many to feel envious, as it quickly approaches profitability for the first time€”after a 14-year slog.

'We hope to be at breakeven in the next few months,' says Stefan Vollmer, who heads corporate communications for the company. Only two years ago, it hovered on the brink of insolvency with losses of $1.8 billion (¤1.5 billion), with a revenue of $800 million. That was one of the factors that led to the insolvency of its owner at the time, KirchGruppe, and the introduction of a new set of owners, including the Premiere CEO, Georg Kofler (who holds a 20-percent stake), and three banks.

Kofler, who took the platform€™s reins just before Kirch€™s exodus, applied some radical surgery€”not the least of which involved convincing the Hollywood studios to reduce their license fees by 50 percent. At the same time, he reduced Premiere€™s staff by 40 percent and put together a marketing plan to emphasize the Hollywood content that wasn€™t yet available on Germany€™s free-to-air services. He upgraded the sports offerings and lured subscribers with the rock-bottom entry fee of ¤5 a month. Within 17 months, the subscriber base grew by more than 500,000 households, ending 2003 with 2.9 million customers.

Premiere has an unusual advantage among platforms, because it doesn€™t own infrastructure that snakes to the doorway of subscribers€™ homes. Instead, it€™s distributed via satellite and through affiliation agreements with cable operators. One of its more significant new alliances is with Germany€™s largest MSO, Kabel Deutschland GmbH (KDG), which has almost 3.5 million subscribers and access to ten million German households. It€™s rolling out digital service in April, and Premiere is part of its digital offerings.

The growth from digital isn€™t expected to come in leaps and bounds. Premiere is only forecasting about 100,000 digital subscribers in the first year from the KDG deal. That€™s certainly a drop in the bucket compared with Premiere€™s present subscriber base€”2.9 million€”and digital isn€™t likely to be the majority of its total growth over the next year, Vollmer says. But he adds, 'One of our tasks is to develop the market for digital TV. It€™s very important to cooperate with players like KDG.'

Clearly, that€™s no easy task. Michael Fries, the CEO of UnitedGlobalCom€”which through its UPC Broadband subsidiary owns EWT/TSS, the fourth-largest independent German broadband cable operator, as well as many other systems throughout Europe€”adds some perspective: 'I think the big question for operators continues to be digital. The digital model hasn€™t excited [consumers the way that has been expected] or succeeded.'

For its part, Premiere is trying to excite subscribers with new channels. It currently has 25 channels, including a new addition, an erotic channel called Blue Movie, which goes alongside its softer core service Beate-Uhse TV. In April, it will add two more services, Animal Planet and HIT24, which will program movie hits from the last few decades of the 20th century.

For the moment, Premiere€™s reduced-rate contracts with Hollywood remain secure. Vollmer says most come up for renewal in 2006. More close at hand is the planned initial public offering in 2005. 'We€™ll have to take a close look at the option,' says Vollmer. 'If the market is right€¦it€™s pretty likely we will jump.'

© 2004 WSN INC.




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