Kirch’s Digital TV Efforts in Germany May Be Back on Track

The star-crossed attempt by media magnate Leo Kirch to sell digital television to the huge, underdeveloped but potentially lucrative German television market is coming back on track after nearly a year of gloom, according to Kirch Group executives.

If Kirch succeeds in averting what looked like an impending financial crisis, it will be the latest in a lifelong string of good bets by the reclusive German media tycoon--but an ambiguous victory.

Kirch is one of the breed of free-flying, bet-the-store entrepreneurs who are accustomed to running their closely held empires without benefit of pesky boards or demanding shareholders. And now, Kirch will have to operate his German digital service--which was to be the crowning achievement of his 40-year career--in cooperation with his former archrival, Bertelsmann, and with the lumbering German telephone monopoly, Deutsche Telekom.

“It’s new for us to give something up,” a Kirch executive conceded.

The elephant-wedding of Kirch and Bertelsmann, two of Europe’s biggest media organizations, must still be approved by antitrust regulators in Brussels. And those officials are not known for their friendliness to media giants, having blocked an attempt by Kirch, Bertelsmann and the German telephone company to work together in 1994.

Still, top executives of the Kirch Group, normally an extremely low-profile bunch, took the unusual step of meeting with journalists this week to get the word out about their hoped-for turnaround.

The executives took pains to deny rumors circulating here that Kirch plans to renegotiate a multibillion-dollar series of film rights deals that he made last year with Columbia TriStar, Paramount Pictures Corp., Warner Bros. Inc., MCA Inc. and Walt Disney Co., to provide exclusive programming for his digital service, known as DF-1.

“The deals are expensive, no question about it,” an executive said. “But you can’t go back [to the studios] and say, ‘Oh, I’ve changed my mind. I don’t want to pay so much anymore.’ ”

The mega-deals, which all but shut Bertelsmann out of the market for big-title Hollywood films, intrigued industry onlookers. Although Hollywood has long known Kirch as an important buyer of German-language film rights, no one could imagine how even he could afford deals this big. The values have never been officially disclosed, but media reports have estimated the total at more than $6 billion over 10 years.

Curiosity about Kirch’s money sources turned into serious doubts about DF-1’s viability late last year, when it became clear that he was missing his projections for subscribers by a wide margin. Originally, Kirch hoped to have 200,000 subscribers by the end of 1996; by this spring, he didn’t even have 50,000.

It was, in large part, Kirch’s fight with Bertelsmann that turned off potential subscribers.

Bertelsmann already has its own successful pay TV channel in Germany--called Premiere--which boasts 1.5 million subscribers and a profit. Because Bertelsmann had the subscribers and Kirch had the content, a clash was perhaps inevitable--but Kirch executives now seem daunted by how long, nasty and damaging it turned out to be.

The warring centered on the decoder box to de-scramble the services’ pay TV signals--which company would set the technological standard for the German market and profit from licensing it. With Bertelsmann and Kirch seeking court orders against each other, starting rumors about each other and forming strategic alliances only to break them, potential customers were reluctant to buy Kirch’s pricey decoder, fearing they would waste their investment should Bertelsmann be the winner.

Under the new arrangement, Kirch and Bertelsmann would blend their holdings in DF-1 and Premiere, with Bertelsmann getting a one-third stake in the Kirch subsidiary that holds the rights to Kirch’s decoder technology.

Another third of that subsidiary would go to Deutsche Telekom, which, in exchange, would allow the digital providers access to the 17 million homes it has already wired for cable. This would make it substantially easier for Kirch and Bertelsmann to market their product.

Kirch executives said they have revised their forecasts and now hope to have 3 million subscribers--the break-even number--by the year 2001.