Waltz Of The Media Giants

European television, as any traveler knows, offers pretty slim pickings: game shows, movie reruns, talking heads. But thanks to new digital technology, the TV wasteland is about to bloom with fresh possibility. By the end of 1995, new digital cable and digital satellite services are expected to revolutionize the media landscape. For starters, the number of TV channels available to broadcasters will swell from a handful to more than a hundred. Digital broadcasting will also speed the development of future interactive and multimedia services.

No wonder Europe's media giants are joining forces to grab the lion's share of infrastructure, programming, and distribution. In a half-dozen recent alliances that cross borders and span industries (table), companies are vying for a fat slice of what promises to be a bigger TV-viewing market. On Aug. 25, Germany's Deutsche Telekom--the monopoly telephone company and the king of European cable, with 13 million subscribers--announced that Media Services, its joint venture with publishing superpower Bertelsmann and Bavarian media mogul Leo Kirch, is planning trials of interactive TV in 6,000 Berlin homes later this year. A week earlier, Dutch electronics giant Philips Electronics--best known for TVs and video recorders--announced plans to offer pay-per-view services to cable operators Europewide, with U.S. partner Graff Pay-Per-View Inc., starting in September in Holland. "Europe's couch potatoes are about to become couch commandos," says Neil Blackley, media analyst at Goldman, Sachs & Co. in London.

Revenues from key segments of the TV industry are expected to grow from $110 billion to $150 billion over the next five years (chart). Everyone from state-owned telephone companies to consumer electronics makers is investing in cable networks, since cable's broad bandwidth is best suited to carry interactive TV and multimedia services. And although most cable networks are still analog, operators can fairly easily convert their equipment to send and receive digital signals--and charge their customers for the decoder box.

CRITICAL MASS. In a bold bid to become Europe's largest cable operator, Philips Media also has teamed up with United International Holdings in the U.S., and they plan to set up systems throughout Europe. "The European market is the richest market after the U.S.," says Scott Marden, president and CEO of Philips Media in New York. And rivaling Philips' effort, France's Canal+ and Bertelsmann are investing $360 million to develop new pay-TV service throughout Europe via satellite and cable. Michael Dornemann, Bertelsmann's chief of worldwide entertainment, sees Europe as a testing ground for increasingly global products.

Existing players hope to gain critical mass through alliances to gain access to a larger base of subscribers. Subscriber fees for cable and pay-TV services generate the bulk of revenues in the European TV market, where commercial advertising is less developed. With so much new competition, capacity, and programming, pricing for the new services is still up in the air. But rapid expansion is initially likely to mean lower revenues for any one supplier. "For several years, we will face a sort of paradox of more viewers and lower revenues," says Marc Tessier, an executive vice-president at Canal+, Europe's largest pay-TV broadcaster. That's why a wide subscriber base is so desirable.

Besides competing with one another, cable operators are head-to-head with satellite technology. In contrast to the U.S., Europe has already seen big investment in direct-broadcast satellite technology, which digital promises to make even more competitive. Digital satellite's new channels could eclipse the future growth of cable in countries such as Britain and France where cable is underdeveloped. Meanwhile, in Belgium, Holland, and Germany, where cable is dominant, the arrival of digital satellite broadcasting will provide access for new entrants.

The race to control the satellite airwaves is already on. European media giants like Rupert Murdoch's British Sky Broadcasting and Canal+ want the European Union to back proprietary systems that decode the digital signals beamed to TV sets. But public broadcasters and smaller rivals are fighting for an open interface that would allow any new player to develop services. Once a few big companies take control of the infrastructure, they argue, it will be difficult to change the way markets are carved up.

BUSTING BARRIERS. European Union regulators have asked the Geneva-based Digital Video Broadcast Group (DVB) to develop recommendations to regulate the market. The association of 160 broadcasters, producers, and government officials is likely in September to agree to support development of both proprietary and open systems. But in reality, admits Albrecht Ziemer, a DVB committee co-chairman, that probably means a handful of large players will rush into the market with proprietary systems, making it economically risky for newcomers to try competing.

Besides challenging regulators, digital TV may also bring down stubborn cultural barriers within and around Europe. Alliance partners already are plotting to acquire, develop, and control programming that can be marketed to the widest possible audience. "It's impossible to launch a new TV service and expect it to be profitable on a national basis. We have to consider Europe as a whole now," says Tessier of Canal+.

A European Union directive currently requires broadcasters to maintain at least 50% European programming. At first, however, a lot of the new channels are likely to carry considerable low-cost Hollywood programming, since developing European-based programs is 10 times more expensive than buying rights to U.S. TV and film fare. Walt Disney Co. already has begun developing children's TV programming for several European countries, and on Aug. 23 announced a joint venture with Luxembourg-based CLT to launch a new children's channel in Germany next year. As digital services become more profitable, European companies will invest more in local programming, says Tessier.

Despite the stampede toward a new digital-TV future, market researchers and CEOs agree the payoff is years away. Cable operators in Britain still show a loss when voice-phone revenues are stripped from total operations. As a result, partners in the current spate of alliances could drop out or reshuffle in coming years. For the time being, though, the participants are betting that bigger will be better when digital infotainment hits Europe's TV screens.

      Partners                            Venture
      PHILIPS ELECTRONICS,                Europewide pay-per-view, video
      ROYAL PTT NETHERLANDS,              on demand, and interactive
      AND GRAFF PAY-PER-VIEW              TV services, starting in Holland
                                          in September
      WALT DISNEY AND                     A new channel called Super RTL
      LUXEMBOURG-BASED CLT                aimed at children, starting in
                                          Germany in 1995
      CANAL+ AND                          Investing $360 million to develop
      BERTELSMANN                         and distribute digital pay-TV ser-
                                          vices Europewide
      BERTELSMANN, DEUTSCHE               Formed Berlin-based Media
      TELEKOM, AND FILM-RIGHTS            Services to offer pay-TV and
      MAGNATE LEO KIRCH                   interactive multimedia
                                          services starting in 1995
      FRANCE TELECOM AND                  Launched Multivision in May,
      LYONNAISE DES EAUX-DUMEZ            the first French pay-per-view
                                          TV, and are developing
                                          multimedia services
      NEWS INTERNATIONAL                  Purchased stakes in
      AND GOLDMAN SACHS                   Bertelsmann's ailing VOX chan-
                                          nel in Germany
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