German giant waking to digital

Pieces finally falling together in Europe's largest market

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

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 Tele-kom, 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 in 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 it's taken a long time to get things started on digital TV," said Robert Niemann, managing director of Sony Pictures International Television Networks Germany, which operates 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 led 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 with European neighbors BSkyB and Canal Plus.

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

Slowly, however, things are changing. Several hot U.S. series including "Lost" and "Rome" 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.

FX's long-running "The Shield," for example, was a flop when the first season aired on free-TV channel Pro7. Strict regulations regarding violence on German TV meant that the hard-hitting 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 "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.

Entertain currently offers the broadest range of channels —145 — on offer in Germany as well as a quickly expanding VOD library.

"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."

Germany has never been a first adapter when it comes to new technology. The market for personal computers, DVD players and the Internet all lagged before reaching a crucial tipping point. 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.