Overview
Sky Deutschland operates a digital pay-TV platform in Germany and Austria. Germany has
37.4 million TV households, while Austria has 3.5 million TV households. Of these 41.0 million TV households, 48.8% receive their TV signals via cable, 44.1% via satellite, 5.4% via terrestrial
transmissions and 1.8% via Internet Protocol TV (“IPTV”). (Source: SES-ASTRA Satellite Monitor TNS Infratest, 2009).
Whilst the viewing share of TV in Germany has remained stable over recent years, TV consumption and market volume have increased. Between 2000 and 2009, average TV consumption in Germany increased by 22 minutes per day (from 190 minutes per day to 212 minutes per day), despite a parallel increase in internet usage. (Source: AGF/GfK Fernsehforschung; TV Scope). Between 2004 and 2008, consumer expenditures on TV increased at a compound annual growth rate (“CAGR”) of 1.8%, whereas expenditures on other media, such as books, newspapers and magazines increased at lower CAGRs or even decreased, with expenditures on these media experiencing CAGRs of 1.2%, 1.0% and (0.5)%, respectively. In absolute figures, annual TV expenditures per household, excluding fees for public broadcasting, grew fromA145 in 2004 to A167 in 2008. However, given the current economic uncertainty, there can be no assurance that TV expenditures will continue to grow at historical rates or at all (see “Risk Factors—General Risks Related to Sky Deutschland’s Business—
The slow and uncertain recovery from the economic downturn may substantially reduce the demand for pay-TV and adversely affect Sky Deutschland’s subscriber recruitment, subscriber retention and ARPU growth targets”). By comparison, over the same time period, expenditures in the related cinema and DVD/Blu-ray market decreased at a CAGR of (2.2)% as a result of falling DVD prices and low visitor numbers between 2005 and 2008. (Source: German Entertainment and Media Outlook 2009-2013 “Die Entwicklung des deutschen Unterhaltungs- und Medienmarktes”, PricewaterhouseCoopers Aktiengesellschaft Wirtschaftspru¨fungsgesellschaft, Frankfurt am Main, October 2009).
In common with other European markets, consumers in Germany and Austria are starting to put more emphasis on digital TV, high definition television (“HDTV”) and interactive TV services, and there has been a high take-up of HDTV-ready TV sets. However, penetration rates of these services are still relatively low in Germany and Austria. With a combined total digital TV penetration rate of approximately 57.5%, the German and Austrian markets lag significantly behind the United
Kingdom and Ireland, which have a combined penetration rate of approximately 87.4%. The combined pay-TV penetration rate in Germany and Austria, at approximately 11.0%, is also relatively low. (Source: SES-ASTRA Satellite Monitor TNS Infratest, 2009, · Screen Digest 2010).
The following table shows key market data relating to the prevalence of pay-TV in Germany, Austria and other key European markets as of December 31, 2009:
Germany &
Austria
United Kingdom &
Ireland France Italy
TV-households total (million) . . . 41.0 26.9 24.6 23.9 Digital households total (million) . . . 23.6 23.6 17.3 17.1 Digital penetration rate (in percent) . . . 57.5 87.4 71.6 71.6 Pay-TV households (million) . . . 4.5 14.3 10.3 9.2 Pay-TV penetration (in percent) . . . 11.0 53.2 42.0 38.4
(Source: SES-ASTRA Satellite Monitor TNS Infratest, 2009, · Screen Digest 2010).
The table above suggests that the German and Austrian pay-TV markets are still underdeveloped in comparison to other European pay-TV markets, particularly the United Kingdom and Ireland, France and Italy, and, as a result, may provide untapped growth potential for pay-TV providers such as Sky Deutschland. However, it is also conceivable that TV viewers in Germany and Austria have to date been more reluctant to embrace pay-TV than their peers in these countries as a result of the fact that the free-TV offering in Germany and Austria is broader and of a higher quality than in other
European markets, and most of it is available via all distribution platforms.
