SUPPLEMENT: GERMANY; Dogfight for the control of digital broadcasting

Alasdair Reid reports on the race to control the digital broadcast arena and the technology that will run it.

Alasdair Reid reports on the race to control the digital broadcast arena and the technology that will run it.



German newspapers have been billing it as the clash of the Titans:

Bertelsmann versus Leo Kirch, the multinational corporation versus the

streetwise wheeler dealer. The prize, as the hyperbole would have it, is

the future of German broadcasting.



The real issue at stake here is control of digital broadcasting. Digital

technology will bring vast channel capacity, high-definition pictures

and, perhaps more importantly, new opportunities to introduce pay-per-

view and subscription channels. The winner in this race will control the

technology, dictate who can use it and collect the subscriptions.



Bertelsmann is ahead. The recent merger of its television and radio

businesses with Compagnie Luxembourgeoise de Telediffusion, the

Luxembourg-based media group, has created Europe’s biggest broadcaster.

Mark Wossner, Bertelsmann’s president and chief executive, has described

the deal, which will create a company with sales of more than DM5

billion (pounds 2.2 billion), as a ‘historic milestone’ which ‘will

enable European broadcasters to compete more effectively with other

global alliances’. The merger has resulted in the world’s biggest media

group after that of the US deal between Time Warner and Disney/ABC. It

is expected to strengthen Bertelsmann’s hand in its showdown with Kirch

over who controls what in the German Pay-TV market.



Bertelsmann has also been developing decoder equipment - called Media

Box - in partnership with the French pay-TV pioneer, Canal Plus, and is

on the verge of forming a company, MMBG (Multimedia-

Betriebsgesellschaft), to develop channel plans and market the equipment

when it’s ready. The main shareholder in MMBG will be Deutsche Telekom -

but Bertelsmann will have a stake along with a number of other media

companies including CLT, Canal Plus, RTL and the German state-owned

broadcasters, ARD and ZDF.



‘We want to create the standard and make it accessible to everyone,’

Nikolaus Formanek, head of corporate communications at Bertelsmann

TV/Film Europe, says. ‘We want to make sure that we can create a market

in the first place. We don’t want this to turn into a battle.’



Kirch does not see it that way. He has already been showing off

prototypes of his rival decoder, D-Box, and the Kirch Group has taken

options on six transponders on the new Astra digital satellites, which

will be operational this summer.



The D-Box is also important for the Kirch Group’s broader pay-TV

interests. It is a major shareholder in the Swiss-German pay-TV

operation, Teleclub, as well as its Italian equivalent, Telepiu. Telepiu

is an ambitious operation and the D-Box is central to its future plans

to go digital. The plot thickens, though. The ideal German channel for

digital upgrade is Premiere, the country’s main existing subscription

channel. Premiere is owned by Canal Plus, Bertelsmann, the UK’s BSkyB

and, yes, the Kirch Group. They each have a 25 per cent stake.



Both Kirch and MMBG say that they will have their systems ready for

testing this summer and are gearing up for a massive marketing blitz

this Christmas. German commentators believe that it’s going to be a bit

like the battle between VHS and Betamax in the video recorder market;

but a better analogy can be found closer to home - Rupert Murdoch

squaring up to British Satellite Broadcasting for control of the UK

satellite business at the start of this decade.



We all know what happened there, and perhaps an eventual merger is the

likeliest outcome of the German contest - especially if, as many

predict, creating a market for the new technology turns out to be a

long, hard slog.



But does Germany need more TV channels?



During the 80s, the German government backed plans to accelerate the

growth of cable, with the result that 60 per cent of households are now

hooked up, and 10 per cent have satellite dishes.



In the wake of cabling came broadcast deregulation and the existing

state networks were joined by the first wave of private commercial

channels - RTL Plus, Sat-1 and Pro-7. These new channels did so well

that a second wave was triggered, including thematic stations like n-tv

(news), DSF (sport) and more ambitious affairs like a second channel

from RTL. The German market also attracted outside interest, with pan-

European operations like NBC Superchannel, Eurosport and MTV keen to

have a presence. The result is that the cable systems have reached

capacity and some of the pan-European channels are being squeezed out.



A good argument, you might think, for the new capacity that digital will

bring. Well, not entirely. The German market has reached saturation

point in more ways than one - these days, there isn’t enough revenue or

audience to go round. During the boom years revenue grew by leaps and

bounds, but for the past three years growth has been less than 10 per

cent a year. For 1996, the predictions are that there will be no growth

at all.



The result is that the smaller stations are struggling (RTL, Sat-1 and

Pro-7 now take 80 per cent of all TV revenue, so there isn’t much left

to fight for). And the state-owned networks, ARD and ZDF, which survive

on advertising as well as licence fee revenue, face disaster. Before

deregulation they took combined advertising revenues of DM2 billion. Now

they are taking a paltry DM600 million.



Advertisers and agencies are not keen to see audiences migrating to

subscription channels, where advertising opportunities may be limited.

Those audiences will not only be lost to advertisers but the end result

could be further destabilisation of the marketplace. The market may

harden in cost per thousand terms but that will be of little consolation

to channels that suddenly find themselves with negligible audiences.

Some private channels would be under threat and there would be an

increased possibility of complete meltdown at ARD and ZDF. That, in

turn, would take a large element of choice out of the market.



Ernst Wilhelm Wohler, the broadcast director of Initiative Media in

Hamburg, assesses the situation: ‘More than one successful subscription

channel, might cause problems for advertisers. But is there any real

demand for pay-TV? If there is, then the development of these digital

boxes is very important. But look at Premiere. There are 34 million

households in Germany and it has only sold one million subscriptions.

