Mogul’s Sleigh Ride to Power Has Hit Quite a Few Bumps

Last year, when Leo Kirch closed film and television deals in Southern California worth a mind-boggling $6 billion to $10 billion, the German media tycoon looked like Santa Claus to a surprised entertainment industry.

He grabbed up film rights from nearly all the major studios, paying top dollar, to try to position himself at the front of the pack as the crowded, potentially lucrative German market--the biggest television market in Europe--entered the pay-TV age.

Today, in terms of a product, Kirch is, indeed, in a class by himself in Germany: He’s the only one so far to offer a 24-channel, movies-to-golf, full-fledged digital-TV service here.

But a series of setbacks--a big shortfall in subscribers, difficulty in raising money and legal battles with the German phone monopoly and a key competitor--have raised questions about whether, after a singularly successful 40-year run in the German entertainment industry, Kirch has finally overextended himself.

Did Santa Claus give away too much in Southern California entertainment markets last year in an overambitious attempt to control Germany’s infant pay-TV sector?

Certainly not, say executives at Kirch Group headquarters here in suburban Munich.

“We knew exactly what we were doing,” says Jan Mojta, Kirch Group general manager for programming. “All our financing assumptions took into account that we would go through a certain [transitional] period. There is no doubt about it that the market is here. The market may develop later than we assumed, but it will develop.”

Kirch, 70, a reclusive mogul famous in Germany for his vast library of films, began attracting attention in America last year when he rapidly signed mega-deals with Columbia TriStar, Paramount Pictures, Warner Bros., MCA and Walt Disney Co. The U.S. programming is intended to fill out the menu on DF-1.

But now that Kirch owns the content, the process of developing a system to exploit it has been fraught with difficulties.

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So far, he has fallen far short of plans to sign up 200,000 subscribers for his DF-1 platform; he can count only about 30,000. That’s a thin base from which to extract the $1 billion in yearly revenue it will ultimately take to make all those costly U.S. rights acquisitions pay off, experts say.

Meanwhile, sources of additional money have proved elusive. In March, Rupert Murdoch declined to exercise an option to acquire a 49% stake in DF-1.

Then, later that month, an expected bank loan fell apart amid accusations that the German government lender was making a sweetheart deal with Kirch, Germany’s biggest, most controversial media baron. Kirch executives say the charges were unfounded.

Kirch also has been waging a bizarre legal battle with his pay-TV archrival, Premiere, of which he himself owns 25%. And he is embroiled in tough negotiations with, of all things, the phone company.

Why the phone company? Although digital television can be delivered by satellite, Kirch’s plans call for delivering DF-1 via cable as well, since about half of all German households have cable and see little point in bothering with satellite dishes. That means striking a deal with Deutsche Telekom, because the big telephone monopoly controls all the cables running under Germany’s streets.

And so far, Deutsche Telekom has proved an expensive bride to woo. Its executives seem to think that if Kirch has all that money to spend on U.S. entertainment, then he must have a few billion dollars to drop on cable transmission rights, too.

So far, Kirch has been unwilling or unable to meet Telekom’s terms, although Dieter Hahn, Kirch Group general manager for sports and communications, says the negotiations are becoming “more constructive.”

“I think there are better chances for an agreement by the middle of this year,” Hahn says.

Fewer signs of momentum can be seen in Kirch Group’s relations with Premiere. The single-channel pay-TV service is controlled by Bertelsmann--Germany’s other huge media concern--and Canal Plus of France.

Premiere doesn’t own anything like Kirch’s vast film-and-television-rights holdings; it buys most of its content from Kirch. But if subscriber rolls are the measure of success in German pay-TV, then Premiere has cleaned Kirch’s clock: It boasts 1.5 million subscribers, to Kirch’s 30,000.

The Kirch Group has long hoped it could gain control over Premiere, using it as a top-quality feature-film channel to top off the DF-1 menu. Premiere, meanwhile, sees benefits in being a Kirch ally. But it doesn’t see why it should enter any deal as an underdog, what with its successes in the subscriber department.

When the two pay-TV operations aren’t busy trying to negotiate an alliance, they’re fighting. In January, Premiere went to court and won an order banning Kirch from marketing DF-1 anywhere in Germany except his home state, Bavaria. That order has since been lifted.

Kirch, meanwhile, counterattacked from his minority-shareholder position at Premiere by calling for the dismissal of Premiere managing director Bernd Kundrun, charging he is biased in favor of Bertelsmann.

The legal wrangling is “very annoying,” Hahn says. “It has taken up a lot of time and resources that we would have liked to devote to our business.”

The unresolved tensions with Premiere, the unexplained loss of Murdoch and the general climate of secrecy in which Kirch conducts his financial affairs all have led some observers to conclude that Kirch must be in big trouble.

Things came to a head last month, when word leaked out that a Bavarian state-owned bank--Landesanstalt fuer Aufbaufinanzierung, or LFA--was participating in a consortium that was preparing a reported $600-million loan to Kirch.

Since most of LFA’s business consists of making below-market-rate loans to needy small businesses in Bavaria, local politicians--and Premiere--pounced on the news and cried scandal. Since when was the state development bank supposed to be nurturing a “needy” multimillionaire such as Kirch as he tries to build a pay-TV monopoly?

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Kirch executives say this interpretation of events is unfair. LFA does make some regular business loans, Hahn says, in addition to subsidized help for the small and the weak. And in any case, the state bank was invited into the consortium last October, and not just last month after the Murdoch investment fell through.

“This was not to resolve a liquidity crisis,” Hahn says. “The purpose of this loan was the financing of the core activities of the Kirch Group,” not DF-1. “We have a very healthy number of bank relationships, and we think we can raise the credits we need in the future through them.”

Hahn added that the loan is now being renegotiated with a revamped consortium--minus LFA--but he declined to reveal the amount.

Programming manager Mojta concedes that these are lean times at DF-1 but says that since Kirch is the sole owner, with no shareholders breathing down his neck, he is willing to withstand a few losing quarters. He estimated it would take about four years before Kirch’s big pay-TV gamble pays off, but says he has no doubts that it eventually will.

“In two years or four years, it’s just a matter of time,” Mojta says.