The Battle for the German TV Screen

Tough rivals train their guns on John Malone

Liberty Media Corp. (LMC.A ) Chairman John C. Malone knew how to make political allies when he toured Germany in mid-November to push his plans to build up the nation's cable television network. The Englewood, (Colo.)-based cable czar dangled a promise of 10,000 new jobs in a country with rising unemployment and elections approaching next year. Sure enough, Malone won an audience with power brokers such as Bavarian Prime Minister Edmund Stoiber and even Chancellor Gerhard Schroder. "He really knows his business," says Bernd Schiphorst, media adviser to the city of Berlin, who lunched with Malone and Berlin Mayor Klaus Wowereit at the Berlin Capital Club, a tony rooftop restaurant.

Malone has some powerful adversaries as well. One of the most notable: Thomas Middelhoff, CEO of German media giant Bertelsmann, which controls RTL Group, Germany's biggest broadcaster. Associates say that Malone and Middelhoff have a cordial relationship, but business is business. RTL Group, partly owned by British media giant Pearson PLC (PSO ), is making an all-out effort to block Liberty Media from getting regulatory approval for plans to buy Deutsche Telekom's cable assets and upgrade the system to offer hundreds of channels and Internet access.

HIGH STAKES. If Malone loses this showdown, he faces a possibly fatal setback to his plans to become the Continent's biggest cable operator. Besides the Deutsche Telekom assets, Malone is poised to gain ownership of a majority stake in UnitedGlobalCom Inc. (UCOMN ), parent company of Amsterdam-based United Pan-Europe Communications (UPC). The deal requires approval by the Securities & Exchange Commission, and, due to its complicated financial structure, Malone won't have direct control over UPC's 7 million European subscribers. But it gives him a greater platform to boost distribution of his own programming holdings, which include the Discovery Channel and stakes in AOL Time Warner (AOL ) and Rupert Murdoch's News Corp. (NWS ) Malone would also get huge economies of scale buying equipment such as set-top boxes.

But the plan inspires fear among Middelhoff and other German broadcasters, who greatly depend on cable to distribute their programs. They worry Malone will favor programming he owns, including a stake in USA Networks (USAI ), and push rivals' programs way down the remote control. "There will be somebody controlling the cable, the access, and the content," says Didier Bellens, CEO of RTL Group, which owns all or part of five commercial TV stations in Germany.

Indeed, if the UPC and Deutsche Telekom (DT ) deals both get approved, Malone would have a grip on over two-thirds of Germany's cable market of 18.2 million subscribers. It doesn't make competitors feel any better that Liberty is interested in a stake in Premiere, Germany's only major pay-TV venture. It is controlled by Munich-based Kirch Group and has rights to a lot of sports programming. "He's an outsider coming in, and he's taking too much," says Paul O'Donovan, a senior analyst at Gartner Group in London. To top it off, Richard J. Callahan--another Colorado-based cable magnate--has acquired many of the German cable assets that Malone doesn't own. Malone and Callahan have close ties, which adds to the Germans' fears.

The combatants are lining up outside Germany's Cartel Office in Bonn, which must approve Malone's $4.9 billion purchase of the Deutsche Telekom network. A decision is scheduled for Jan. 7. With his powerful allies and big bucks, Malone can probably win approval. The question is what the terms may be. Cartel Office officials indicate that they would like Liberty to upgrade the cable network so it can also carry telephone voice traffic and so expand German consumers' phone options. But that would double or triple the cost for Liberty, which plans to spend just $13 per home to allow digital channels on upgraded cable.

Detractors paint Malone as an unscrupulous outsider who will jack up fees and break his promises. Liberty officials privately counter that RTL's campaign is mostly for show and that, all rhetoric aside, Bertelsmann isn't as hostile as it makes out. Maybe, but RTL Group did just cancel a contract with the Berlin office of Kohtes Klewes after the PR firm agreed to represent Liberty. If Malone gets the regulatory nod, RTL and other competitors can appeal in court, which could delay Liberty for more precious months. With so much at stake, this fight could get nasty.

By Jack Ewing, with Christine Tierney in Frankfurt, and Ronald Grover in Los Angeles

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