01 Oct 1998

Germany's cable TV business is big and full of potential. The national network owned by Deutsche Telekom (DT) passes about 26 million homes and 17 million of these subscribe. Most of the network is underground which discourages tampering. The German system is largely digital and the programmers who use it to reach subscribers pay DT for the privilege. True, DT only directly connects about six million of the country's subscribers, but the other firms that collect fees from cable customers also pay DT for the programming they take off of the national DT cable network.

It looks like DT has a pretty good business. But looks can be deceiving. Its cable TV business is actually losing about DM1 billion (£410 million) a year. Meanwhile, the competition authority in Brussels has reservations about Germany's largest phone operator also controlling the national cable network. In December 1997, the EC approved a proposal to force telephone giants like DT to legally separate their cable TV assets. And this Summer DT was told by the EC that it must divide and sell the majority of its cable TV assets if it pens a digital TV deal with Premiere, Germany's pay-TV operator co-owned by the Kirch Group and Bertlesmann. Then in September DT lost an appeal against local regulator RBTP to raise its cable TV rates.

The planned 15 per cent price hike would have been the first cable rate increase for five years in Germany, and it would have bumped the monthly retail cost of cable from DM 22.5 (£7.90) to DM 25.9 (£9.11).

No wonder DT's CEO Ron Sommer has put the system on the sale block. He can't make it make money. Not with regulated rates, an invested cost in the billions of marks and a tight rein from competition watchdogs over how DT gets into the content side of the business. Sommer also has to be careful about how he expands the cable service beyond TV. Creating more revenue streams on cable by adding Internet access, data, and interactive services would push up revenues, but the new services would also put the cable net into direct competition with DT's core telephone network.

So who are the possible buyers? Sommer acknowledges that there is "a long list" of interested parties and that bankers are already involved on both sides. But potential suitors say the price tag that DT has stuck to its cables is too high, and would effectively cripple an investor.

"These nets are not being offered at market rates," says Dick Callahan, who used to run US West International, the former name of MediaOne International.

"They are being offered at invested rates and that's two to three times too high." Callahan, who is building a cable network in Spain with backing from GE Capital, says that modern cable nets should be built for about $1,000 (£595) a line, whereas he estimates that DT built its cable nets for three times that, and notes "I can't make Mr Sommer an offer around what he has invested because he invested more than market."

Sommer won't say how much he wants for the cable business, but he dismisses accusations of inflated prices as "bargaining" by potential suitors. DT's financial statements put a book value for the network at DM8 billion (£3 billion). Sommer believes that any buyer would have to spend an additional DM5 billion (£1.76 billion) to add two-way capability to the cable lines.

Sommer is willing to sell the network, but an unreasonable price could help delay a sale and thereby delay more competition to DT in Germany.

And some observers note that DT's plan to divide the cable network into six regional entities and then sell all or partial stakes, would effectively cut what is a national network into parts, making it a less effective tool to compete with DT's national telephone network.

In the face of this kind of criticism, Sommer told an audience at the recent Wall Street Journal CEO Summit in London, "If you put your money where your mouth is, I'm willing to sell it to you."

But MediaOne International, a unit of MediaOne Group (Denver, Colorado) also understands the economics of upgrading cable networks to carry voice, faxes and two-way services. It currently provides phone over cable-TV lines in five European countries - but not in Germany, Europe's biggest market. Sommer says he could sell the cable net outright or, if the partner is "in content", he might keep a stake.

So what other companies might be interested? Well, Microsoft began a trial of its Web TV service on DT's cable system this Summer and Bill Gates has shown he likes cable through his equity stake in Comcast, a big US cable operator. And then there's Time Warner - president Richard Parsons said recently that although he finds the DT cable sale "interesting" it is a "major investment" which TW is loath to do right now in Europe.

Whether it's carved up among a number of investors or bought as a whole, the German cable network is attracting a lot of attention. Don't forget it was only a few months ago that AT&T agreed to pay $48 billion (£16.9 billion) for TCI, which counts 10.5 million direct subscribers and another ten million subs through affiliates.