Murdoch faces major challenge in Germany

LONDON: Rupert Murdoch's German pay-television channel may need more than a new moniker for a turnaround.

On July 4, Germany's biggest pay-TV channel Premiere AG, now 30.5 percent controlled by Murdoch's News Corp, will start broadcasting under its new name: Sky Deutschland.

While the move brings the unprofitable channel squarely into the Murdoch fold, it has a tough battle ahead as subscriptions fall.

"The new management will face similar problems as the old one," said Friedrich Diel, a fund manager at Frankfurt Trust Investment, who recently sold his Premiere shares amid concern that "stingy" German consumers won't fork out money for pay-TV when they have more than 30 free channels to choose from.

Turning operations around in Germany, where News Corp has invested about 600 million euros ($845 million), might become a test case for the New York-based company's TV ambitions in Europe. The German pay-TV market, which led to the collapse of media magnate Leo Kirch's Kirch Holding GmbH in 2002, has resulted in losses of 349.4 million euros for Premiere since Murdoch's initial stake purchase in January 2008.

The number of subscribers at the channel dropped 3.2 percent in the year ended March to 2.37 million as the economic slump forced consumers to spend less.

"Germany is Europe's biggest economy, so it's essential for Murdoch to have a local presence and he may accept more setbacks there than in other countries," Diel said. "It would make sense to create some kind of pan-European pay-TV broadcaster, as it would give them more buying power and would help to slash costs."

European presence

News Corp has declined to comment on speculation that it aims to create a pan-European broadcaster and also on whether it aims to buy more assets in Europe. When Promotoro de Informaciones SA, Spain's largest media company, put Digital Plus, the country's biggest pay-TV service, up for sale last year, Murdoch didn't bid.

Murdoch's success in Europe has been mixed. While British Sky Broadcasting Group Plc, or BSkyB, in the UK is profitable, Sky Deutschland posts losses. Sky Italia SpA, which increased operating profit every year since Murdoch took full control in 2005, saw those earnings fall 35 percent in the quarter ended March as competition from Prime Minister Silvio Berlusconi's Mediaset SpA intensified. Sky was Italy's only pay-TV channel until Berlusconi unveiled similar services in January 2008.

"The war is getting more and more intense," said Fabrizio Perretti, a professor at Bocconi University in Milan. Mediaset will be able to break into households when Italian regions switch to digital terrestrial networks, he said. "Sky is attracting more high-end customers while Mediaset seems to target mass users. Still, they will step on each other's toes."

News Corp bought 14.6 percent of Germany's Premiere in January 2008, anticipating "enormous" growth in the country's TV market. That stake rose to 30.5 percent after it bailed out Premiere in December, agreeing to a 450 million-euro share sale to allow renegotiation of terms on 525 million euros of debt.

"We believe management has made considerable strides in the past eight months," said Alice Macandrew, a News Corp spokeswoman in London.

Premiere, or Sky Deutschland, says the subscriber base will start growing in the third quarter, helped by a marketing campaign, better customer service and a new price structure. It also forecast a return to net income in 2011. The channel relies mainly on sports broadcasts and movies to lure clients, especially rights to the top Bundesliga soccer games.

"Premium pay-TV has never really got off the ground in Germany, and it will be interesting to see if Murdoch's pay-TV magic can turn around German pay-TV," said Richard Broughton, an analyst with research firm Screendigest in London.

BSkyB success

Murdoch's efforts are aimed at emulating the success of BSkyB, which has shown that pay-TV operators can be profitable despite competition from state broadcasters and private free-TV channels.

BSkyB was created in 1990 with the merger of Murdoch's Sky Television and British Satellite Broadcasting, with about 1 million clients. Buying exclusive live broadcasting rights in 1992 to popular events such as the Premier League, England's top soccer league, helped it win more clients. The company, 39 percent owned by News Corp, also added other offerings such as the History Channel and Disney Channel in 1995.

In the first three months of this year, earnings before interest, tax, depreciation and amortization climbed 16 percent to 311 million pounds ($513 million). The channel had 9.32 million subscribers at the end of March.

"The UK market is really very different from the German market," said Diel.

About 6 percent of German households subscribed to Premiere at the end of 2008, while 33.7 percent of British households got BSkyB's pay-TV service, according to Screendigest.

Many German consumers are "stingier" than in other nations and are inclined to ignore a superior pay product if they can get an inferior product for free, Diel said.

"As long as there will be a free-TV summary of Bundesliga matches, many Germans won't be tempted to subscribe to a live pay-TV offering," he said.

Leo Kirch, the founder of what was once Germany's second- biggest media company, invested more than 4 billion euros in the pay-TV business that failed to meet targets as it competed with free TV channels, including state-owned broadcaster ARD and RTL Group SA's RTL channel.

Buyout firm Permira took control of Premiere in 2003 after Kirch Holding collapsed in Germany's largest bankruptcy since World War II.

"The situation in Germany is very difficult," said Sonia Rabussier, an analyst at Sal. Oppenheim Jr & Cie in Frankfurt. "I think the business is developing more slowly than Murdoch was hoping."

Bloomberg News

(China Daily 07/06/2009 page11)