That isn’t success.’



German agencies believe - or perhaps hope - that digital TV will not

have an impact for at least three years. There are more pressing

concerns, like the impact of other technologies. Agencies worry that

Germans are spending increasing amounts of time with their personal

computers, logging on to the Internet or playing computer games.



It all fuels uncertainty. Wohler says that all of this could lead to a

renaissance in older media, such as posters. But the new technology

won’t go away and Germans are almost guaranteed a digital TV Christmas

this year. Millions of Deutchmarks have already been set aside for the

marketing campaigns. The race is on.



Leo Kirch



Leo Kirch is sometimes described as ‘Germany’s Rupert Murdoch’ and it’s

certainly true that he provokes similarly strong reactions - you either

love him or hate him. He is streetwise: a tough, opportunistic

businessman who, like Murdoch, stands outside the establishment yet has

powerful political allies both at federal level - he is a close friend

of Chancellor Kohl - and within the Bavarian state government.



Despite the expansion of his media empire in the last decade or so, he

still sees himself primarily as a film and television distributor and

producer. Now aged 69, he entered the business back in 1956 when he

bought the German distribution rights to Fellini’s La Strada. He was

gambling on the possibility that Germany’s new state-run television

service might be interested in running feature films.



It was. Overnight, Kirch had discovered a lucrative new market and in

the decade that followed he succeeded in buying up the rights to a vast

library of German-language and international films. By then, he had

moved into production too, acquiring much of Germany’s answer to

Hollywood - studios around Munich that once launched Garbo and Dietrich.



Through Beta Film, his production company, and Taurus Film, the

distribution arm, Kirch has built an unassailable position in the

German-language programming market. He is also involved in a wide range

of international co-productions.



He survived a bankruptcy scare in the mid-80s and might have gone under

but for the deregulation of German TV and the arrival of new channels

hungry for programming. Kirch is a 43 per cent shareholder in one of the

most successful new channels, Sat-1. His son, Thomas, launched another,

Pro-7, and has gone on to launch more. This is one of the main reasons

that people distrust Leo Kirch. Although Thomas’s channels are not part

of the Kirch Group, it is assumed that Leo exercises more than a little

control and that Thomas is nominally in charge to circumvent laws that

restrict concentration of ownership.



The other source of disquiet is Leo’s relationship with Axel Springer

Verlag, the biggest newspaper group in Europe (it publishes Bild, Die

Welt and a range of regional titles), which is also the other major

shareholder in Sat-1. Kirch took a stake in Springer in the late 80s and

promptly mounted a full takeover bid, causing a political storm, with

concentration of ownership again an issue. After a protracted legal

battle, Kirch backed down; but he still owns 35 per cent of Springer.

Many on the political left believe that he has far too much influence on

German media.



Despite the power he wields, Kirch is rarely seen in public or in the

media - until recently. The fact that he has adopted such a high profile

to promote his D-Box system indicates just how seriously he takes the

digital race.



Mark Wossner



Bertelsmann is one of the world’s media giants: its record 1994-95

turnover of dollars 14.6 billion puts it second only to Time-Warner on

the global stage. Though it dominates several sectors of its home

market, especially magazines, only a third of that turnover comes from

Germany, with the remainder coming from the rest of Europe (a third),

the US (25 per cent) and Pacific Rim markets.



It is a classic multinational corporation. But as with Kirch, the

importance of the digital race has forced senior executives to raise

their heads above the parapet in recent times. Even the president and

chief executive, Mark Wossner, has been featured in the press, showing

off Media Box, its digital television decoder equipment prototype. He

almost certainly felt uncomfortable about the whole experience - he’s

very much a reserved and formal backroom man.



To see these virtues as a sign of weakness would be a mistake.

Bertelsmann should not be underestimated. Until ten years ago, it was

primarily a print-based company. It owns Gruner and Jahr, which has a

significant presence in the US (McCall’s and Family Circle, for

instance) and in all of the major European countries (Prima, Best and

Focus in the UK), as well as dominating the German market, where its

best-known title is Stern. It also owns Bantam Doubleday Dell, which

makes it one of the world’s biggest book publishers, and RCA, which

makes it a major player in the music industry.



But its recent strategic merger of its television and radio businesses

with Compagnie Luxembourgeoise de Telediffusion and its expansion into

multimedia is what has silenced potential critics. Bertelsmann was one

of the first companies to take advantage of TV deregulation with the

launch, in partnership with the Luxembourg-based media giant, CLT, of

RTL Plus. RTL TV, as it has been renamed, is now the undisputed market

leader, just shading Kirch’s Sat-1 in terms of audience and revenue.

Bertelsmann is also a shareholder in RTL 2, Vox (an ‘infotainment’

channel run in partnership with Rupert Murdoch) and Premiere, Germany’s

main subscription channel. Its UFA TV production division makes

Germany’s most popular TV soaps and is a serious rival to Kirch.



Bertelsmann is also committed to the development of leading-edge

technologies. In March it signed a joint-venture agreement with the US

Internet service provider, America Online. Through MMBG, the joint

venture company formed to develop digital TV in Germany, it already has

a powerful network of alliances with some of Europe’s top media

companies.



In short, Bertelsmann may be big, but it is certainly no dinosaur. As

one company source puts it: ‘Wossner is not a fighter in the way that

Kirch is. But compared with Bertelsmann, Kirch is tiny. We have no need

to be afraid.’



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