German cable sector reaching out to last-mile

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FRANKFURT, Germany -- As the German cable TV industry finally begins to consolidate, the industry giants including former state-owned operators Kabel Deutschland and UnityMedia are looking to a smaller regional cable group, Kabel BW, as a business model to follow.

Kabel BW is midsize player, with 2.3 million cable TV subscribers in the southwestern state of Baden Wurttemberg. But the company is showing its competitors how to make money in the complicated and expensive business of German cable.

Competitors look on enviously as this little powerhouse seems to have found the solution to the German industry's biggest problem: the divide between the big cable providers and the jungle of independent, last-mile operators.

Such cable giants as KDG and Unity have millions of subscribers, but only a minority receives services directly from the company. The bulk has contracts with small last-mile operators, some of which serve only a couple of hundred homes each.

The situation stems from the old days of German state monopoly Deutsche Telekom. While Telekom operated the national cable network, small local companies were allowed to build up local last-mile services to speed German cable penetration.

When the monopoly fell, Telekom's systems were split up and sold. But of Telekom's 18 million German cable homes, only about a third were door-to-door. The rest had those pesky last-mile middlemen in between.

The situation differs for Kabel BW, the smallest of the former state-owned operators, that European investment group EQT acquired from U.S. private-equity firm Blackstone in 2005.

"We reach almost all of our clients directly -- over 95% of them. That makes communication with our customers a lot easier," Kabel BW CEO Klaus Thiemann said.

Easier communication is not the only benefit to owning that last mile.

The cash cow of cable services right now is triple play -- offering Internet, cable TV and telephony services over the same pipe. But in many cases, German cable operators can't provide triple play services to customers because the last-mile middlemen haven't upgraded their lines. Even if customers want high-speed Internet or telephone services via cable, the aging copper wires winding into their homes can't carry them. Suddenly KDG's 10 million cable subscribers look a lot less valuable.

Kabel BW solved the last-mile problem early on when it acquired the southern German homes served by Telecolumbus, one of larger last-mile groups.

"To acquire the regional Telecolumbus networks was the right strategic decision," Thiemann said.

That deal, with investment group Orion, proved key to Kabel BW's rapid expansion in the lucrative broadband business. In October, Kabel BW had more than 200,000 subscribers to its Clever Kabel broadband/telephony service, more than double last year's figure.

By year's end, Thiemann expects to be able to provide 25 Mbits/sec broadband service to all of its 2.3 million subscribers as well as about 1 million more households in the region that don't currently subscribe to its cable TV offerings. By 2010, the company is forecasting 550,000 broadband customers, each paying up to €50 a month for triple play services. That's the kind of market that makes Kabel BW's competitors drool.

The giants are following Kabel BW's lead. In the fall, KDG signed a $916 million deal, also with Orion, for 1.2 million last-mile subscribers. UnityMedia is pursuing a similar strategy.

But the big boys could face opposition as they try to gobble up last-mile operators. Heinz-Peter Labonte, president of last-mile lobby group FRK, has given up on Baden Wurttemberg but is pushing Germany's antitrust office to keep a close eye on further consolidation by KDG and Unity.

"If consolidation in the cable industry goes on like this competition in the cable market will cease," Labonte said.

On the content side, KDG and Unity also are playing catch-up to Kabel BW. With about 400 TV and 200 odd digital radio channels plus all 612 live matches of Germany's premier Bundesliga soccer division, Kabel BW's couch potatoes have a better selection of programming than almost anywhere in the country.

Compared to the larger networks, Kabel BW has one big advantage. Instead of packaging its own expensive pay TV bouquet, it serves as a reseller for the KDG or Unity bouquets. This keeps program acquisition costs low and gives Kabel BW subscribers a wider selection. For the time being there are no plans to change this arrangement. However, Thiemann soon plans soon to introduce VOD and gaming services.

Having successfully shown cable competitors how it's done, Kabel BW has set its sights even higher. Thiemann's ambitious goal is to become the region's "first choice for phone and Internet services as well as TV."

That will mean taking on a true goliath -- market leader Deutsche Telekom. But just like the company's new pitchwoman -- charismatic women's world boxing champion Regina Halmich -- underdog Kabel BW never shies away from a fight.
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