Teutonic Disorder

For decades the most robust media market in Europe, Germany’s TV business today is beginning to bend under the downward pressure of several factors—some beyond its control and some of its making.
Like their counterparts in other markets, German commercial broadcasters are feeling the impact of declining advertising revenues. Unlike other markets, however, the two major advertising agencies in the country, IP Deutschland for the RTL stations in Germany and SevenOne Media for ProSiebenSat.1 Media’s German stations, have been severely discounting their rates in an effort to entice advertisers. This practice has hurt an already challenged advertising market.
ProSiebenSat.1, meanwhile, is also in the process of restructuring and is still struggling with integrating the SBS stations it acquired two years ago. And the pay-TV sector is in turmoil. New management put in place at Premiere by shareholder News Corporation found that the pay-TV platform has significantly fewer subscribers than previously reported.
Who is sitting pretty? The public broadcasters ARD and ZDF, who, despite the ups and downs in the economy, can always count on the more than €8 billion in license fees they collect, and in fact they have a surplus of €486 million.
How the German TV market will navigate these problems will depend in great part on the length of the recession, and the state of the country’s economy. Will it improve to the point of turning around the ad market and preventing broadcasters from eventually making serious cuts to their programming budgets? Will consumers have enough discretionary income to spend on pay TV and other forms of media?
For the time being, German broadcasters are moving ahead with a business-as-usual attitude, confident in the resilience of their market.
With about 37 million TV households, Germany is Europe’s second-largest TV market and one of the most competitive. Of those homes, 52.5 percent receive their TV signals via digital or analogue cable. However, in 2008, total cable penetration declined a bit compared to the previous year. Satellite penetration is at about 42 percent. In 2008, IPTV was picking up some momentum with 536,000 subscribers compared to about 120,000 a year earlier, according to data from the Berlin-based multimedia business association Bitkom. Almost half of all IPTV users are clients of Deutsche Telekom AG (DT), which has set an ambitious target: “By the end of this year we want to surpass 1 million subscribers,” says Timotheus Höttges, the DT executive board member who is in charge of the T-Home service.
While Germany is one of the last markets in Europe to go digital, the process is picking up speed. There is almost no analogue terrestrial left in Germany. Digital terrestrial TV has a penetration of 10.5 percent. In 2007, about 18.2 percent of German viewers were digital satellite clients, while only 7.9 percent had digital cable, but this number is poised to grow.
The cable operator Unity Media announced that 1.3 million of its 4.6 million clients are digital subscribers. And its basic digital bouquet reported an increase of 25 percent to 568,000 subscribers. Germany’s largest cable operator, KDG, reached some 9 million connected homes and reported an increase in digital basic subs of 11 percent to 846,000.

PAY-TV CONUNDRUM
Despite the successes of some individual cable operators, pay TV remains a challenging business. Since its inception, it has had to compete with a robust free-TV offering of more than 37 channels.
Unity Media’s satellite bouquet, arenaSAT, had managed to successfully snatch away from Premiere the coveted rights to the live games of the Bundesliga, the German premier football league, for the last few seasons. But arenaSAT lost the rights in the middle of the contract period and subsequently saw its subscriber figures decline 50 percent in the last year, dropping to roughly 100,000 subscribers, which is only 10 percent off the platform’s peak figures.
Reclaiming the rights to the Bundesliga games was not enough to keep Premiere on a growth trajectory. When News Corporation’s ownership stake reached 25.01 percent last year, it replaced CEO Michael Börnicke with News Corp. Europe’s CFO, Mark Williams. The company then took operational control of the pay-TV platform and discovered that Premiere had about 2.4 million subscribers, about a million fewer than the 3.6 million previously reported.
“Premiere has zero visibility,” comments one German media insider. “News Corp. has cleaned house as much as they could in the last two quarters, but they are basically living with the aftermath of all the lying and cheating that went on in the past that led to misstating the number of subscribers. They are now down to a net paying subscriber base of 2.5 million and will clearly benefit from having Bundesliga rights in the fall of 2009. But it means that quantifiable progress won’t be visible for another year from now. Murdoch is going to have to cough up hundreds of millions of euros to stabilize the situation. Clearly, it’s very hard to build a business that for 15 years has been getting it wrong constantly.”