Sky Deutschland therefore believes that exclusive premium content is key to any pay-TV operator’s success. Sky Deutschland’s offering includes much exclusive premium content, such as movies and
live sports broadcasts. However, some of the pay-TV content offered by Sky Deutschland is also available on free-TV stations. For example, two German free-TV stations are entitled to show summaries of the matches of the first and second divisions of the German football league (Fußball-Bundesliga) on a time-delayed basis. Other premium sporting events, e.g., Formula One races, are broadcast live both on Sky Deutschland and on free-TV. The same may apply to future broadcastings of movies, TV series, sporting events and other content, including content broadcast in HDTV quality. Sky Deutschland expects the degree of competition in the provision of HDTV to increase significantly. Similarly, Sky Deutschland expects the degree of competition from other distribution platforms, such as IPTV, to increase considerably as broadband availability becomes more
widespread and bandwidth increases. Furthermore, competitors are increasingly seeking to replicate other parts of Sky Deutschland’s product offering, such as its Sky+ personal video recorder (“PVR”) system. Several cable network operators have introduced their own such systems.
Growing Importance of Premium Content
As more pay-TV providers emerge, Sky Deutschland believes that the importance of exclusive premium content is likely to increase further as providers attempt to differentiate themselves from their competitors. At the same time, TV content broadcasters are increasingly looking to offer their content as part of premium pay-TV services so as to maximize revenues and diversify their risk, reducing exposure to more volatile advertising revenues in the free-TV market. Private free-TV broadcasters are increasingly encrypting some of their content to make it available through pay-TV systems. An example is the RTL group’s RTL Crime and RTL Passion channels. Similarly, some TV distribution platform operators, such as cable network operators, are focusing on up-selling pay-TV content to their customers as well as enhanced functions associated therewith, such as “video on demand” (“VoD”) and interactive TV, as part of their “triple-play” offerings, whereby pay-TV is bundled with other multimedia and telecommunications services.
Premium content also drives technological changes. As consumers learn of the benefits to be gained from watching premium movies, sporting events and other content in HDTV quality, they will increasingly demand the same of all content. Similarly, it is expected that once consumers
experience being able to record and watch Sky Deutschland’s premium content whenever they want via the Sky+ service, others will also seek to purchase PVR systems. The fact that premium content is the driving force behind technological change is also evident in the case of Deutsche Telekom, whose distribution of the live broadcasts of the first and second divisions of the German football league (Fußball-Bundesliga) over IPTV pursuant to its IPTV rights is driving the take-up of its IPTV service.
TV Content Broadcasters
TV programming is broadcast to households by TV content broadcasters. There are many TV content broadcasters in Germany and Austria, operating in a highly competitive market. These TV content broadcasters face intense competition, both from each other and from providers of other entertainment options, such as DVDs, and can be divided into two broad categories: free-TV broadcasters and pay-TV broadcasters.
Free-TV Broadcasters and Distributors
The German and Austrian free-TV market is characterized by a large offering of free-TV channels provided by a number of free-TV content broadcasters, which can be divided into public
broadcasters and private broadcasters. Both public and private free-TV broadcasters broadcast their programming by cable, satellite, digital terrestrial reception via antenna (“DTT”) and, to a lesser extent, IPTV. Sky Deutschland’s principal competitors are the German and Austrian free-TV broadcasters. Market statistics show that the penetration rate of pay-TV in Germany and Austria is significantly lower than in other major European TV markets, such as the United Kingdom and Ireland, France or Italy, which may be because of a reluctance on the part of consumers in Germany and Austria to embrace pay-TV as a result of the free-TV offering in Germany and Austria being of a higher quality than in other European markets and available over all distribution platforms.
