SUPPLEMENT: EUROPEAN MEDIA; Digital TV’s long labour

Six months ago, Bertelsmann seemed to have the world at its feet. Now

Leo Kirch is leading Europe’s digital television revolution, Alasdair

Reid reports

It was perhaps appropriate that KirchGroup chose to launch DF1 at

Hockenheim on 29 July. The race was on in more ways than one. While

Damon Hill was heading for victory in the German Grand Prix, the DF1

roadshow was there to show off the digital technology that could

dominate European broadcasting well into the next century.

There were promotional events, an exhibition stand where potential

subscribers could examine the new D-Box set-top decoders and a large

screen where fans watched the race and saw the enhanced-quality pictures

digital TV offers. The 19-channel DF1 digital package was launched

simultaneously via the Astra 1-D and 1-E satellites.

The launch was backed by a press, poster and television campaign through

the Service Plan agency in Munich, with the total budget for this year

expected to exceed DM30 million (pounds 14 million).

It was deemed a great success. Within two weeks of the Hockenheim race,

more than 100,000 people had called a Freefone number to request more

information. DF1 believes its target of signing up 200,000 subscribers

by the end of the year is realistic.

Subscribers to DF1 are offered a two-tier proposition. The basic 17-

channel package, including MTV, the Discovery Channel, six film channels

- most of which offer ‘classic’ movies - and several children’s

channels, costs DM20 (pounds 9m). For an extra DM10, they receive two

sports channels.

Ten more stations will be launched this autumn. In addition, DF1 is

gradually introducing pay-per-view services.

Exciting stuff. Unless you happen to work for Bertelsmann, that is. Six

months ago, Bertelsmann was leading the German digital race, and held

most of the cards. It had formed a consortium, including KirchGroup and

most of the major players in European broadcasting, and was fine-tuning

its technology before an autumn launch. When Kirch Group - headed by the

maverick German media baron, Leo Kirch - broke ranks to go it alone,

many observers thought it was a foolhardy move. But when Rupert Murdoch

left the consortium to join KirchGroup, they rapidly changed their

minds. BSkyB is now a 49 per cent shareholder in DF1.

Bertelsmann has had other things on its corporate mind. In April, it

signed an agreement to merge its broadcasting division, Ufa, with CLT to

form Europe’s largest broadcasting concern, and it has been working

furiously to complete the deal. Unfortunately, one side-effect of this

merger was to shake loose the last remaining superpower in its digital

consortium - the French pay-TV specialist, Canal Plus. Canal Plus is

talking to both sides but many believe it will plump for KirchGroup.

Throughout July, Bertelsmann tried to pick up the pieces and forge some

form of rapprochement with its former digital allies, while also

insisting that it would continue to develop its own receiver, called the

Media Box, and its own programming plans. So far, only one thing has

emerged from the high-level talks between the two rivals: if and when

Bertelsmann goes ahead, it will use a compatible decoder system and

transmission standard. Subscribers will be able to receive DF1

programmes on the Media Box and Bertelsmann signals will be decoded by

the D-Box.

But that’s academic. Bertelsmann has neither the programmes nor the

boxes ready. There is continuing speculation that it will have to merge

its digital interests with DF1.

However, Nikolaus Formanek, head of corporate communications at

Bertelsmann TV and Film Europe, counters: ‘Of course there are talks,

there are always talks. But our plans haven’t changed in the slightest.

We are still planning our own decoder and programming.’

Bluster? We shall see. A good analogy is Sky and British Satellite

Broadcasting squaring up to each other in the late 80s. Murdoch beat BSB

to the punch and BSB realised that a war between rival satellite systems

would be so costly that it wasn’t worth trying to win it.

That’s certainly the way German ad agencies see it. ‘Two months ago,

Kirch looked as if he was going to lose. Obviously, now the situation

has changed. This is a big victory for Kirch,’ Ernst Wilhelm Wohler, the

broadcast director of Initiative Media in Hamburg, says. ‘In

advertising-supported television there is only room for two players in

Germany - Kirch and Bertelsmann. In digital subscription TV, there will

only be room for one.’

