REPORT ON GERMANY: TV is dead ... Long live TV - A highly competitive free-TV sector, flat advertising revenue growth and a lack of enthusiasm for digital make the German TV market a tough one, but media owners are still eager for a piece of the action, A

Outside the US, Germany is the most important broadcasting marketplace in the world. Not only is it home to 33 million television households, it is at the heart of a booming European production business which ties in France and Italy as partners. In addition, Germany’s proximity to emerging economies such as Poland, Hungary and the Czech Republic makes it a crucial staging post for marketers with ambitions to expand eastwards.

Outside the US, Germany is the most important broadcasting

marketplace in the world. Not only is it home to 33 million television

households, it is at the heart of a booming European production business

which ties in France and Italy as partners. In addition, Germany’s

proximity to emerging economies such as Poland, Hungary and the Czech

Republic makes it a crucial staging post for marketers with ambitions to

expand eastwards.

Such factors explain why so many global media heavyweights are seeking

to secure lasting influence in Germany. Unfortunately, building a

beachhead has proved complex and costly - with no guarantee of ultimate


The most important players are the domestic media giants, Bertelsmann,

Kirch and Deutsche Telecom, which have fought tenaciously to protect

their positions. Then there are the outsiders - News Corp, Silvio

Berlusconi’s Mediaset, Canal +, Disney, Time Warner and Viacom -

circling the market like a pack of half-starved wolves.

As if that isn’t enough competition for one market, there are also two

publicly funded broadcasters, ZDF and ARD, which between them attract 30

per cent of free-to-air viewing. Like the BBC, they have extended their

influence into thematic television with the launch of the children’s

channel, Kinderkanal, and the news network, Phoenix.

Unlike the BBC, they air four hours of advertising a week between


All of this is good news for German viewers who can gain access to an

unparalleled range of sports, movies, news and entertainment via more

than 30 free-to-air channels.

But it has been crippling for media owners. The combined cost of

production, movie acquisitions and marketing has been astronomical.

Currently, less than half-a-dozen free German channels are reckoned to

be in profit.

There are two problem areas for Germany’s media owners. Firstly, there

are limitations on the potential for revenue growth in the free-TV

sector. Secondly, there is the distinct lack of interest that consumers

have shown in Kirch founder, Leo Kirch’s, efforts to kickstart digital


Although international headlines have been dominated by the lack of

progress made by digital, the free television market, which attracts

around DM12.5 billion (pounds 4.3 billion) of ad revenue a year, is

easily the most significant part of the German television economy.

Currently, it is carved up between the public broadcasters, Bertelsmann

and Kirch.

Through CLT-Ufa, a joint venture with Luxembourg’s CLT, Bertelsmann

controls one of Europe’s largest television production studios as well

as Germany’s leading commercial TV network, RTL.

Although RTL’s market share has been eroded in recent years, it

currently takes 16.1 per cent of the German audience. It also has three

sister channels: RTL 2 (with a 3.6 per cent share of the market), Vox

(3.1 per cent, a joint venture with News Corp) and SuperRTL (1.6 per

cent, a joint venture with Disney).

Like Bertelsmann, Kirch has a vast production and programme rights

business (which, incidentally, holds the TV rights to the FIFA World

Cups in 2002 and 2006). It also owns a commercial network, Sat 1 (13.3

per cent) and a free-to-air thematic sports channel, DSF (1.2 per


In addition, Leo Kirch’s son, Thomas Kirch, runs the country’s third

major commercial network, Pro Sieben (9 per cent) and Kabel 1 - a

relatively new network which has taken a 3.9 per cent share of the

market since it launched in 1993.

While the cost of running such networks is growing, the potential

returns are not. Sat 1, for example, stunned onlookers when it went into

the red in 1997. Although a relaunch may return the network to profit in

1999, the prospects for growth in free-TV look bleak.

A key reason for this is that the volume of commercial airtime on German

TV is close to its legal limit. Also, agencies are seizing the

opportunity to squeeze discounts out of media owners.

