CAMPAIGN REPORT ON GERMANY: Fortress TV - Foreign companies have targeted Germany's turbulent TV industry, eager for a piece of its action. But it's not going to be easy to break in, Andy Fry reports

During the 90s foreign media players made various attempts to gain

a foothold in Germany's free-to-air TV market.The most serious assault

came from Rupert Murdoch, whose desire to break into this seven

billion-euro advertising market saw him buy stakes in both the Vox and

TM3 networks. When these attempts failed, he changed tack and bought his

way into the struggling pay-TV sector (see panel).



With Murdoch's withdrawal from free TV, the way was clear for the German

media giants Bertelsmann and Kirch Gruppe to carve up the TV advertising

market between them. By the end of 2000, they controlled 85 per cent of

TV ad revenues - a situation of growing concern to advertisers and their

agencies.



Bertelsmann was the first to start rationalising its TV assets when it

backed the merger of CLT-Ufa (its European broadcasting joint venture

with Groupe Bruxelles Lambert) and Pearson Television to create the

production/broadcasting powerhouse RTL Group. Bertelsmann then bought

GBL's share of RTL in return for a 25 per cent stake in its own

company.



Today, RTL Group is 67 per cent controlled by Bertelsmann and owns 22

European TV networks. In Germany, it has 100 per cent of the market

leader RTL (14.8 per cent audience share, 27per cent ad revenue) as well

as controlling interests in RTL 2 (3.7 per cent audience share), Vox

(2.8 per cent) and 50 per cent of Super RTL (2.7 per cent). In addition,

it has assimilated the airtime sales house IP which used to be run at

arm's length.



Kirch Gruppe's move towards consolidation was facilitated by the family

ties between the veteran media mogul Leo Kirch, majority shareholder in

the family oriented Sat1 (10.8 per cent audience share and 20.8 per cent

of the ad market) and his son Thomas, owner of the youth-oriented

ProSieben (8.2 per cent audience share).



In June last year, these two networks were pooled in a single outfit

with the snappy title ProSiebenSat1Media (in which the publisher Axel

Springer also has an 11 per cent stake). Within P7S1M, the Sat1 airtime

sales house Media1 was merged with Pro7's MGM to create SevenOne

Media.



Also within P7S1M are Thomas Kirch's cable network Kabel 1, which

launched in 1993 (5.7 per cent audience share) and the news channel N24

(less than 1 per cent). Outside the merged unit (for shareholder

reasons) are two more Kirch networks: the sports channel DSF (1.3 per

cent share), and the women's channel TM3 (1 per cent share), which

previous owner Murdoch swapped for a small stake in Kirch's free-to-air

business KirchMedia.



Most of the corporate realignment at Bertelsmann and Kirch was completed

during late 2000. It is too early for it to have had any impact on TV

airtime prices, according to David Linn, the broadcast director at Carat

Germany. 'Clearly buyers would rather have three large sale points than

two. But it would be difficult to find conclusive proof that

consolidation is yet to drive TV inflation,' he says.



Partly, this is because the two players have yet to reorganise their

operations internally. But there are also structural reasons why market

leverage has yet to lead to higher prices in Germany, Jonathan Barnard,

the manager of Zenith Media's knowledge management department, says:

'Germany's airtime market takes a long time to respond to big events

like the Kirch consolidation because ratecards are only set once a year.

Channels publish ratecards in about August, with a booking deadline of

September, which agencies must meet if they want to get the best airing

dates. When ratecards are published in 2001 they may be inflated by

consolidation.'



The deputy managing director of MediaCom Germany, Jutta Simon, says TV

inflation grew at 5 to 10 per cent last year and is likely to continue

at this level in 2001. Like Linn, she says: 'There is no clear evidence

that the duopoly has already increased inflation. But we expect

Bertelsmann and Kirch will try to exploit the situation.'



Simon identifies two major factors likely to drive inflation. First:

'Stations are facing growing programme costs' (for their own productions

as well as for licensing programmes and sports rights). Second: 'The

sales houses are under pressure from their shareholders to increase

income. They cannot increase the volume of advertising, because the

amount allowed by law is already virtually sold out. So the only option

is to increase prices.'



