EUROPEAN MEDIA: Finding the formula

ITV Digital's fall from grace has been mirrored across Europe by the failure of many digital TV platforms. Jon Rees investigates some of the problems they encountered and how they might get it right next time.

When even the acknowledged master of the medium, Rupert Murdoch, loses his shirt in a rash venture, then the European digital television market must be treacherous indeed.

Murdoch will find out in October whether his magic touch has finally deserted him. It is then that he could claim £1 billion in return for his investment in Germany's Kirch pay-TV which owns Premiere, the pay-television operation.

But Murdoch is not holding his breath: indeed, he decided there was so little chance of getting his money back he wrote off the investment at the start of the year. Kirch pay-TV has filed for insolvency.

Things have gone badly wrong. There was the sheer cost of attracting subscribers by buying ruinously expensive sports rights, while film deals with Hollywood studios soaked up any leftover money. Then, in too many cases technology functioned poorly and was pirated. Subscriber management and customer service were often woeful.

Now the wreckage of the digital TV market lies across the continent, from the demise of ITV Digital, the crippling of Premiere in Germany, the collapse of Quiero in Spain (which had only 210,000 subscribers) and the chaos in Italy as Telepiu and Stream desperately try to stem their losses.

Despite all this, though, digital television has a future in Europe.

According to TGI Europa figures quoted in an IM Futures report on European media, 46 per cent of the British population likes the idea of digital TV, while 30 per cent of German and Spanish respondents are also keen.

At the moment, Europe's digital television map is in the hands of three key players: Murdoch's News Corporation, which controls BSkyB and Stream; Jean-Rene Fourtou, the chairman of France's Vivendi Universal, which owns Canal Plus, Telepiu and Spain's Sogecable; and John Malone's Liberty Media, which controls Europe's largest cable operator, United Pan-Europe Communications, and also has a stake in Telewest.

The two satellite stations - BSkyB in the UK and Canal Plus in France - have both proved digital TV is viable. Both were first into their respective markets and while being first carries a risk, it also builds valuable experience. By the time ITV Digital went under in March its churn rate was 25 per cent, while BSkyB's is around 10 per cent. BSkyB's digital service saw its average revenue per user soar to nearly £350 this year - ITV Digital's was £225 when it collapsed.

One Sky executive says: "Getting the right mix of content, marketing, technology and customer service is a remarkably complex juggling act.

The technology, for instance, is critical and will become more so as interactivity becomes more widespread. There are about 100 brand owners who have advertised their products interactively now on Sky, for instance, and the technology has to work."

BSkyB saw interactive revenues increase by 100 per cent to £186 million in total in the year ended 30 June, with about £95 million of that coming from its betting service, Skybet. Across Europe, there are 16 million households with interactive television (compared with five million in the US).

In the case of both BSkyB and Canal Plus, each had built up a significant analogue subscriber base, too, and converting existing customers to digital proved distinctly easier than attracting new customers to digital in the first place.

"Murdoch is fantastic at marketing - all his News Corporation companies have proved that. In BSkyB he has a strong product, with content and technology that provided added value. And he was remarkably courageous about it - as fast as the money came in, he reinvested," the chairman and chief executive of Zenith Optimedia Group, John Perriss, says.

Digital terrestrial TV, meanwhile, is struggling in the UK and in mainland Europe. Quiero has closed, in Sweden growth has been slow, while in Ireland it has been delayed. In Germany, cable TV is the dominant digital medium: while 13 per cent of UK homes and 11 per cent of French homes have cable, the figure is 60 per cent in Germany.

Murdoch may yet emerge with some kind of interest in the German pay-TV market. Although Premiere has spent £2 billion since it launched in 1997 for just 2.4 million subscribers, Kirch group has held on to its football contracts with the German equivalent of the Premier League which could provide the basis for a revamped pay-TV platform.

Fourtou has decided to concentrate on the French operations of Canal Plus, setting up a new listed company to handle the assets. Vivendi Universal will own 49 per cent of this new group. Some or all of the remaining assets will be sold off eventually.

In Italy, Vivendi Universal's agreement to sell Telepiu to News Corporation has run into trouble after News Corp struggled to find local partners and so cut its offer. In the Netherlands, UPC is threatening to seek Chapter 11 bankruptcy protection. UPC is attempting a debt-for-equity swap to sort out its £6.4 billion debt.

In Spain, the rival satellite digital companies have agreed to merge their services in an effort to stem operating losses. The agreement between Telefonica, Spain's largest company, and Sogecable will create a single pay-TV company in Spain with 2.5 million subscribers and sales of 1.3 billion euros. Telefonica decided that Spain, with 12 million TV households, is too small to support more than one pay-TV company.

There's a shake-out going on with digital TV companies merging and the weaker going to the wall. But the survivors will be stronger, having learned the hard way, and are more likely to prosper.

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