The downs and ups of German pay-TV.

Within this year, both major German commercial TV network groups, ProSieben and RTL, intend to expand their activities into pay-TV. It's not likely that they will launch their own digital platforms to compete with the existing, and now well-accepted, Premiere and KDG platforms. It is more likely that they will launch individual pay channels that will be distributed on the existing platforms. ProSieben CEO Guillaume de Posch has indicated the KDG cable bouquet to be the likely carrier for his projects.

Last year, ProSieben failed to negotiate with Premiere to take over three specialized channels, which are not considered part of Premiere's core competence. The ProSieben strategy was to diversify by loosening its dependence of advertising revenues, including launching its international sales unit Seven One International. It will not, however, acquire the remaining half of Euviva Media, that is held by Barry Diller's HSE24, and which operates, in Germany, the interactive game channel 9Live and travel channel sonnenklar.tv.

As a result of its success story over the last three years, Premiere is now an established premium platform, and is unlikely to be negatively affected by these proposed new pay-TV channels.

Premiere's intended sale of its specialized channels is part of the overall consolidation strategy that resulted in "the most amazing turnaround in European industrial history," to quote the digital pay-TV platform's recent advertising campaign accompanying its March IPO in Germany (see chart on previous page). Three years ago, Premiere was debt-ridden with heavy operating losses on an annual basis; when they weren't declining, subscription numbers couldn't surpass three million subscribers. In the following year, the multi-billion dollar 10-year output deals with the Hollywood majors were successfully renegotiated, with prices cut on an average of 50 percent. Other costs were cut by the same degree.

Premiere's other business activities not directly linked to the subscriber and content business (like the development and marketing of set-top-boxes) were sold. Not affected were old contracts, like the favorable cable carriage with former cable monopolist Deutsche Telekom, which expires in 2007, that granted Premiere cable carriage in all German systems without allowing anyone to access its client base.

Additionally, Premiere was able to maintain good relationships with the new cable operators and, while Premiere is targeting the premium segment, the cable operators--with their newly launched digital bouquets--target the general audiences.

Aggressive subscriber marketing led to increasing subscriber figures and put Premiere in the black for the first time in 2004.

Premiere CEO Georg Kofler, who at one point controlled a 20 percent stake in the company, is considered the most successful TV executive in Germany. He began his career as office chief to Leo Kirch in the late '80s. He took over management of a small, almost bankrupt TV venture, Eureka (which Kirch's son Thomas had acquired), and transformed it into the successful ProSieben network--which, for many years, was the only German commercial TV venture to show profits--while RTL and others were paying their dues.

Kofler was considered one of Kirch's crown princes but lost the battle against Dieter Hahn, who is said to have forced him out of his ProSieben chair. Afterwards, Kofler successfully managed and expanded the first German home shopping network, HOT (now called HSE24 and partly owned by Barry Diller), which he has founded within the ProSieben Group, and was involved in launching 9Live, the first German interactive game TV venture.

It was Kirch who made Kofler CEO of Germany's then only pay-TV platform, Premiere, which was on the brink of insolvency. Within three years, Kofler not only prevented Premiere from the fate of other parts of Kirch's group, but, in 2004, the company was able to show profits for the first time. Today, Kofler has taken Premiere--which now boasts over 3.2 million subscribers--to the German stock exchange. On the first day of listing at the German stock market, Premiere stock was 12 times over-subscribed.

Even though Premiere now holds a solid subscriber base, compared to other countries, pay-TV penetration in Germany is still low. The revenue-persubscriber number is also low in comparison to other countries.