Vive le Pay TV : Europe Is Embracing Trend, and Top Supplier Hollywood Is Poised to Benefit

When Mike Tyson quickly finished off British boxer Frank Bruno in a heavyweight title bout earlier this month, there was little joy in this capital. Except that of media baron Rupert Murdoch.

Bruno lasted only three rounds. But early figures show Murdoch’s London-based pay television venture, British Sky Broadcasting, managed to lure more than half a million subscribers who paid up to $23 each to watch the lopsided contest in Britain’s first experiment with pay-per-view TV.

“It exceeded all our expectations,” said BSkyB Deputy Managing Director David Chance.

The encouraging response underscores a broader, more important message: Europe’s next television revolution--this time into pay TV--is well underway. Driven by a powerful combination of new digital technology, enormous capital, rich markets, government deregulation and the egos of men such as Murdoch, German media entrepreneur Leo Kirch and Italian businessman Silvio Berlusconi, pay television is about to engulf the Old World with a force that could dwarf the impact of the proliferation of commercial channels a decade ago.

“What we’re talking about is a historic shift,” Paul Kagan, the respected California-based media industry publisher and investor, said in a recent interview here.

“All these driving forces--technology, finance, the individuals, the cultural climate--have come together at the same time. Media competition, something that has been an evolution in the United States, is an explosion in Europe. Everything is being telescoped into a few short years.”

Others who track European media developments agree.

Alastair Smellie, an analyst at the London stock brokerage ABN Amro Hoare Govett, predicted Europe-wide growth rates exceeding 20% a year in pay TV subscriptions through the end of the decade, a development that would bring the service to one in five households on the Continent.

A study conducted by the securities firm Morgan Stanley in London charted a near-vertical growth curve, from a little more than 100 channels transmitting in Europe now to 1,800 by the end of 1998.

The implications of all this for U.S. TV and film companies are considerable since it both heightens competition for their offerings and dramatically expands a market that is already the largest foreign outlet for the U.S. entertainment industry.

Together with major sporting events and limited offerings of local producers, Hollywood productions are considered a “must” ingredient for any successful pay TV venture.

“There’s no question this is going to generate more outlets for American providers of entertainment,” Kagan said.

But some caution that even in the current favorable climate, pay TV is a hard sell in Europe, where consumers in many cases already pay $150 to $200 a year in license fees to support state-owned networks and about half that again to receive the newer commercial channels, many of which are available only via cable.

The quality of free programming in Europe is also considered to be above that in America.

“European subscribers are typically going to be those who love sports and good films,” Smellie said.

“Americans subscribe just to get a decent signal.”

Pay TV is certainly not new to Europe. Murdoch launched Sky Television in Britain six years ago, then eventually merged with competitor BSB to form BSkyB, a venture that today claims just more than 5 million subscribers. In France, Canal Plus began transmitting in 1984 and now commands just less than 5% of French viewers, while its sister company Canal Plus Espane has carved out a pay TV base in Spain.

But the launch of six European television satellites over a two-year period, coupled with the arrival of digital TV technology, which needs barely a tenth of the satellite capacity required to transmit an existing analog signal, would in effect transform pay TV in Europe, expanding its capacity, enriching its offerings and dramatically enhancing its attraction to viewers.

Sharp new growth is expected in Britain, France and Spain, whereas long-dormant, potentially lucrative markets, including Germany and Italy, are suddenly considered ripe and up for grabs.

Indeed, the jostling among media giants has already started.

Earlier this month, BSkyB and Canal Plus joined forces with Europe’s biggest media company, Bertelsmann Group, to form a blockbuster “strategic alliance” aimed at exploiting the region’s single largest market, Germany.

The group, which also includes the French media and advertising holding company Havas as a minority, nonvoting stakeholder, reportedly plans to launch a 100-channel digital assault in Germany by early fall.