News Corp. has increased its stake in Premiere to 29 percent, but it will probably increase further since management has said it will finance a second capital increase, in an attempt to raise Premiere’s equity.
In February, News Corp. was granted an exemption by the German Federal Financial Supervisory Authority, BaFin, from having to make a mandatory public offering for Premiere in the event that its share in the pay-TV operator should reach or exceed 30 percent.
“Premiere is still the problem child, and everything that surrounds the Premiere platform, the low pay services, are clearly somewhat tied to the fate of Premiere’s expansion or contraction,” concluded the industry insider.
Pay-TV penetration was at about 15 percent in 2007, but with Premiere’s write-off of subscribers, that percentage is unlikely to move upward. Germany’s TV landscape continues to be dominated by free TV.
The German TV market is roughly split in thirds: one third is taken by the RTL channels, the other third by the ProSiebenSat.1 Group and the last third together by ARD, ZDF and the regional ARD member networks and the public thematic channels.

WHO’S ON TOP?
In 2008, Mediengruppe RTL’s combined share of all channels, that’s RTL, Vox, Super RTL, RTL II and the news channel
N-TV, in the coveted target demographic of 14- to 49-year-olds, was at 32.9 percent. The ProSiebenSat.1 group, with ProSieben, Sat.1, kabel eins, the call-in channel 9Live and the news channel N24, had 29.3 percent.
Breaking down 2008 viewership by individual channels gives a more detailed picture. The year was dominated by major sports events—the Beijing Olympics and the EURO 2008 football championship—whose coverage was largely provided by the public broadcasters. Nonetheless, in the 14-to-49 demo, RTL was once again in the lead with a viewing share of 15.7 percent, followed by ProSieben with 11.8 percent, Sat.1 with 10.8 percent and Vox with 7.5 percent, while the public broadcasters ARD and ZDF had only 7.5 percent and 7 percent, respectively.
Looking at shares among the total viewing audience, the numbers are quite different: ARD and ZDF take the lead with 13.4 percent and 13.1 percent, respectively, putting RTL in third place with only a 11.7-percent share.
Even though viewers continue to flock to free TV, this year is going to be a tough one for commercial broadcasters. Competition has increased in the last two years from the likes of smaller, niche channels like Discovery’s DMAX and the movie channel Tele 5, but advertising revenues will most likely continue to decline.
The German TV advertising market is worth some ¤8.7 billion, which is a gross figure. The actual revenue, minus massive rebates, is a lot lower, less than half the gross.
“The revenues for TV advertising will decline by 10 percent,” was the blunt statement made by Klaus-Peter Schulz, the head of sales and marketing for ProSiebenSat.1, at the Deutscher Medienkongress in Frankfurt this January. Martin Krapf, the managing director of IP Deutschland, the sales house of Mediengruppe RTL Deutschland, on the other hand,
simply stated, “Nobody knows what’s going to happen this year. For that reason I will not make any estimates.”
What is sure to happen this year is continued fallout from the heavy discounting IP Deutschland and ProSiebenSat.1 have been extending to their ad clients.
At the end of 2007, the Bundeskartellamt (the German competition authority) found that the sales arms of RTL and ProSiebenSat.1, which together have more than 80 percent of the ad market, had abused their dominant position by offering ad agencies steep discounts.
This practice was deemed anticompetitive because advertisers and agencies were granted preferred rates and rebates in return for large advertising investments. This effectively put at a disadvantage smaller broadcasters who were not able to offer the same kind of discounts. Last year both sales houses were fined and had to introduce new discounting formulas. While the RTL’s new model has been accepted by its clients, ProSiebenSat.1’s was not.
But ProSiebenSat.1’s problems are not limited to the difficult ad market. The German business of the entire group is facing a severe reorganization, including staff shake-ups. Former CEO Guillaume de Posch left the group at end of the year and the new CEO, Thomas Ebeling, just took up his position in March. Ebeling has no media background, as he comes from a big international pharmaceutical conglomerate.