Public free-TV broadcasters
Public free-TV broadcasters are obligated to provide basic educational and cultural audio-visual information to the public. In addition, they show a range of live sports and highlights of other popular sporting events. They primarily finance themselves through statutory radio and TV broadcasting fees and, to a lesser extent, through TV advertisements. In Germany, there are two major public TV broadcasters, ARD (the so-called “Erste” and various “third” programs) and ZDF, which also operate a number of other channels, including 3Sat, Phoenix, ARTE, and Ki.Ka. These public channels had a combined audience share of 42.9% of the German free-TV market at
December 31, 2009 (Source: http://www.agf.de/daten/zuschauermarkt/marktanteile). In Austria, there is one public free-TV broadcaster, ORF, which operates two main TV channels with a total audience share of about 39.2% of the Austrian free-TV market as of the same date (Source: www.agtt.at). In Germany in 2009, radio and TV broadcasting fees per household amounted toA17.98 per month and the total amount collected was approximatelyA7.6 billion (Source: GEZ Gescha¨ftsbericht 2009).
Public free-TV content broadcasters distribute their services in analog, digital standard definition and HDTV quality, and via web-TV through so-called “Mediathek” services. ARD, ZDF and ARTE launched their HDTV channels with the start of the 2010 winter Olympic Games.
Private free-TV broadcasters
Private free-TV broadcasters primarily finance themselves through advertising. The leading private free-TV broadcasters in Germany are the RTL group, which operates several channels, including RTL, RTL 2, Super-RTL, VOX and n-tv, and the ProSiebenSat.1 group, which also operates several channels, including Sat.1, ProSieben, kabel eins, N24 and 9Live. There are also a number of smaller private free-TV broadcasters, operating a number of channels, including Tele 5, Sport1 (formerly DSF), Eurosport, NICK, DMAX, VIVA and Comedy Central. These private channels had a combined audience share of 52.5% of the German free-TV market at December 31, 2009 (Source:
http://www.agf.de/daten/zuschauermarkt/marktanteile). In addition, there are approximately 25 smaller private national free-TV content broadcasters in Germany that compete in this market.
The leading Austrian private free-TV content broadcasters are ATV, Puls4 and Austria 9, which had a combined audience share of approximately 6.2% of the Austrian free-TV market as of
December 31, 2009 (Source: www.agtt.at). There is also a significant spill-over of German free-TV channels (both public and private) into the Austrian market.
In Germany, the overall net turnover for TV advertising was approximatelyA3.640 billion in 2009 (Source: ZAW-Jahrbuch “Werbung in Deutschland 2010”), of whichA253.24 million was earned by the public broadcasters (Source: ZAW-Jahrbuch, “Werbung in Deutschland 2010”).
Private free-TV content broadcasters offer their content in analog and digital standard definition.
They are also actively introducing HDTV services and new channels. The broadcasting of RTL HD and VOX HD started in November 2009 and the ProSiebenSat.1 Group has started offering its three full channels ProSieben, Sat.1 and kabel eins in HDTV quality. There is also the HD+ service, via which satellite users are able to watch RTL HD, Sat.1 HD, ProSieben HD, VOX HD and kabel eins HD without payment for the first year and thereafter forA50 per year.
Pay-TV and Video on Demand (VoD) broadcasters and distributors
Mainly as a result of the range and quality of the free-TV channels available, the German and Austrian pay-TV markets are still underdeveloped in comparison to other European pay-TV markets, particularly the United Kingdom and Ireland, France and Italy. There are relatively few pay-TV broadcasters in Germany and Austria with most pay-TV offerings being provided by pay-TV content distributors that distribute third-party content.
Pay-TV broadcasters
Sky Deutschland is the leading pay-TV content broadcaster and distributor in Germany and Austria and the only pay-TV content broadcaster and distributor whose programming is available via several distribution platforms, other pay-TV content distributors being limited to their own infrastructure.