Offerings are expected to include a group of theme channels, in addition to pay-per-view services and “near video on demand”: an array of top-quality films, each with several starting times during the course of an evening.

For Murdoch, the deal marked his long-anticipated arrival on the Continent.

His experience with pay TV in Britain, his access to the Twentieth Century Fox studio he owns, coupled with Bertelsmann’s corporate muscle and its 25% stake in the lone pay TV operator in Germany (known as Premiere) seemed to give the alliance an aura of the unstoppable even before it gets started.

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But cornering a multibillion-dollar market isn’t quite that easy.

For starters, the arrangement must be approved by the European Union’s antitrust authorities, who have rejected three other media alliances (in the Netherlands, Germany and Scandinavia) in the last two years.

“We will scrutinize this very closely,” said Willy Helin, spokesman for the EU Commission’s antitrust branch in Brussels.

Then there are powerful competitors.

Kirch, the publicity-shy German media mogul, for example, has ended up outside the Murdoch-Bertelsmann-Canal Plus alliance. Kirch already own stakes in German, Spanish, Italian and Swiss commercial TV channels, plus a slice of Premiere.

More important, however, he also controls vast amounts of film material, American and German, considered crucial to any pay TV venture that hopes to win customers with quality programming.

“A German [pay TV] service without the Kirch library is inconceivable,” said Guen Akyuz, an associate at London Economics, a business consultant.

But equally inconceivable is the long-term survival of both, at least as competitors. Most media industry observers are convinced there is only enough good viewing material to support one pay TV system per market.

The Sky-BSB battle for British viewers in the early 1990s, in which Sky at one point was said to be losing $16 million a week, and a fight underway for the Swedish market between FilmNet and a local holding company, Kinnevik, are cited as proof.

But programming content isn’t the only battlefield in the struggle for pay TV supremacy. To receive a digital signal, consumers must pay $600 to $700 for a decoder box; Kirch and the Swiss-South African group NetHold are pushing a different technology than the Murdoch-Bertelsmann-Canal Plus alliance.

It is a development that has led some to fear a replay of the videotape war between VHS and Betamax technologies in the 1980s.

Europe’s other major untapped national market is Italy, where soccer-mad and film-crazy Italians are seen as ideal targets for a digital pay TV service.

Here, Kirch has gone together with NetHold and Berlusconi’s Fininvest to upgrade their jointly owned pay TV service into the country’s first digital offering.

Some analysts believe that Murdoch and Canal Plus may also try the Italian market.

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NetHold spokesman Jean-Louis Erneux said his group’s service, Telepiu, expects to begin transmitting 20 channels later this summer using a digital signal and hopes to have 150,000 subscribers by the end of the year.

To help lure viewers, Telepiu earlier this month purchased pay TV and pay-per-view rights to live Italian soccer league coverage.

Starting with the new season in August, Telepiu will offer 17 matches simultaneously on pay-per-view basis.

“It will offer a chance for everyone to watch their favorite team live, even when they are playing away,” Erneux said.

With major sports events seen as vital for a successful pay TV venture, Telepiu is believed to have paid a considerable sum for the soccer rights. (Germany’s Premiere pay TV recently forked out $70 million for that country’s main soccer league coverage in the 1997-98 season, an amount exactly double what it paid to cover the current season.)

Whether the price of film rights will climb as sharply remains unclear, but few doubt that Europe will become a more attractive market than ever for American producers.

In a deal concluded just last month, Kirch is believed to have paid Columbia TriStar $1 billion for its film library and German rights to its productions over an undisclosed number of years.

“There will be an increase in prices, there’s no question of that,” said Mark Bielby, media analyst for Deutsche Morgan Grenfell in London.

“The real question for film studios is whether they will make more money in markets with a single dominant operator where prices are linked to subscriber numbers, or in one with two rich, credible competitors.”

Either way, Hollywood stands to cash in. “European television,” Kagan said, “is catching up fast.”