Europe's Pay TV.

How and Why Pay TV Biz Has Been Partitioned 

French domestic politics will determine the future of pay TV in Europe. The spotlight of European pay TV has shifted back to France whereas, in the recent past, it was focused first on the U.K. (with BSkyB) and then on Germany (with Premiere on DF1).

A misstep by the terrestrial TV network TF1 disrupted the delicate balance of pay TV in Europe when it acquired 9 percent of Pathe, the French multimedia conglomerate controlled by Jerome Seydoux.

The TF1 action triggered a swift reaction from Canal Plus, which went after a larger chunk of Pathe through Vivendi, Canal Plus' parent company.

Human, business and political factors have all contributed to the escalation of the hostilities. Relations between TF1's President Patrick Le Lay and Canal Plus' President Pierre Lescure were never cordial, partly because Canal Plus has socialist leanings (it was created by Francois Mitterrand) and TF1 is a neo-Gaullist creature (having been spearheaded by Jacques Chirac). Lescure, a former TV journalist, is the son of a communist and he's entrenched on the political left. Michel Thoulouze, Canal Plus' top executive and head of its international activities, is also a former TV journalist from the left.

TF1 made the additional mistake of not maneuvering for control of Pathe once they made the move. Indeed, Pathe occupies a strategic position: it owns 17 percent of Rupert Murdoch's BSkyB and 20 percent of Canal Plus' digital pay TV service Canal Satellite.

By stopping TF1's ambitions towards Pathe, Canal Plus shielded Canal Satellite from TF1 (which operates TPS, a competing digital satellite service) and, in the process, became Murdoch's partner in BSkyB.

Contrary to what has been written, Lescure pursued Pathe to protect Canal Plus from TF1, not to deter Murdoch from establishing a pay TV service in Italy (which would have competed with its Tele Piu), The Pathe transactions gave Lescure the added bonus of hastening Murdoch's flight from Italy and isolating TF1. (TF1 was also Murdoch's partner in the Italian pay TV project).

Controlled by Jean-Marie Messier, Vivendi owns 34 percent of Canal Plus and, now, 19.8 percent of Pathe. Canal Plus has 10 percent of Pathe on its own.

Furthermore, Vivendi -- through its 20 percent share of Audiofina -- has 50 percent of CLT-UFA. In Germany, CLT-UFA owns 24.9 percent of Murdoch's Vox and 37.5 percent of Leo Kirch's Premiere. Albert Frere, Audiofina's main investor, recently sold his 25 percent stake in TPS to Suez Lyonnaise des Eaux, reportedly because he no longer believes in the feasibility of TPS. However, Suez Lyonnaise des Eaux, which also owns 35.76 percent of M6, is controlled by Frere himself. According to a CLT-UFA executive, "Frere is out of TPS without being out." CLT-UFA, too, has sold its stake in TPS, but remains one of its shareholders through shares in M6.

Here the chess board gets mixed up even further. CLT-UFA owns 39.89 percent of French terrestrial TV M6, which owns 25 percent of TPS. Therefore, by controlling CLT-UFA, Messier (with the help of Frere, who owns 34.46 percent of M6) would place Canal Plus into the role of a majority stakeholder in TPS. TF1, with only its 25 percent share, would occupy a minority position. At that point TPS would become part of the digital package offered by Canal Satellite, thus squashing all of TF TF1's forays into the European audiovisual arena.

At this point there is contradicting information. One report calls for an agreement between Audiofina's Albert Frere, and Vivendi's Jean-Marie Messier for the Vivendi purchase of Audiofina's shares in CLT-UFA, the audiovisual group co-owned by Frere and Messier along with Bertelsmann. Frere did not approve Premiere's budget and would like to see CLT-UFA get rid of this unprofitable pay TV service.

The second scenario calls for CLT-UFA to sell a large portion of its shares in Premiere to Leo Kirch.

Either scenario would have to allow Murdoch to enter the pay TV business in Germany, as this is the only way to pull Murdoch away from other parts of Europe.

It is clear that, for the future, European pay TV service will be divided between BSkyB and Canal Plus; the first will have operations in England and Germany, while the second will control the rest of Europe.

In Germany, Murdoch will be able to solidify his presence with the help of Frere and Messier, both of whom will be maneuvering for an agreement among Vox, Premiere and DF 1.

European antitrust regulations will not allow any type of consolidation between Canal Plus and BSkyB, and a co-management arrangement between Murdoch and Lescure is out of the question. The only possible solution would be a "non-aggression pact," especially since the EU antitrust commissioner Karel van Miert can't force any of these players to enter a market.

According to a Canal Plus executive, a non-aggression pact is important because in Europe pay TV is a very expensive business which doesn't reach more than 10 percent of all European households, nor enough to become an object of contention.

