Universal Sued by Kirch Over Film Quantity, Quality

Kirch Group, the German television giant that threw huge sums of money at Hollywood three years ago to lock up film and TV rights for its fledgling digital pay-TV systems, on Wednesday sued Universal Studios Inc. for more than $2 billion, saying that it isn’t happy with what the studio is producing.

The lawsuit argues that Kirch was effectively duped because Universal isn’t the studio now that it was then. Kirch argues that it was led to believe Universal would continue making movies and TV shows “of the same quality and quantity” that it had been producing.

Instead, Kirch argues, Universal breached the deal by slashing its film output roughly in half, hasn’t produced the kind of entertainment with international appeal that it promised, negotiated a deal to turn over its TV business to mogul Barry Diller and shifted away from film and TV production toward the music business.

In addition to seeking money, the lawsuit, filed in Los Angeles County Superior Court by KirchMedia, seeks to break the contract.

A Universal spokeswoman said, “We’ve reviewed the complaint, and it is completely without merit.” She declined further comment.

But studio sources suggested that Kirch, which has been strapped for cash amid hefty start-up costs for its operations, is trying to get out of the deal because it is having second thoughts about the generous terms it gave Universal.

Companies Had Clashed Before

Bad blood between the two companies isn’t new. In 1997, Kirch, looking at big losses in launching its digital pay-TV channels, tried to merge its operation with a rival one backed by Germany’s Bertelsmann.

Universal angered Kirch by filing a complaint with the European Union and issuing public statements alleging that Kirch was trying to monopolize the German TV market, and wasn’t living up to its contracts.

In May 1998, the European Union rejected the merger, an action Kirch alleges forced it to absorb millions of dollars in losses and which substantially set back growth in its digital pay-TV business. In the lawsuit, Kirch argues that a clause in its deal with Universal allows it to break the contract because of the European Union decision.

The souring of the deal is a far cry from the one that was ballyhooed when it was announced in July 1996. At the time, both parties touted the agreement, with Universal estimating that it could reap more than $2.5 billion over 10 years.

Kirch’s deal with Universal was one of a number of high-profile agreements--others included ones with such companies as Sony Pictures Entertainment and Warner Bros.--made during a spending spree by the company that year. Kirch was in fierce competition with the Bertelsmann venture then. Overall, Kirch ended up cutting deals with six of eight major Hollywood distributors potentially worth as much as $6 billion over their lives.

But debt-laden Kirch ran into its own troubles, including huge start-up costs for its digital TV systems, a shortfall in subscribers and problems raising money and legal battles. Last week, British Sky Broadcasting Group, 40% owned by Rupert Murdoch’s News Corp., agreed to buy about one-fourth of Kirch’s pay-TV unit for $1.4 billion.

For its part, Universal’s film division has been erratic since the Kirch deal was made, releasing such duds as “Babe: Pig in the City” and “Meet Joe Black” last year. This year, the studio released such hits as “Notting Hill,” “American Pie” and “The Mummy,” but also had such disappointments as “Mystery Men” and “EdTv.” Like other studios trying to contain spiraling costs, Universal has been releasing fewer films.

Strategy Shift by Universal Parent

In addition, Universal parent Seagram Co. has been clearly shifting its strategy toward the music business, especially since acquiring PolyGram one year ago for $10.4 billion.

In the lawsuit, Kirch said that it believed that Universal would make available about 20 to 30 films a year, but instead is providing only a fraction of that.

Kirch alleges that Universal made available just 13 films in 1995 and 11 each from 1996 and 1997. Kirch said Universal plans to provide just 11 films from last year, and 10 from this year.

Typically, there is a lengthy lag time between the time that films are released into theaters and when they are available to foreign pay-TV services.

In television, Kirch argues, the transfer of the assets to Diller’s control has resulted in a push for more programs aimed at U.S. audiences that have no international appeal, including wrestling, talk shows and sitcoms.