Endurance test for upstart Arena

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COLOGNE, Germany -- In soccer, as in business, endurance can be the deciding factor between victory and defeat. That's a lesson Germany's newest pay TV player, Unity Media, is learning two months after launching its soccer-driven channel Arena.

Before its bow in August, Arena was the Cinderella story of German sports television. The channel came from nowhere in December 2005 and outplayed market leader Premiere, stealing away rights to Germany's top soccer league, the Bundesliga.

What made the Bundesliga deal so impressive was that Arena actually offered less than Premiere -- just ?220 million ($279 million) a season for three seasons, well under Premiere's bid. The new channel won over German soccer association the DFL by promising various marketing incentives. In particular, Arena ensured that free-TV channels will still be able to show Bundesliga highlights. Premiere wanted an all-exclusive deal.

Arena has had a strong start, signing up 800,000 subscribers virtually overnight, and the channel is on target for its short-term goal of 1 million customers by year's end.

But pay TV -- again like soccer -- is more a marathon than a sprint. To turn a profit, Arena needs about 2.5 million subscribers. That, in turn, requires a combination of tenacity and very deep pockets.

"We estimate it costs Arena ?200 ($253) per subscriber to acquire a customer," one analyst from UBS in London says. "To hit the 2.5 million subscriber target, that means an upfront investment of ?500 million ($633 million). And in three years, Arena could lose its Bundesliga rights -- which would mean losing the main reason customers are signing on for their service."

Unity Media CEO Parm Sandhu has already warned investors that Arena will lose between ?120 million-?140 million ($152 million-$177 million) this season and that it will be years before the channel starts to pay for itself.

Arena's success thus far looks less impressive when one crunches the numbers. Of the channel's 800,000 subscribers, half are not direct customers but receive Arena's soccer games via competitor Premiere under a carriage agreement signed between the two rivals in July (HR 7/23).

UBS estimates that, after subtracting Premiere's handling fee, Unity earns just ?8 ($10) per month from these subscribers compared to ?12 ($15) per month for direct Unity and satellite customers.

But Unity has little choice but to pay ball with Premiere. The majority of German pay TV customers get their fix via cable. Arena also has carriage deals with Unity cable subsidiaries Ish and Iesy as well as with regional cabler Kabel BW and satellite provider Astra.

Germany's biggest cable company, Kabel Deutschland (KDG), however, is on side with Premiere. To get access to KDG's 10 million homes -- which represent more than half of German households that have cable -- Unity had to sign on with its biggest rival.

The deal is a compromise for Arena in two ways. Not only does the channel earn less per subscriber thanks to Premiere's handling fee, Arena also gives up the direct relationship with cable customers who watch their channel but pay Premiere.

And it is direct customer relationships that Arena wants. Unlike Premiere, which offers a wide spectrum of programming from films and TV series to erotica and all varieties of sports, Arena has only one game plan: the Bundesliga. The German league is a major draw but only runs 9 months a year -- a risky proposal if one wants to build a profitable pay TV business.

But pay TV is only one element of Unity's plan. The company's long-term goal is to sign up customers for its new Internet and telephony services.

"Unity doesn't like to admit it, but the Bundesliga is really a loss-leader," one cable TV analyst in Frankfurt says. "The real money is in telephony and broadband."

While Arena charges just ?14.90 ($19) per month for its pay TV service, Unity can make between ?50-?60 ($63-$76) a month from subscribers who sign on to their full triple-play package of pay TV, broadband and telephone services.

Unity head Sandhu says he hopes Arena will make a "considerable contribution" to forecasted revenue growth in the third quarter this year. The bulk of that contribution is expected to come from add-on services.

But adoption of Unity's Internet and telephony package, sold under the brand Tividi, was less than impressive in the first half of this year. The company signed up just 60,000 Internet subscribers and 29,000 new telephone customers as of June 30. Unity has so far refused to break down subscriber numbers following Arena's launch in August.

"Anyway you look at it, Unity and Arena have a tough job to get the sort of customer base they need," UBS' analyst said. "60% of Premiere subscribers -- or around 2 million -- take sport. Even if Arena steals all of them away, they would still have to get 500,000 subscribers from somewhere to get the 2.5 million they need to make the operation work. Premiere took 15 years with very attractive programming and a ton of advertising to get where it is now. Arena just has the Bundesliga and just three years. Even if you figure in add-on services, it remains a very risky proposition."
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