Murdoch And Kirch: Take That, Bertelsmann!

Murdoch's deal with Kirch may create a Euro-TV superstar

One is a reclusive Bavarian who has spent decades building a powerful position in German television. The other is an Australian who roams the globe looking for deals to extend an already vast media empire. Now, Leo Kirch and Rupert Murdoch have joined forces. The resulting deal could upset all the predictions about who will control the future of European TV.

On July 8, British Sky Broadcasting (BSkyB), which is controlled by Murdoch's News Corp., said it would acquire up to 49% of DF1, the digital-TV company set up by Kirch's broadcasting company, Kirch Group of Munich. The goal is to dominate the German market for digital TV. This new pay-TV technology will soon make it possible for viewers to receive hundreds of channels and special services. Digital TV is expected to be the engine of growth for television well into the next century. Together, Kirch and Murdoch could also go forth to launch digitalTV services elsewhere on the Continent, where Murdoch has had little presence.

A SWITCH. The announcement represents an amazing reversal of alliances. Earlier this year, Bertelsmann, the German media giant and a bitter rival to Kirch, had forged a digital-TV pact with BSkyB and France's premier pay-TV company, Canal Plus. But then Bertelsmann merged its broadcast business with that of Compagnie Luxembourgeoise de Teledifusion. News of the merger infuriated executives at Canal Plus, which competes directly with CLT in France.

The resulting acrimony damaged the digital-TV alliance so badly that Murdoch pulled out of it and BSkyB chief Sam Chisholm contacted Leo Kirch about a possible deal. Kirch, whose executives had been furiously preparing the launch of a digital-TV service, welcomed a chance to turn Murdoch from foe to friend.

Now 69 and nearly blind from diabetes, Kirch built his business over 40 years with his ability to move fast. A deal was quickly cut. Under the arrangement, BSkyB won't pay any money up front but will help cover DF1's startup costs, which Kirch executives figure will come to $650 million over four years.

The service is slated to begin on July 28 with 17 channels offering sports, movies, classical music, and other special interest programs. At 49% participation, Murdoch's investment could reach $318 million. Final details of the partnership have yet to be ironed out, says David Chance, deputy managing director of BSkyB. Industry sources say Kirch and Murdoch are still looking for partners to help finance the digital project. On July 28, U.S. broadcaster NBC agreed to be a part of the DF1 project.

Skeptics caution that Murdoch has failed to make other partnerships on the Continent work. But the two companies do make a good fit. Kirch has German rights to 15,000 feature films, 50,000 hours of TV series, and pay-TV rights to Formula 1 racing. For its part, BSkyB has more than 5 million British subscribers in pay TV. The company has outmaneuvered cable rivals with "an unparalleled customer-service operation," says Robert B. Montgomery, managing director of consultants Kagan World Media Ltd. in London.

HUGE JUMP. Moreover, the skyrocketing price of programming rights, particularly in sports, makes it imperative for companies to share costs. With help from a Swiss ad agency, Kirch in early July agreed to pay $2.2 billion to broadcast World Cup Soccer matches in 2002 and 2006. That's a huge jump from $180 million for the 1998 rights.

Those spiraling costs, along with Bertelsmann's partnership woes, are behind its sudden decision to scale back its ambitious digital-TV plans for now. The idea is to offer a more modest menu of programs to the 1.2 million customers of Premiere, currently Germany's only pay-TV channel. There's a problem here, though: Kirch. In the early 1990s, Kirch briefly suspended hostilities with Bertelsmann to help set up Premiere in cooperation with his German rival and Canal Plus. Now, Kirch is using his 25% stake to block Bertelsmann's plans as much as possible. Bertelsmann executives are considering a lawsuit to try to break the logjam.

If Bertelsmann doesn't show more determination in digital TV, it may lose its remaining ally, Canal Plus, which ever since the CLT deal has had a chilly relationship with its old German ally. The French are betting big money on digital-TV in France, and they want the same commitment from their German partner. "The train is leaving the station," says one Canal Plus official. "If they miss it, the loss will be enormous." Kirch and Murdoch up, Bertelsmann down. The whole saga might make a good drama--for digital TV.