For a long time, Sky Deutschland was the only pay-TV content broadcaster and distributor in the German market. Now, however, Sky Deutschland competes with several other pay-TV content distributors, of which the most important are cable network operators. In the summer of 2006, a second pay-TV content distributor, Unitymedia, entered the market, distributing pay-TV content via
its subsidiary, Arena. At December 31, 2009, Unitymedia had approximately 491,000 pay-TV subscribers (Source: www.unitymedia.de, press release of March 17, 2010). However, on June 15, 2010, Unitymedia announced that it would discontinue distributing pay-TV via Arena on
September 30, 2010 in order to concentrate on the distribution of its “3play” offerings. In addition, there are currently two other significant cable pay-TV content distributors in Germany, KDG with approximately 817,000 pay-TV subscribers at March 31, 2010 (Source: Company report, dated June 10, 2010) and KBW with approximately 200,000 pay-TV subscribers (Source: KBW press release of April 30, 2010). Pay-TV content is also distributed by Eutelsat, an operator of a satellite distribution platform, as a wholesale product called “visAvision”, which includes international channels and is distributed to cable network operators for onward distribution to their customers.
Deutsche Telekom also distributes pay-TV content over its DSL network through its “Entertain”
package. In respect of its live broadcasts of all matches of the first and second divisions of the German football league (Fußball-Bundesliga), Sky Deutschland competes directly with Deutsche Telekom. The latter acquired the IPTV rights for the live broadcasts of all matches of the first and second divisions of the German football league (Fußball-Bundesliga) through the 2012/2013 season, and currently distributes them to both TVs and mobile devices through its “LIGA total!” package, which is also available in HDTV quality.
In the Austrian market, there are approximately 170 cable pay-TV distributors. Most are small regional companies with only a few hundred customers. The two largest cable network operators are UPC and LIWEST. Their basic package is comparable to the packages offered by German cable network operators. In addition, however, they give subscribers the option to extend their selection with attractive pay-TV channels, e.g., MGM, 13th Street and SciFi, for an additional fee. UPC offers all Sky Deutschland packages with the exception of Sky Welt.
Video on Demand (VoD) distributors
Sky Deutschland also competes with a variety of providers of VoD services. This is particularly true of Sky Deutschland’s pay-per-view offering, which competes with the corresponding offerings of Unitymedia, KDG, KBW and various other vendors, such as the ProSiebenSat.1 group (maxdome), the RTL group (RTLnow), ARD (ARD Mediathek) and ZDF (ZDF Mediathek). These platforms offer their content either free of charge or on a pay-per-view basis. In addition, several internet providers active in Germany, e.g., Apple (iTunes) or Deutsche Telekom (Videoload), offer
pay-per-view services to their customers. The leading operator in this segment is Deutsche Telekom with its “Entertain” package, which also offers a VoD service. “Over-the-top” distributors, such as maxdome, offer VoD content over the broadband network of a third party and may also offer set-top boxes for the display of TV content streamed over the internet on a TV set. In Austria, Telekom Austria AG (“Telekom Austria”) and UPC also offer pay-per-view services. Since Sky Deutschland typically does not hold exclusive rights for pay-per-view broadcasts, competing vendors are able to offer their customers movies in direct competition with Sky Deutschland.
Other distributors (Home video and DVD)
In addition, Sky Deutschland competes with a variety of alternative distribution channels for movies, such as DVD sales and rentals, websites, internet service providers, cable network operators,
pay-per-view services and other entertainment options available to consumers. Even though some of these other entertainment options may still suffer from a limited market acceptance, they may become more important in the future. While Sky Deutschland competes in some of these markets, many of them offer lower margins than Sky Deutschland’s core business, and there can be no assurance that any profits Sky Deutschland generates in these markets will be sufficient to offset any associated margin shortfall in its core business.
Sky Deutschland’s movie selections compete with retail and online home video/DVD services. In 2009, approximately 55.2% of all German TV households had a video recorder, 64.0% had a DVD player and 19.6% had a DVD recorder, whereby there may be some overlap between those with DVD players and DVD recorders (Source: Media Perspektiven Basisdaten – Daten zur
Mediensituation in Deutschland 2009). Movies usually become available on video/DVD up to six months before they may be broadcast on a pay-per-view basis; the regular pay-TV broadcasting window opens even later. In recent years, many studios have shortened the video/DVD window, and Sky Deutschland expects this trend to continue.