Kirch has one of Europe’s biggest programme libraries and prolific TV

and film production facilities. Murdoch also controls a vast arsenal of

programming. However, Bertelsmann isn’t that far behind and Ufa-CLT has

been in talks with the big film studios about buying material for

digital broadcast. For instance, its main German channel, RTL, recently

tried to extend its long-standing relationship with MCA/Universal by

offering the studio dollars 900 million for 15 new films a year over a

five-year period. Its film channel, Club RTL, will have a big part to

play in the company’s digital offer, whichever route it chooses to go

down. Bertelsman is also a shareholder, alongside Kirch, in Premiere,

and is believed to be interested in increasing the channel’s sports

coverage before a digital upgrade. Lastly, RTL has also been trying to

strengthen its links with the world’s biggest media owner, Turner-

Time/Warner.

But even here, Kirch has its nose in front. Just days before the DF1

launch, Kirch signed an dollars 800 million long-term licensing deal

with Warner Brothers International. The agreement gives Kirch immediate

access to Warner films that were released last year and Time-Warner an

option to acquire an equity stake in DF1. The Warner television channel,

WBTV, will be added to DF1’s basic subscription tier.

Not content with that, Kirch also increased the bidding with

MCA/Universal by offering dollars 1 billion for a long-term rights

agreement. Although the details have not been disclosed, it is worth

assuming that the deal will edge RTL out of the picture.

For many, this bidding war strengthens their sense of deja vu - BSB

promised to throw similarly astronomical sums of money at film studios

in the late 80s, but the sums just didn’t add up. Some commentators

wonder whether the same might not be true about the digital race in

Germany.

The D-Box decoders retail at DM890 (pounds 400), which isn’t cheap, even

for affluent, techno-loving Germans. The boxes were only available in

250 shops at launch and, although this is set to rise to 2,500 outlets

by the end of the summer, many observers question whether anything like

100,000 units can be shifted by Christmas. At the moment, only one

manufacturer - a subsidiary of the Vebacom telecommunications group -

is supplying boxes. Only when there is competition between manufacturers

will the number of boxes rise.

Digital signals will not be transmitted over cable networks in the

immediate future. More than 60 per cent of German households are cabled

and they are not going to buy satellite dishes just so that they can get

digital pictures. The Kirch Group estimates that DF1 will not be

profitable until it has attracted three million subscribers. It could

take a long time.

David Linn, the broadcast director of HMS Carat in Wiesbaden, says that

advertisers shouldn’t be worried about losing viewers to pay-per-view

services in the medium term. ‘Even when DF1 succeeds in getting three

million subscribers, those subscribers will only devote 20 per cent of

their time to it, if the patterns we’ve seen for existing subscription

services are anything to go by. That’s the equivalent to losing a

potential 600,000 viewers in a country that has an adult TV audience of

60 million. That isn’t exactly the stuff that turns the world on its

head,’ he points out.

Linn believes the jury will be out until things settle down, especially

regarding the channel line-up.

The Premiere channel could be the key to this. Delivered in conventional

analogue format on cable and satellite systems, Premiere is a

subscription channel with a customer base of one million. Unfortunately,

it is owned by both Kirch and Bertelsmann and a tug of war is already

developing. However, a well-managed upgrade to digital could help

maximise the new technology’s potential in this start-up phase. The two

sides will have to reach an understanding before that can happen.

Linn adds: ‘The fact that both sides have agreed a compatible

transmission standard is a great step forward because everyone thought

that if there were two competing systems, it would create consumer

uncertainty, which in turn would have paralysed the market. No-one

doubts that in the future everything will go digital.’

This, of course, is the heart of the matter. Digital will offer almost

infinite channel capacity, high-quality wide-screen pictures and ever

more sophisticated pay-per-view and subscription management systems. In

the not too distant future, all new TV sets will have in-built digital

decoders. But, in the medium term, access to the digital audience will

be controlled by its pioneers.

The rewards could be huge. In Germany, for instance, many broadcasters

may end up using the DF1 platform to launch digital channels, but Kirch

and Murdoch will be collecting the subscription revenues on their

behalf. That will put them in a very powerful position. And they will

almost certainly export the lessons they learn in Germany to other

markets. Kirch has links with Nethold, which has subscription TV

interests in the Netherlands and Scandinavia, and the two companies

control the Italian Telepiu pay-TV operation, which is also planning to

go digital in the near future. Murdoch, of course, has BSkyB, and

worries have already been raised that he will seek to control the

digital market in the UK.

The gamble is whether Europe’s consumers want digital pictures and

whether they are ready to pay for them. The odds look good.

This article was first published on Campaign