Alexander Rutziger, Carat Germany’s managing director, believes the big

general entertainment networks will continue to come under pressure. ’A

30-second ad on the major channels is decreasing in impact,’ he


’Advertisers are now looking to build an effective campaign across a

wider portfolio of channels. The big commercial stations need to find

intelligent and flexible ways to reach the viewer.’ Rutziger suggests

that ad revenue will grow faster among Germany’s free niche


The experience of German news channel, n-tv, owned by the publisher,

Handelsblatt, and the Time Warner subsidiary, CNN, seems to confirm this

trend - it went into profit for the first time last year. Although its

average audience share is 0.5 per cent, it recorded ratings as high as

2.2 per cent during events like the Austrian avalanches and war in the

Balkans, according to Kenneth Jautz, its managing director. ’We are

benefiting from the emerging era of niche television in Germany,’ Jautz

says. ’Our ad revenue growth is double digit while the likes of Pro 7

and Sat 1 have projections which are flat to low.’

Wide distribution via cable, as well as CNN’s input, have helped n-tv to

secure a reputation as Germany’s leading news-only network. ’News is a

high-cost production environment,’ Jautz says. ’But we can draw on CNN’s

correspondents and infrastructure in our coverage.’

The pan-European sports broadcaster, Eurosport, also claims to have

established a firm foothold in Germany.

Currently, the network has 90 per cent distribution in Germany and a

market share of 1.3-1.6 per cent. By targeting an homogeneous audience

of sports fans with major events, the network can run as a profitable

business, says Thomas Deissenberger, Eurosport Germany’s managing

director. ’Our depth of coverage gives us a close relationship with our

viewers which creates a big point of difference from general

entertainment networks,’ he says. ’The slowdown in advertising growth is

more of an issue for them.’

The hardship brought about by flat ad revenue is made worse because

Deutsche Telecom has an effective monopoly over the German cable system.

Many private networks are reliant on DT’s 17 million cable households to

secure national distribution. However, unlike the rest of the cable

television world, DT charges channels for carriage - rather than paying

fees to the channels.

The result is that broadcasters are not only denied a second

subscription-based revenue stream, but they incur additional

distribution costs.

The parlous state of the free-TV market in Germany makes it harder for

foreign players to get involved in any meaningful way. Time Warner

(n-tv) and Disney (SuperRTL) both have small footholds but Viacom’s

Nickelodeon abruptly quit the market last year. The launch of ARD/ZDF’s

Kinderkanal, coupled with Nickelodeon’s inability to get widespread

cable distribution, made the market uneconomic for the US children’s


Rupert Murdoch has also found Germany a frustrating target. So far, he

is restricted to 50 per cent of a small general entertainment network -

Vox - and two-thirds of TM3, a struggling Munich-based network. However,

analysts believe that TM3, acquired in 1998, could provide a launchpad

for Murdoch’s Fox Kids Network.

The abundance of German free-TV stations has also had a debilitating

impact on the progress of Leo Kirch’s digital pay-TV platform, DF1.

Launched in 1996, DF1 had lost Kirch more than DM1 billion by the end of


In that period, it attracted around 160,000 subscribers - less than

SkyDigital secured in its first three months.

Kirch has strived to boost consumer interest in digital and to find

partners that will share the financial risk. Murdoch, Bertelsmann and

Canal + have all been touted as potential partners.

Although Kirch’s underlying problem has been the strength of the free-TV

proposition in Germany, another factor has been the presence of a robust

analogue pay-TV platform called Premiere, which launched in 1990. Until

1997, Premiere - which by then also had a digital offering - was owned

by Bertelsmann (37.5 per cent), Canal + (37.5 per cent) and Kirch (25

per cent).