TV Distribution Platforms
Television content is distributed in Germany and Austria over various distribution platforms, including cable, satellite and DTT systems, as well as through broadband internet access
technologies such as VDSL or ADSL2+. In both Germany and Austria, cable and satellite are the most important distribution platforms. Cable was the leading television content distribution platform in Germany as of December 31, 2009, with approximately 18.6 million, or 49.6%, of households watching cable TV. Satellite was used by approximately 16.2 million, or 43.3%, of households, followed by DTT, with approximately 2.0 million, or 5.3% of households, and IPTV with approximately 0.7 million, or 1.7%, of households. (Source: SES-ASTRA Satellite Monitor TNS Infratest, 2009). In Austria, satellite is the leading distribution platform as of December 31, 2009, used by approximately 52.3% of households, followed by cable, which is used by 39.8% of households, DTT, which is used by 5.3% of households and IPTV, which is used was 2.6% of households. (Source: SES-ASTRA Satellite Monitor TNS Infratest, 2009). IPTV has only recently been introduced in Germany. The main operator is Deutsche Telekom, which launched its service in 2006. In Austria, Telekom Austria launched its IPTV platform, Aon Digital, in 2006. Other IPTV operators in Austria include EDV-System and Pitztalnet. As broadband penetration rates and bandwidth increase, it is likely that distribution of TV content via the internet will become increasingly prevalent.
The following table illustrates the development of the percentage of German and Austrian
households that watch TV primarily via cable, satellite, DTT and IPTV for the period from 2005 to 2009. The total percentage exceeds 100% because some households use more than one distribution platform.
Germany 2005 2006 2007 2008 2009
(in %)
Cable . . . 50.5 49.8 48.4 49.0 49.6 Satellite . . . 43.8 45.0 45.2 43.0 43.3 Terrestrial/DTT . . . 5.7 5.2 6.3 7.3 5.3 IPTV . . . — 0.1 0.1 0.7 1.7
Austria 2005 2006 2007 2008 2009
(in %)
Cable . . . 37.0 37.0 36.5 38.6 39.8 Satellite . . . 50.6 52.0 55.3 53.4 52.3 Terrestrial/DTT . . . 12.4 11.0 7.2 6.9 5.3 IPTV . . . — — 1.0 1.2 2.6
(Source: SES-ASTRA Satellite Monitor TNS Infratest, 2009).
Across these distribution platforms, 57.5% of German and Austrian television households receive and use digital programming. (Source: SES-ASTRA Satellite Monitor TNS Infratest, 2009). To receive digital TV signals, consumers require either a set-top box or an integrated digital TV set.
Analog terrestrial TV has been switched off and completely replaced by DTT in Germany. TV signals broadcast via satellite are mostly digital, with digital usage at 75.0%. This is significantly higher than for cable, for which digital usage is 34.0%. (Source: SES-ASTRA Satellite Monitor TNS Infratest, 2009). This is due, among other factors, to the fact that the sale of analog satellite
equipment ceased several years ago. However, cable networks are now almost fully digitized with digital signals distributed in parallel to analog ones so that cable users may decide whether to watch digital or analog TV.
Cable
There are approximately 20.0 million German and Austrian households with a cable connection (Source: SES-ASTRA Satellite Monitor TNS Infratest, End of Year 2009).
The structure of the German cable network has been strongly influenced by historical factors, the most important of which was the former monopoly on telecommunication services held by Deutsche Telekom and its predecessors until 1996. This monopoly permitted Deutsche Telekom to control the build-out of the cable network in Germany. As a result, the cable network in Germany was divided
The structure of the German cable network has been strongly influenced by historical factors, the most important of which was the former monopoly on telecommunication services held by Deutsche Telekom and its predecessors until 1996. This monopoly permitted Deutsche Telekom to control the build-out of the cable network in Germany. As a result, the cable network in Germany was divided