01 May 2004

The German cable TV business has always been an oxymoron: it may be cable, but the business is dire.

The reasons are historic. Deutsche Telekom built the country's cable infrastructure and although many firms ended up retailing the service, DT kept a death grip on the pipes. Once this was finally unwound, outsiders like John Malone's Liberty Media saw the potential to build a robust competitor to DT. But local regulators baulked. Concerned that the Liberty strategy of owning both content and pipes and access to the subscriber would be a business model too far, they nixed the project. Meanwhile, Callahan Associates, now Cable Partners, found its ambitious plans to build a triple-play of telephony, broadband and TV in North Rhine-Westphalia demanded much larger cash reserves, not to mention patience, than they had anticipated.

Recently, a consolidation of German cable has begun, led by Kabel Deutschland, a group owned by a consortium of banks and private equity players including Goldman Sachs, Apax Partners and Providence Equity Partners. Kabel has bought Ish, the former Callahan property in North-Rhine Westphalia, as well as an operator in Baden Wuerttemberg and one in Hessen for €2.7bn. The deal is still subject to regulatory approval, although Roland Steindorf, CEO of Kabel Deutschland said in early April that he has no intention of controlling content on the pipes, a thinly veiled reference to the faux pas that tripped up Liberty in 2003.

But does this strategy really make sense as the pay-TV business moves inexorably from being a simple transmission pipe for TV to being an interactive avenue with betting, shopping, on-demand programming, not to mention advanced telecom services like wireless networking around the home?

It is worth noting that although the purchase has made Kabel a whole lot bigger, now serving some 17m cable households in Germany, it has limited control over the end customer. Again this is a consequence of the history of cable in Germany. There exist different levels of cable TV operators and Kabel is buying up Level 3 operators, i.e. the ones that control the pipes that lie along the streets but do not go all the way into the houses. These latter are called Level 4 operators. Liberty was of course eager to buy Level 4 properties to harness the power that comes with "owning the customer".

Kabel's stated plan is to convince the Level 4 operators (many of them housing associations) to agree to raise consumer prices (currently as low as €14 a year!) in exchange for new and better TV and internet services. This sounds good, but talk to anyone who has worked in the German market and they will tell you that the relationship between the Level 4 and the Level 3 operators is, at best, wary and at worst, downright hostile.

In another part of the forest, Telecolumbus, another large German cable operator, is raising more debt through a bond issue to the tune of some €475m, which is slated for the refinance of existing debt for its cable operations, providing cable services to some 2.6m cable TV homes via (Level 4) housing estates. Telecolumbus is owned by BC Partners, a UK buyout group, which purchased it last year for some €510m.

The good news is the private equity guys are willing to step into German cable. The unknown is whether it will work.

The competition is alive and looking increasingly fit, from the recently resuscitated satellite pay-TV operator Premiere to Deutsche Telekom, which may not be as aggressive in its DSL rollout as its peer in France with the aptly-named Ma Ligne TV but knows that future growth is in its T-Online business and robust DSL penetration in Germany. (Ma Ligne TV may mean "my line" TV in French, but if you are in cable, it could also be read as "malign" TV, and the malicious threat is growing). DSL is becoming more cost-effective for telcos to roll out everyday. For telecom companies, which are seeing their bulwark fixed line revenues eroded quarter by quarter, mobile, broadband and DSL are the life preservers.