They Aim To Please

April 2008

The pay-TV business in all but one of Western Europe’s five largest countries was in turmoil in the early years of the present decade. In Italy and Spain, where competing pay-TV platforms were slugging it out for subscribers, the realization was sinking in that each of those markets was only big enough for one player. In France, also with two competitors in a costly battle of attrition, it would take a bit longer for the same reality to hit home. In Germany, the owner of the only pay-TV provider had crashed on the financial rocks. Only in the U.K. was the pay-TV business, ruled by Rupert Murdoch’s BSkyB, cruising along profitably in growth mode.

Since that time, shakeouts and consolidation have changed the pay-TV scene dramatically for the better. Meanwhile, Murdoch has extended his reach beyond the U.K. as the only significant cross-border player in the pay-TV sector. His acquisition of a 14.6-percent stake in Germany’s Premiere at the start of this year, raised to 19.9 percent in late February, has been interpreted by some as the start of a move to take the company over. Premiere appears to have the most room for growth of any of the major market players. Germany, Western Europe’s largest market, has also been something of a laggard in adopting pay TV, a tendency that has been blamed on the wide variety of programming available on basic cable.

As of the end of 2007, the Premiere platform stood at 4.279 million subscribers, of which 3.65 million were Premiere’s own subs, while the rest were subscribers of the Bundesliga soccer package offered by Arena, an upstart pay-TV company launched by Unity Media that outbid Premiere for the soccer rights only to discover that it needed Premiere’s distribution-and-marketing infrastructure to survive. Premiere’s own subscriber count grew by 241,152 subs in 2007, up by 7.1 percent from the previous year. Revenues were down by about 7 percent to €984.5 million, but EBITDA soared by 74 percent to €83.4 million. In the second half of the year, once Premiere sub-licensed the Bundesliga rights for the new season from its would-be competitor, business picked up noticeably, and the company has expressed confidence that it will win the rights in the next bidding round.

However, the lack of competition in the German market has stirred the Bundesliga, the most important source of pay-TV content, to adopt a new strategy. Rather than selling rights to platforms that will produce the content and sell to the consumer, its new venture with Leo Kirch, Premiere’s former owner, intends to create the content itself and then make it available for platforms to distribute. Premiere is already making content available to third parties as the gatekeeper. The new approach would put the Bundesliga in that role. At press time, a senior source close to the situation, which is highly sensitive, said that negotiations on the future of rights are likely to start in the near future.

POST-MERGER VICTORIES

Consolidation took place in Spain and Italy at about the same time, five years ago, turning two struggling pay-TV markets into successful ones in rather similar fashion. In both countries, the leading telecom companies plunged into pay TV and got their fingers burned.

In Spain, the fusion of Canal Satélite and Via Digital into Digital+ was confirmed at the start of 2003 under the umbrella of Sogecable, owned 50 percent by Canal Satélite’s parent, the publishing giant Prisa, and 16.7 percent by Telefónica, the national telco, which had launched Via Digital. France’s Vivendi, the parent of Canal+, still holds a 5.5-percent stake in the Spanish service, but gone are the days of waving the Canal+ España banner, when the French group seemed intent on building a pan-European pay-TV empire.

“After the merger, there was a period of rights renegotiation and adjustment, but we don’t have any intention to exert downward pressure on rights,” says Begoña Liso, Sogecable’s head of sports acquisitions. “I think we’re at the right level.” She adds that there is no expectation of new competition in the pay-TV market per se. New platforms such as Imagenio in IPTV are growing, but Sogecable is a programming provider for them. She points out that competition in free TV has intensified.

Indeed, in a rather retro move in this increasingly digital world, in 2006 Sogecable became the first pay-TV company to launch a mainstream free-TV network, and very successfully. Its new channel, Cuatro, has an audience share of about 7.7 percent in a very competitive terrestrial market.

At the end of 2007, the pay-TV subscription count for Digital+ stood at 2.065 million. That was an increase of only 1 percent on the end of 2006 and only 5.4 percent from two years ago. However, churn has come down impressively, from 22 percent in 2004, as the merger solidified, to about 12 percent in 2007. Revenue rose to €1.522 million in fiscal 2007, up 3.3 percent from the previous year.

The Telefónica connection remains important operationally for Digital+. In December 2007, Digital+ launched a triple-play service called Trío+, combining ADSL and voice from the telco with satellite pay TV. A new triple play with Orange offering broadband and mobile TV plus Digital+ programming is in the works.

In Italy, the pay-TV market has just received an unusual boost in the International Olympic Committee’s somewhat surprising decision to sell rights to SKY Italia rather than to the public broadcaster RAI.

The merger of two rivals also took effect in early 2003 in Italy. Again, one, Telepiu, was originally backed by Canal+, and the other, Stream, had a national telco (Telecom Italia) and Murdoch’s News Corporation as partners. The new brand was SKY Italia. However, there was only one corporate winner in the end. News Corp. bought out Telecom Italia’s 20-percent stake in the merged group in 2005, and now owns 100 percent of the Italian pay-TV operator. Italy is the only major market where pay TV is entirely owned by a single group. Even in the U.K., the home market of Murdoch’s Sky brand, News Corp. only holds 39 percent of flagship BSkyB.

Of all the major pay-TV operations, SKY Italia has probably achieved the most spectacular growth in the past few years, with subs increasing by more than 2.5 million since the launch, in July 2003. At the end of 2007, the total stood at 4.43 million. In the second quarter ended December 31, 2007, revenues rose to $955 million.

To entice subs, SKY Italia is the only Italian programmer to be transmitting in high-definition; it has a package of five HD channels. It has embraced new media through IPTV deals with its former partner Telecom Italia’s Alice Home TV, as well as FastWeb and Infostrada TV, and is launching programming on broadband through a deal with Tiscali. It also has mobile-TV deals with Telecom Italia Mobile as well as Vodafone and H3G.