Two elements could change this scenario, though. The French political equilibrium is the first element. Up until now, Vivendi's Messier has good relations with members in both wings of the French Parliament, but the political right has been litigious and President Jacques Chirac is paying for it. However, this doesn't necessarily mean that Messier will move to the left. In fact, it is said that the Lescure-Thoulouze era will last two more years at the most, and then the entire Canal Plus management team will be reshaped.

The second element that could derail the plan is technology. American studios, together with cable TV operators and computer companies in Europe and in the U.S., are promoting a digital TV standard based on the Internet protocol. This would eliminate local pay TV platforms in favor of a universal television system that could be operated from anywhere. Such a scenario seems more realistic to Bertelsmann's chief, Thomas Middelhoff, who predicted that current pay TV platforms will be replaced by an Internet-protocol type system.

                            CAST OF CHARACTERS
AUDIOFINA:               Holding company controlled by Albert Frere in
                         in which Messier owns 19.6 percent.
BERTELSMANN:             German conglomerate in the publishing and
                         audiovisual fields headed by Thomas Middelhoff.
BOLLORE, VINCENT:        Head of Bollore Group and Messier's friend. By
                         selling his 19.6 percent of Pathe to Vivendi, he
                         checkmated TF1.
BSK YB:                  Created in 1983,  this U.K. pay TV now has a
                         capitalization of $14 billion. Murdoch owns
                         39.8 percent. It is the second largest pay TV
                         service in Europe, with seven million subscribers.
                         It earned $447 million in 1998. In Germany, BSkyB
                         owns 49 percent of Vox.
CANAL PLUS:              Created in 1984 as a terrestrial pay TV service
                         service by friends (and partners) of Francois
                         Mitterrand. Currently, it has a stock value
                         of $9.3 billion. It operates in France, Spain,
                         Scandinavia, Poland, Benelux and Italy in both
                         the along and digital arenas. In 1998, it lost
                         $100 million.
CANAL SATELLITE:         Created in 1995, it is Canal Plus' satellite
                         digital pay TV service in France. It has one
                         million subs and it is 70 percent owned by Canal
                         Plus and 20 percent by Pathe.
CLT-UFA:                 Audiovisual group owned by BWTV (Bertelsmann) and
                         Audiofina.
ELECTROFINA:             Holding group owned by Frere that controls 51.3
                         percent of Audiofina.
FRERE, ALBERT:           Belgian financer, majority shareholder of Suez
                         Lyonnaise des Eaux and Audiofina (after Messier
                         sold his shares in Electrofina).
KIRCH, LEO:              Co-owner of Premiere and Vox in Germany. Sole
                         owner of digital pay TV satellite service DF1.
                         Launched in 1996 with 350,000 subs.
LE LAY, PATRICK:         President of TF1 and Lescure's nemesis.
LESCURE, PIERRE:         A socialist, former TV journalist, president of
                         Canal Plus since 1994 and Le Lay's nemesis.
LE CINQ:                 Defunct French terrestrial TV network created by
                         Silvio Berlusconi, who also owns Italy's Canale 5
                         and Spain's Tele 5. It was sacrificed to make room
                         for Canal Plus.
M6:                      Terrestrial Tv network owned by CLT-UFA (39.89
                         percent), Suez Lyonnaise des Eaux (35.76 percent)
                         and others.
MESSIER, JEAN-MARIE:     Chairman of Vivendi and canal Plus.
MURDOCH, RUPERT:         Australian-born and U.S. naturalized media mogul.
                         He controls BSkyB in Europe and Fox Studios in the
                         U.S. Politically "uncommitted."
PATHE:                   French multimedia group controlled by Jerome
                         Seydoux. Pathe owns leftist daily Liberation.
                         Pathe's other major shareholders are Vivendi
                         (19.8 percent), Canal Pluz (10 percent) and
                         and TF1 (5 percent, reduced from 9 percent).
PREMIERE:                German pay TV service co-owned by CLT-UFA (37.5
                         percent) and Leo Kirch (62.5 percent) with 1.7
                         million subs.
SEYDOUX, JEROME:         Former head of berlusconi's Le Cinq. Majority
                         shareholder of Pathe (purchased from Giancarlo
                         Parretti) and president of BSkyB. Brother Nicolas
                         controls Gaumont.
SUEZ LYONNAISE DES EAUX: Holding group controlled by Albert Frere.
TF1:                     Former French public broadcaster, privatized under
                         the guidance of rightist Jacques Chirac. It
                         competes with the socialistic Canal Plus.
THOULOUZE, MICHEL:       Former TV journalist, now heads Canal Plus'
                         international expansion: TPS, TF1's digital
                         satellite pay-TV service with 500,000 subs.
                         It is owned by TF1 (25 percent), M6 (25 percent),
                         Suez Lyonnaise des Eaux (25 percent) and France
                         Television-France Telecom (25 percent).
VIVENDI:                 Holding company formed with the 1998 merger of
                         Generale des Eaux and Havas, controlled by
                         Jean-Marie Messier. With its 34 percent, it is
                         Canal Plus' main shareholder.