Germany's digital market coming together

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COLOGNE, Germany -- After more than a decade of lagging behind, Germany's digital TV market seems poised to reach critical mass with all the major players -- Hollywood, local free TV giants, cable companies and telecos -- pushing for digital expansion.

Consider the facts: After years of dismissing digital TV as "irrelevant," German free TV giants RTL and Pro7Sat.1, have launched four new digital channels: RTL with RTL Crime and RTL Living, Pro7Sat.1 with Sat.1 Comedy and Kabel 1 Classics.

Cable consolidation, long hoped for, has finally begun. In September, Germany's top cable group, Kabel Deutschland (KDG) signed a deal, valued at nearly $900 million, that many analysts saw as a breakthrough in the stagnant German market. Now a handful of players -- KDG, Orion, Unity Media Kabel BW -- have the size and technical infrastructure to start turning digital TV from a money pit into a cash cow.

Deutsche Telekom, the telephone and ISP market leader with 10 million high-speed households, has rolled out a massive national campaign to sell its IP-TV offering, hiring one of Germany's leading agencies, Hamburg-based GFEH, to handle online promotion.

The Hollywood studios are out in force, signing digital VOD deals with cable and IP-TV providers, launching new digital channels and cross-promoting like crazy between their German free-to-air and pay offerings.

"All the players that used to be fighting one another are now pulling together," said Wolfram Winter, head of Premiere Star, the new digital satellite service launched Sept. 13 by German pay TV platform Premiere. "Finally we are starting to see the promise of digital pay in Germany that began way back 1996 with the launch of (now defunct pay channel) DF1."

"The German television market is like a huge tanker, it takes a long time to get moving, and its taken a long time to get things started on digital TV," said Robert Niemann, managing director of Sony Pictures International Television Networks Germany, which operate digital channels AXN and ANIMAX. "But once that tanker starts moving, it develops an incredible momentum. The momentum for digital TV has started and I think growth in the coming years will be enormous."



For producers and rights holders, a real digital pay market in Europe's largest territory promises a bonanza of new revenue as niche audiences and second-run opportunities open up.

Germany has always been the odd man out in Europe, consisting of an enormous free TV market, with 60 million plus households, latched to a tiny pay TV business with about 4 million subscribers.

This has lead to strange distortions. RTL and Pro7Sat.1 have been able to leverage the profits from Germany's massive free-TV business to build pan-European empires. But Germany's top pay TV company Premiere is a mite compared to European neighbors BSkyB and Canal Plus and often struggles to secure top soccer or film rights.

"Premiere is not able to co-finance programming, that's unheard of in the pay TV market," noted German rights mogul Herbert Kloiber of Tele Munchen Group.

Slowly, however, things are changing. Several hot U.S. series including "Lost," "Rome" and "The Black Donnellys" had their German premiere on pay TV before moving to free-to-air, something previously unheard of in the market.

"We are seeing the start of something like the basic cable model in the U.S., with series debuting on digital pay before moving to free," said Niemann of SPTI Germany.

Niemann notes that this development has opened up opportunities for niche programming squeezed out of Germany's more mainstream free TV networks.

FX's long-running "The Shield," for example, was a flop when the first season aired on free TV channel Pro7. Strict regulations regarding on-air violence on German TV meant that the hard-hitting dirty cop series was forced into an unattractive late night slot and ratings were dire. Pro7 dropped the show.

When digital channel AXN launched in Germany in 2004 it picked up new seasons of "The Shield" and made the series a main focus of its promotion campaign. The series has become so successful that Pro7's sister channel Kabel 1 is giving it another shot, airing the old "Shield" seasons while AXN carries the new shows.

Across the German digital dial, new niche channels are sprouting up, and catering to previously ignored audiences. From the North American Sports Network (NASN) for German baseball and basketball fans to the family entertainment on Nick Premium to the 60-plus crowd targeted by German folk music channel Goldstar TV.

Then there is IP-TV. Entertain, the IP-TV offering from Deutsche Telekom, launched a new marketing offensive this fall. Its subscriber base is still tiny but Telekom is throwing its considerable marketing weight behind the broadband TV rollout, which it sees as key to selling lucrative triple play offerings -- Internet, telephony and television -- to customers.

Some 15 million German households can potentially link up to Telekom's IP-TV service right now, a figure Telekom says will hit 17 million by year's end. By 2010, the company forecasts a total of 25 million German broadband homes -- a massive potential market for digital TV.

Entertain currently offers the broadest range of channels, 145, on offer in Germany as well as a quickly expanding VOD library of feature films and documentaries. This year, Telekom signed new VOD deals with, among others, Universal Pictures International Entertainment, Buena Vista International Television and German production giant Studio Hamburg.

Still, problems remain. Key among them are the technical barriers to expansion. Only about a third of German households are equipped to receive digital pay TV, compared with 70%-80% in the U.K.

That should change now that Germany's cable market is starting to consolidate. In a recent deal, cable giant KDG acquired 1.2 million customers from competitor Orion for more than $800 million and a pledge to pull out of a bidding war with Orion for smaller cable group Primacom. Most analysts see the deal as a welcome step in the process of consolidation needed to give cablers the economies of scale required to make digital TV profitable.

"Things are moving but the uptake of digital TV is still slow, the networks have to be upgraded," said Catherine Muhlemann, senior vp of MTV Networks Germany. "But cable operators are starting to grow the business. KDG now has something like 600,000 digital subscribers -- that's a real market."

Another problem is content. The bulk of digital programming on offer in Germany is also available, in some form, on free-to-air. Specialty channels abound but the German pay market lacks the exclusive, premium-content offerings that have been the driver of new subscriptions for HBO, BSkyB or Canal Plus.

"So far, with hardly any exceptions, the various broadband or satellite bouquets are low cost, low quality, more of the same and therefore not able drivers for future developments," said Kloiber of TMG.

Germany has never been a first adapter when it comes to new technology. The market for personal computers, DVD players, the Internet -- all lagged behind before reaching a crucial tipping point in the territory. When that tipping point will be reached for digital TV is still an open question. But for the first time in Germany, the signs are pointing in the right direction.
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