Once Kirch’s losses began to mount, it became clear that the only way

for DF1 to thrive was for it to merge with Premiere - which required

Canal + to disappear from the scene. This was achieved by swapping the

French company’s stake in Premiere for Kirch’s 45 per cent share of

Italian pay operation Telepiu, plus a cash premium.

With Canal + gone, Bertelsmann and Kirch found themselves on the verge

of an unlikely alliance. Despite being long-term business rivals, Kirch

needed Bertelsmann because of Premiere and Bertelsmann needed Kirch

because of his company’s digital know-how.

At this point, the German competition authorities stepped in, declaring

that a 50-50 alliance between Bertelsmann and Kirch in German pay-TV was

unacceptable. The situation remained like this until January 1999 when

Kirch, needing cash to keep his digital dream alive, reorganised his

business with a view to floating the profitable part (the rights

portfolio and free-TV business) and using the proceeds to back


Three months later, Kirch announced a free-TV alliance with Mediaset and

Saudi Prince Al-Waleed, bringing together broadcast and production

interests in Germany, Spain and Italy. Kirch also announced plans to

float its free-TV operation ’in the next two to three years’.

Almost simultaneously, Kirch surprised observers by revealing an

agreement with Bertelsmann to buy its stake in Premiere - a move

unlikely to attract any repercussions from the German competition

authorities. As a result, Kirch has picked up two million pay-TV

subscribers from Premiere and cleared the way for his digital


The group will invest a further DM1.7 billion in digital, says Dieter

Hahn, Kirch’s vice-chairman. Some of this, presumably, will be offset by

the cash raised from Mediaset, Al-Waleed and the prospective


Hahn predicts the newly merged pay operation will reach 20 per cent of

households (6.5 million) by 2008.

As a result, Murdoch’s entry points into Germany look limited. He was

linked to the Kirch/Mediaset deal but is reported to have lost interest

when it became clear that Kirch’s pay-TV business was not part of the

package. Likewise, Bertelsmann’s decision to concentrate on free-TV,

production and online - leaving Kirch to digital - makes the prospect of

Murdoch getting into pay-TV remote.

Adam Smith, Zenith Media’s head of knowledge management, has followed

developments in Germany closely. ’If you believe that digital is a

better technology and that analogue will eventually be redundant, then

that argues in favour of Kirch’s strategy,’ he says. ’But we just don’t

know what level of demand there will be in Germany for more channel

choice or interactive applications.’

The picture is equally murky in the free television market, Smith


’From an advertiser’s point of view, it doesn’t really matter if the

channels are making a loss,’ he says. ’But from a commercial

stand-point, you can’t make losses for ever. That said, German

broadcasters have shown remarkable durability. They have been working

this way for ten years with hardly any consolidation.’

Part of the reason for the lack of consolidation is what Rutziger calls

’the chain of commercialisation’. For example,Kirch owns a massive

library of movie rights which he can push through outlets like Sat 1 -

effectively subsidising the channel. Likewise, Kirch’s free-to-air

sports channel, DSF, though loss-making, is regarded as an important

shop window for the digital platform.

Kirch and CLT-Ufa’s production activities also introduce important

economies of scale. By producing TV programmes for a number of their

outlets across Europe, they effectively reduce the cost of programming

for their German networks.

It is not clear what will happen to the free stations which are neither

part of big groups nor niche in appeal. Many hope that Deutsche

Telecom’s monopoly position in cable will be broken by the European or

German regulators - effectively opening up a new income stream.

Rutziger believes that so long as the smaller networks provide a cheap

airtime alternative or carve out a clear position, they will continue to

feature on advertisers’ schedules. ’We buy target groups. So the key

issue for the broadcasters is whether they can build target audiences

that appeal to advertisers. ARD and ZDF, for example, have older

audiences which are important to sectors such as over-the-counter

drugs,’ he says.

Murdoch, meanwhile, is likely to persist with Vox and TM3 because owning

television frequencies in Germany is still regarded as a long-term


And if one thing is certain, winning the broadcast race in Europe is all

about taking a long-term view.

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