It’s been almost three years since the investment firms Permira and KKR bought the controlling stake of ProSiebenSat.1 from another group of investors led by Haim Saban. Permira and KKR were a powerful influence in ProSiebenSat.1’s acquisition of SBS. Integration of the stations has proven difficult, especially in the current economic downturn. The group’s low debt ratio has shot up to more than ¤3 billion, roughly equal to the group’s annual revenues.
The reorganization plan at this point calls for grouping all German broadcast activities under one roof called “the German Free TV Holding,” which will also control program acquisitions and production activities. As a result, probably by late summer, Sat.1 will have to move from its current location in Berlin to the group’s headquarters in the Munich suburb of Unterföhring. Only the news and current-affairs departments, together with the news channel N24, will remain in the German capital.
Meanwhile, the current rebate battle surrounding TV advertising continues. The smaller niche channels, such as Tele 5 and DMAX, were not affected and actually fared quite well, increasing their audiences and ad revenues and investing in programming. Viacom, feeling the ad pinch, had to combine its two services, Nickelodeon and Comedy Central, into one feed.
There is concern within the advertising community that the discounting that occurred in the free-TV sector will spill into online advertising.
In these challenging times, the leading commercial broadcasters in Germany are looking to reach out to viewers on new-media platforms, while trying to create new revenue streams. All major players have launched online VOD services. ZDF and ARD each have their “Mediathek,” the RTL service is called “RTL Now,” while ProSiebenSat.1 has “maxdome.” These channels are offering blockbuster films, as well as imported and homegrown fare.
Viewers of the RTL channels can watch series and popular soaps in advance of the free-TV premiere for a fee, for seven days after broadcast free of charge, and beyond that for a fee again.
ARD and ZDF offer a similar service with one difference—everything is free. They also offer a vast news service and archive, which has prompted negative reactions from leading German publishers and commercial broadcasters who feel the pubcasters are overstepping their remit. This conflict ceased last fall—at least for the time being—with German media authorities deciding on rules that limit public networks’ online expansion.
One interesting consequence of the popularity of these online VOD services is that some imported series are performing less well on the linear channels. ProSieben has witnessed this trend with Terminator: The Sarah Connor Chronicles.
As in other countries, young people watch their favorite TV series online. German TV series are also suffering. Long-running hits like RTL’s action series Alarm für Cobra 11 are still doing well, but many new projects have failed. Sat.1, trying to polish up its program schedule with projects like the crime action series GSG 9, just to name one, didn’t get the results it had hoped for. The same was true for the series Die Anwälte (The Lawyers) on RTL. RTL sold the series to ARD, where is also struggled. The reason for that is widely agreed upon by German programming experts. German series tend to copy U.S. series too much, and the production quality and budgets do not meet the expectations of viewers used to U.S. production standards.

REPLICATING SUCCESS
What has worked have been international formats, such as Idols on RTL. Record shares of Deutschland sucht den Superstar have even had an impact on the ratings of ZDF’s long-running Saturday prime-time megahit variety show Wetten, dass…? (Wanna Bet?).
At ProSieben, Deutschlands neues Topmodel, based on the format of America’s Next Top Model, did extremely well, but so did the channel’s in-house production Schlag den Raab (Beat Your Host!). This format not only found an enthusiastic audience in Germany, but has also sold to several international territories, including the U.K. and Spain. For Sat.1, the new season of its own comedy series Schillerstraße (Schiller Street) proved to be even more successful than the previous ones.
However, German producers are confronted with tough times. “Especially those primarily working for commercial networks will have to tighten their belts,” says one renowned entertainment lawyer, who adds, “For those working for the public broadcasters, it is quite a different picture.”
ARD and ZDF each year together collect about €8 billion in license fees alone—and that’s regardless of their audience viewing shares—giving them plenty of cash to invest in new production. And that allows them to remain mostly un-affected by the problems facing commercial broadcasters and pay TV.