BACK AT THE TOP

Consolidation came to the French market at the start of 2006, leaving Canal+, Europe’s first pay-TV company, as France’s lone pay-TV provider once again, after “merging with” (effectively taking over) its digital competitor TPS. The Canal+ side of the fusion is dominant, with Vivendi holding 65 percent of the merged group and Lagardére holding 20 percent, while TPS’s partners TF1 (9.9 percent) and M6 (5.1 percent) have much smaller stakes. France Telecom was originally a partner in TPS, adding France to the list of the markets where the main telco’s attempt to become a TV company did not pan out.

The failure of the telcos to score in television has been partly a matter of corporate culture, according to William Field, a partner in the leading London consultancy Spectrum Value Partners. “Fundamentally, telcos and media companies are very different in terms of their businesses and the kind of people who work for them,” he said in an interview in a new survey on digital sports competition strategies. “It’s very hard for large telcos to become good media companies, no matter how hard they try.”

At the end of 2007, Canal+ had 5.3 million subscribers, a figure almost identical to the sub count for the CanalSat and TPS digital DTH platforms, which have not yet been integrated. Canal+ has just renewed its grip on French League football rights.

Canal+ offers six premium channels bundled into the Canal+ Le Bouquet package. This offer is available on DTH, ADSL, cable and DTT (which, because of capacity issues, carries only the first three channels of the bouquet). The latest addition has been Canal+ Family. Canal+ said no other premium channels are in the pipeline.

In addition, CanalSat provides a multichannel offer with 300 channels available on DTH and ADSL. The latest channel additions have been Disney Cinemagic, Vivolta (a channel designed for 45- to 60-year-olds), Planéte Justice (a channel dedicated to legal issues) and BabyFirstTV, for young children and their parents. No other channel has been announced yet.

The number of Canal+ subs climbed by 80,000 during 2007, only 1.6 percent from the previous year. But subs have continued to migrate to digital, with 71 percent of subs now getting their service on DTH or via digital terrestrial, up from 61 percent in 2006. The 2007 financial performance of the Canal+ Group was impressive, with revenues rising by 20.2 percent to €4.363 million. That figure is more than four times greater than Premiere’s revenue total in Germany (where the population is 30 percent bigger than in France).

Canal+ started HD transmissions back in April 2006. It moved into offering programming via ADSL even earlier, in March 2004, through deals with France Telecom, Free and Neuf Telecom. In 2005, it launched into mobile TV and through partnerships with SFR and Bouygues Telecom now has over 250,000 subscribers for Canal+ Mobile/CanalSat Mobile.

The main pay-TV operators in Continental Europe remain way behind BSkyB in customers and income. Britain’s dominant pay-TV company had 8.832 million subscribers at the end of 2007, adding 385,000 DTH subs during the last quarter of the year. Revenues for the 2007 financial year reached £4.551 billion (about €6 billion), up 9.7 percent from the previous year.

While competition was pushing rivals toward mergers in some other markets a few years ago, BSkyB was seeing off the challenge of ITV Digital, which collapsed in 2002. A new competitor arrived on the scene in 2007—Setanta, which became the first company to break Sky’s monopoly grip on live pay-TV Premiership soccer. However, like Arena in Germany, Setanta sticks to the sports niche.

NEW ENTICEMENTS

Sky has probably been the U.K.’s market leader in new-media innovation. Indeed, Sky Broadband is the country’s fastest-growing broadband provider, competing with telco and cable offerings. Sky Broadband added 260,000 subs during the last quarter of 2007 to reach 1.2 million customers. Sky is even competing with telcos in the voice business, and has the country’s fastest-growing home-phone service, Sky Talk, which recently reached 1 million customers. To get these services, which undercut telco prices, you need to be a Sky TV customer first.

Meanwhile, the incumbents are continuing to innovate. In late January, Sogecable launched Spain’s first HD channel, Canal+ HD. It will show all of this summer’s Euro 2008 soccer championship tournament. BSkyB will increase its HD lineup to 17 services in coming months, adding Sky Sports HD 3, Sky Movies Premiere HD and FX HD, a comedy and drama channel. There are now 422,000 Sky HD customers.

As a result of all the consolidation that has taken place in the major European pay-TV markets, the question arises: Is there really less competition for rights?

“In recent years, new players have been emerging, particularly in the areas of DTT and new media (such as VOD), where we have seen steep growth in our business,” says Tom Toumazis, the executive VP and general manager of Disney-ABC International Television for EMEA and Canada. “This is leading to increased competition for content across all genres, and, potentially, opportunities to monetize new windows.”

He continues, “The growth and strengthening of new-media platforms, particularly VOD, are offering some interesting opportunities for content providers. For example, telcos are entering the VOD market in a strong position. Recently, we’ve closed VOD agreements with companies such as BT and France Telecom. Some free-TV broadcasters are also thriving in the new-media space. We’ve successfully worked with VOD platforms such as Channel 4’s 4oD in the U.K. and ProSiebenSat.1’s maxdome in Germany to bring content to viewers in flexible, interesting new ways.”

However, the pay-TV incumbents dominate the space. In February, Sky premiered two new shows on its video-on-demand service, Anytime on TV, which is now showcasing Lost 24 hours before the series is shown on Sky One. In France, Canal+’s VOD offer, Canalplay, is the market leader with 200,000 downloads per month. Canalplay is available via the Internet and directly on television via the telco Iliad’s TV offer.

All of these new offerings, and the rapidity with which they are rolling out, is just proof that the pay-TV platforms have learned from past mistakes and are working hard to please their subscribers. And a win-win-win scenario is opening up—for the platforms, the viewers and the distributors of content.