01 April 2008

The German pay-TV market has always over-promised and under-delivered. Several times it has delivered financial body-blows to those unfortunate enought to be involved in it.

But has the time finally come for pay-TV in Germany to make good? James Murdoch seems to think so, buying a 19.9% stake in Premiere, the country's satellite pay-TV company - his first big move since leaving the CEO job at BSkyB earlier this year to run all of News Corp's European and Asian businesses. What does he know that we don't?

Of course News Corp has been here before. In 1999 News Corp-backed UK pay-TV operator BSkyB's then CEO Tony Ball bought 22% of Premiere, which was controlled at the time by German media mogul Leo Kirch. Ball - and BSkyB - came to regret the purchase. Sky wrote off the investment - nearly £1bn (€1.3bn) - in 2002.

Leo Kirch's own star faded soon after. Premiere itself went bankrupt and was subsequently taken over by private equity and creditor banks. The company achieved something of a renaissance under CEO Georg Kofler. The new owners floated the company on the German exchange in the spring of 2005, but before the year was over the pay-TV operator lost the crucial rights to air Bundesliga football matches.

As it turned out, the new owner of the rights to German football games, cable operator Unitymedia, could find neither the resources nor the infrastructure to make the best use of those rights. So an agreement was struck with its erstwhile pay-TV rival Premiere. Under the terms of the deal, the satellite broadcaster was allowed to sell the games to its subscribers through the 2008-09 season. In return Unity took an equity stake in Premiere. However, the German competition authority did not much like the teaming up of the biggest satellite pay-TV operator (Premiere) with one of the biggest owners of cable TV systems (Unitymedia) in this way, and ruled that Unity had to divest its Premiere stake.

Enter the ever-opportunistic News Corp (remember it was James Murdoch, while still CEO of Sky, who purchased nearly 20% of ITV, effectively blocking a takeover bid by its UK rival Virgin Media for the UK's largest commercial broadcaster).

Clearly, Murdoch sees some upside potential in Germany. He bought 14.58% of Premiere for €287m from Unitymedia (at €17.50 cash per share) in early January. By late February he had increased News Corp's stake to 19.9%.

Has the situation changed enough to make pay-TV work in a market that possesses the largest number of free stations in Europe in a very competitive commercial TV landscape?

As Europe's largest TV market, Germany still has a huge allure. And adding a German pay-TV operation would fill out News Corp's European footprint. The media giant already has a 39% stake in BSkyB, with more than 8.8m subscribers, and 100% ownership of Sky Italia, with more than four million. Premiere currently only has 3.65m subscribers, so there is a lot of potential for growth in what is Europe's largest market.

News Corp may have moved first, but there are others interested in Premiere. French media giant Vivendi, owner of Canal Plus, Spanish pay-TV operator Sogecable, the US's Comcast, German cable operator Kabel Deutschland, German publisher Axel Springer, German broadcaster ProSiebenSat.1 Media and John Malone's Liberty Media have all been rumoured to be interested. With so many potential bidders, an offer valued at above €18 per share may be required to buy majority control.

Murdoch may move to secure Premiere through a full takeover bid, or at least take a majority stake (although News Corp effectively controls BSkyB with only 39%). In any case, adding Premiere to its Sky businesses would give News Corp over 16m pay-TV subscribers in Europe.

The problem remains how to crack the German market. The shortest route is to get control of the live broadcast rights to top-tier football, the winning formula for Sky in the UK and for Sky Italia.

But in a twist that makes a long-term observer of the Germany pay-TV market like me shake her head in wonder, the man with whom Premiere's management will have to negotiate for access to live Bundesliga games starting with the 2009-10 season is none other than Leo Kirch. At 81, Kirch is currently enjoying a bit of comeback, having secured the Bundesliga rights after promising the German football league revenues of at least €3bn.

Visions of Murdoch and Kirch at the negotiating table? Well, the younger man could have more stamina, but Leo Kirch has the wisdom of experience. Maybe if they combined their talents they could create the winning formula that German pay-TV has waited so long to deliver.