Linn says pressure from shareholders has been matched by demand from

clients. However, he says there are deflationary factors. As in the UK

and US, technology and new-media companies have slashed marketing

spend.



In addition, advertisers are wary of the prospect of a US-inspired

recession.



Indeed, RTL Group did not sound like a business about to increase ad

rates when it forecast flat earnings in March. Although this situation

is primarily linked to increased production costs, RTL's chief

executive, Didier Bellens, sounded ready to batten down the hatches when

he told analysts: 'We are better placed than most to withstand the

uncertainties in advertising markets around Europe.'



Barnard's analysis of Germany chimes with this air of creeping

concern.



'The main cause of inflation has been strong demand from advertisers as

the German economy expands. But this looks like it has peaked, and we

may find clients reluctant to pay any ratecard increases that the

channels try to impose.'



The managing director of CIA Germany, Dirk Fromm, also anticipates an

economic downturn - but he believes this may be a blessing for some

traditional TV advertisers. 'Some of television's long-term advertising

partners were forgotten in 2000 with the rapid rise of the IT and

telecoms companies. But I think they will now be able to negotiate

airtime deals with channels from a position of strength.'



If Bertelsmann and Kirch do try to turn the screw over the next 24

months, there are some media alternatives - but they are limited. Fromm

says the problem is not a lack of airtime but a shortage of 'quality

airtime. There are lots of 24-hour channels in Germany but everyone

wants to advertise in the same slots. There are many poor shows on

German networks that no-one wants to advertise around.'



Rival media may be benefiting from TV inflation, Simon says.

'Advertisers are looking hard at other media right now. And there is a

tendency for TV to lose against other media - especially radio and

magazines.' To back her case, she says TV spend in January 2001 was down

4 per cent year on year.



Fromm says media inflation has made German media agencies more

innovative.



'When there is a lot of money in the market, it is easy for agencies to

just place it on TV. But when media efficiency becomes an issue,

agencies work harder.' In particular, he believes greater attention is

being paid to the way in which interactive media can supplement

traditional marketing activity. 'Advertisers are showing greater

interest in websites which accompany popular TV shows.'



Fears of media inflation as a result of consolidation need to be

balanced against possible benefits. Linn accepts Simon's point that

Kirch's shareholders are likely to be the biggest beneficiaries from the

creation of P7S1M.



But he does not rule out the possibility of advertisers benefiting from

efficiencies within media groups.



At a more deep-rooted level, there is also an argument that Bertelsmann

and Kirch may work in a more co-ordinated fashion.



'All the Kirch channels will benefit from access to a pooled programme

library and production facilities,' Barnard says. 'They will also be

better able to target complementary audiences and offer a range of

programmes at a particular time.'



With Bertelsmann and Kirch so dominant in free-to-air TV, there is

little room for foreign players. The latest attempt to crack the market

came in 1999 when Murdoch bought Champion's League soccer rights and

tried to turn the women's channel TM3 into a mainstream competitor to

RTL and Kirch. This plan was a failure, Simon says: 'The high number of

relevant TV stations leaves very little room to build up a new one. Such

a strategy would require extremely high initial investment.'



Linn says: 'The only way into the free TV market for foreign players is

probably via niche channels.' Currently, the only non-German players

operating sustainable businesses are embedded in niches. There are two

pan-regional players, TF1's Eurosport and Viacom's MTV stable, and two

domestic networks - Super RTL (50 per cent owned by Disney) and the news

channel nTV (49.97 per cent owned by Time Warner).



Although the analogue cable market in Germany is limited by regulatory

requirements and antiquated technology, the major medium-to-long-term

opportunity for foreign players to crack the German market may be

digital cable, Linn suggests. With this in mind, the arrival of Liberty

Media's John Malone on the German cable scene is a development to be

watched with interest (see panel). Not for the first time, the man they

call Darth Vader may emerge as playmaker in the ultimate shape of the

market.



PREDATORS CIRCLE GERMANY'S TV MARKET



Having prowled around the German market throughout the 90s, Rupert

Murdoch's chance came in 1999 when Kirch Gruppe's financial problems

allowed the News Corp chief to secure a share in Kirch's pay-TV

business. Murdoch (who at that time had been thought to be eyeing

Russia) paid dollars 1 billion for a 22 per cent share of KirchPayTV -

whose main asset is the digital satellite platform PremiereWorld.



