For Canal Plus, It's Tough Being On Top
On Sept. 1, the battle for Europe's couch potatoes is going to get hot. French media giant Canal Plus aims to expand its early lead in Europe's fledgling digital satellite pay-TV market by launching a slew of new programming. With 112 satellite channels and services, soccer fans will be able to watch every top-league match, children will be able to download video games, and the unemployed can scan Europewide job listings on the "Tomorrow" channel.
For Canal Plus Chief Executive Pierre Lescure, it's a big gamble. Already No.1 in European pay-TV with 10 million customers in 10 countries, Canal Plus aims to dominate the digital satellite market, where customers can get extra channels, sparkling reception, and interactive services via a satellite dish and decoder box. Canal Plus is already out front, with 640,000 digital subscribers. That has encouraged Time Warner Inc. to enter negotiations for a 10% stake in Canalsatellite, Lescure's digital satellite operation.
But making digital pay-TV profitable will be an uphill struggle. For the company to break even on its investments in digital service by the end of 1998, subscriber rates must soar. And new competition is putting pressure on margins. In Spain, its second-biggest market, Canal Plus faces a bitter political battle over its exclusive rights to air big-league soccer. Analysts wonder whether Lescure can manage the many challenges in his far-reaching empire while building a new core business out of digital pay-TV. "They need to keep their foot on the accelerator," says Terry Povey, media analyst at James Capel & Co. in London.
In March, Lescure made his boldest gamble on digital pay-TV, buying troubled, Amsterdam-based NetHold for $1.2 billion. The purchase brought Canal Plus 1.6 million new subscribers--all potential converts to digital. Canal Plus clinched the deal quickly last fall, in part so U.S. rival DirecTV would not snap up NetHold and jump into the European market. But given NetHold's fiscal 1996-97 losses of $3 billion after mammoth startup and development costs, analysts fear Lescure paid too much. To avoid being dragged down by its acquisition, Canal Plus must quickly turn around NetHold's money-losing operations in Scandinavia, Holland, Belgium, and Italy.
Puffing on a cigar in his Paris office overlooking the Seine, Lescure insists he is on track to return Canal Plus to profitability in 1999. Although he says the company will be near breakeven this year, Morgan Stanley & Co. is estimating a loss of $10 million. But Canal Plus's technology, programming, and geographic reach give it "the weapons to remain the leader," says Lescure.
Analysts are less sanguine. Over the past year, the company's stock fell roughly 30%, to $165, while France's CAC index rose 39%. Besides the rich price Lescure paid for NetHold, investors worry that he faces high hurdles in Italy and Spain, where governments are intervening to protect local players. EU competition ministers in Brussels already have ordered Spain to change a law that made Canal Plus's decoders illegal. But "even if they come out on the right side of the regulation in Spain, it may take two years to resolve," warns one London analyst.
Lescure's toughest task is making good on a huge investment in Italy's Telepiu--the tarnished jewel in NetHold's crown. Although market researchers say Italy is Europe's hottest potential market for digital pay-TV, Telepiu had net losses of $190 million last year. Over the past three months, Michel Thoulouze, Canal Plus executive vice-president for international operations, has slashed $200 million from annual operating costs at Telepiu, cut staffing by 38%, and redesigned programming. And Lescure is aggressively trying to boost subscriptions. Telepiu forced customers to buy $1,000 decoder boxes at electronics stores. Under Canal Plus, Telepiu rents out the boxes for just $8 a month, included in a $37 monthly fee. "The Italians love this offer," says Thoulouze.
Meanwhile, Canal Plus must defend its home front. In France, new competitors unleashed heavy promotions this year. Rival Television Pay Service (TPS) claims it has snared 175,000 subscriptions since its launch in April by offering four months of free service. Canal Plus countered with free satellite dishes for new customers this fall. And Lescure and Thoulouze think superior programming will help them maintain their two-thirds market share.
"CHAPTER TWO." A broader challenge, some media experts say, is that the European market for digital pay-TV could develop more slowly than Lescure thinks. "Besides pay-per-view, I don't see what digital gives besides more channels," says Paul Styles, head of broadcasting consulting at KPMG in London.
Lescure and Thoulouze aim to fill those extra channels with premium, high-margin services. Thoulouze is developing specialty stations such as Season, which focuses entirely on hunting and fishing. And this fall, Canal Plus will offer a high-speed connection to the Internet, plus interactive shopping. KPMG's Styles thinks interactive services may pay off sooner than programming.
Even Lescure admits that the real competition may not have emerged yet: big telecom operators and the likes of Microsoft Corp. and Oracle Corp., which want to put a combination TV-computer in every home. "Today is chapter two" for pay-TV, he says. As a pioneer in a rough-and-tumble new market, Canal Plus may have investors biting their nails in the months ahead. But Lescure vows his empire will strike back.