With so many free-to-air networks in Germany, PW's growth has been

slow.



Having set a target of 2.9 million subscribers by the end of 2000, it

actually finished the year with more like 2.2 million. As Zenith's

Jonathan Barnard points out, the most significant issue to arise from

this is that Murdoch has an option to take control of PW if Kirch fails

to hit pre-arranged subscriber and revenue targets by the end of 2001.

Most likely, Kirch will try to head this off by giving away set-top

boxes (as Sky Digital and ONdigital have done in the UK).



Arguably more interesting than Murdoch's activity is the news that the

US cable entrepreneur John Malone (boss of Liberty Media, set to spinoff

from the US phone giant AT&T) has acquired 55 per cent of six Deutsche

Telekom cable franchises for dollars 2 billion. DT was required by law

to sell all 13 of its cable franchises. Malone, who gains access to ten

million homes, may have secured a good deal.



Although analysts reckon that Malone will need to spend another dollars

3 billion to prepare the network for telephony, digital and broadband,

he has now pieced together a European cable business which reaches 20 to

25 million subscribers. Aside from his new DT interests, Malone owns a

stake in TeleWest and United Pan-European Communications (into which he

has just pumped a further dollars 1 billion). He has also discussed

moving closer to ntl, which has cable interests in the UK and

continental Europe.



Malone, who built up the US cable giant TCI before selling it to AT&T,

is regarded by many in the media sector as a commercial visionary. Some

believe he is building a European business with a view to selling it at

a premium to AOL Time Warner (of which he is a board member). In the

wake of the recent AOL TW mega-merger, the chairman, Steve Case, has

made it clear that European expansion is a priority. Malone's cable

activities may be a Trojan horse.



Malone is the second largest shareholder in Murdoch's News Corp. With an

18 per cent stake, he is viewed as an ideal managerial bridge between

the 70-year-old Murdoch and his young sons, James and Lachlan. Although

Murdoch is primarily labelled as a satellite man, he is also keen on

cable through investments in both India and China. AOL TW may be eager

to grow its business, but who is to say that Malone is not rolling out

the red carpet for his old pal Rupert?



VIEWING SHARES AT MAIN CHANNELS (%)

Channel 1996 1997 1998 1999

RTL 17.1 16.1 15.1 14.8

ARD 15.3 15.1 15.4 14.2

ZDF 15.0 14.0 13.6 13.2

SAT.1 13.6 13.3 11.8 10.8

ProSieben 8.9 9.0 8.7 8.4

Kabel 1 3.5 3.9 4.4 5.4

RTL 2 4.0 3.6 3.8 4.0

Vox 3.1 3.1 2.8 2.8

DSF 1.1 1.2 1.1 1.3

Super RTL 1.4 1.6 1.9 2.8

Others 6.5 7.1 9.1 9.8

AD EXPENDITURE (million euros)

Channel 1996 1997 1998 1999

RTL 1,647 1,795 1,863 1,948

ARD 245 238 258 261

ZDF 239 205 210 211

SAT.1 1,325 1,343 1,537 1,567

ProSieben 1,202 1,375 1,413 1,454

Kabel 1 167 248 320 356

RTL 2 301 343 343 378

Vox 153 207 251 263

DSF 99 108 131 168

Super RTL 54 92 123 156

Others 71 83 90 181

Total 5,504 6,037 6,539 6,943

SHARE OF AD EXPENDITURE (%)

Channel 1996 1997 1998 1999

RTL 29.9 29.7 28.5 28.1

ARD 4.5 3.9 3.9 3.8

ZDF 4.3 3.4 3.2 3.0

SAT.1 24.1 22.2 23.5 22.6

ProSieben 21.8 22.8 21.6 20.9

Kabel 1 3.0 4.1 4.9 5.1

RTL 2 5.5 5.7 5.2 5.4

Vox 2.8 3.4 3.8 3.8

DSF 1.8 1.8 2.0 2.4

Super RTL 1.0 1.5 1.9 2.3

Others 1.3 1.4 1.4 2.6



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