Can Murdoch succeed in the market where Kirch failed

If the News Corp. execs Rupert Murdoch sent to rescue loss-making paybox Sky Deutschland could speak German, one of the first words they might want to learn is Kapitalvernichtung.

The “destruction of capital assets” has been plaguing those at the helm of Sky Deutschland since media mogul Leo Kirch bowed the platform as Premiere 19 years ago.

One highly touted manager after another has discovered the ugly truth that Teutons are a frugal species loathe to fork over anything for pay TV when they already pay mandatory pubcaster fees of nearly $30 ($41) a month for dozens of high quality, largely ad-free channels.

But Sky Deutschland’s new topper, Brian Sullivan, an American who will take the reigns April 1, is optimistic that a turnaround is in the cards after an expensive relaunch in 2009 and a newfound emphasis on quality.

“The underlying quality of our service is the critical requirement to build this business,” Sullivan tells Variety. “We have the best sports in the German-speaking market, the most comprehensive HD offering, we’ve got all the blockbuster movies in HD, ad free and most of them with original language track. Quality is the critical differentiator and a powerful selling point. It’s having an impact among both existing and new subscribers.”

Kirch launched Premiere, the first Teuton paybox, in 1991 and it has been hemorrhaging red ink ever since, contributing to the fall of the Kirch Group in 2002, in what was then the biggest bankruptcy in German history.

News Corp. had been an investor in Premiere at the time and lost €$1.5 billion on the deal.

Five years later, Murdoch again began buying up shares in Premiere, then controlled by investment group Permira.

Last year, News Corp. amassed a 45.42% stake and, in July, spent $140 million rebranding and marketing the platform as Sky Deutschland.

It hasn’t had an auspicious start. Sky Deutschland’s 2009 operating loss jumped to $355 million from $78 million in 2008 on revenues that dropped to €$1.2 billion from $1.3 billion. Execs put the losses down to higher programming costs for Bundesliga rights, higher marketing costs and declining advertising revenues plus higher write-downs and costs associated with the rebranding.

The platform, which refrained from offering 2010 projections when reporting its results recently, added only 71,000 subscribers last year for a total of 2.47 million, falling well short of the target set by outgoing topper Mark Williams.

Williams, an Australian who did wonders for Murdoch’s Sky Italia before stumbling over the tightwad Teutons, lasted just 18 monthsat Sky Deutschland.

When asked why News Corp.’s feevees have worked in the U.K. and Italy but not in Germany, Sullivan says, “Pay TV in Germany has had a number of false starts, and until Sky there hasn’t been a comprehensive lineup of premium programming across all genres backed by a customer-focused approach to service and delivery.”

He points to the one silver lining from the otherwise desultory 2009 results — the fact that average revenues per user have gone up steadily in the past year.

“The reaction from the market since the launch of Sky has demonstrated that Germans and Austrians are willing to pay for better TV — and our marketing is now communicating the breadth and quality of the Sky service,” says Sullivan, 48, who is the fourth topper since the company’s flotation in 2005.

Sky has faced withering competition from telco giant Deutsche Telekom and regional cable outfits that have joined the game alongside feevee IPTV and cable services.

Even Sky’s showcase Bundesliga soccer, long the main draw, has lost some of its luster. Telekom’s IPTV “Liga Total” has siphoned away about 1 million soccer fans who pay a fraction of Sky Deutschland’s prices for the right to watch Germany’s professional soccer matches live.

Sky Deutschland had nevertheless been confident it could attract between 3 million and 3.4 million subscribers by the end of 2010 to reach break-even. But net gains have been only modest, due in part to a high churn rate.

Sky Deutschland has since lowered its target to 2.8 million to 3 million subs. “Break-even will be pushed back into 2011. We believe this is the right decision for the business and will reinforce medium term growth,” Sullivan says.

Peter-Thilo Hasler, an analyst at independent corporate finance advisory firm Viscardi, has heard it all before from the company, which is based in the Munich suburb of Unterfoehring.

“Sullivan is most likely going to suffer the same fate as his three predecessors,” Hasler tells Variety. “The company’s been around for 20 years and, except for a couple of quarters, it hasn’t even been close

to being profitable. Instead it’s been massively in the red, and the situation has worsened in the last two years. The cash-burn rate is just phenomenal.”

Hasler points to Germany’s meager 14% pay TV penetration in Germany, Europe’s largest market, and says the simple truth is: “Germany is different than every other country when it comes to pay TV. Germans can watch more than 30 high-quality, commercial-free networks for free. Why pay for more?”

But Sullivan argues important indicators are pointing upward.

“I’m especially pleased that the Sky brand reached an awareness level above 70% at the end of 2009,” he says when asked about the success of the relaunch. “Our customers have embraced the new program lineup and are using our service much more extensively.”

Sullivan says the aggregate viewership for Bundesliga soccer is up 79% this season from last — and that the numbers for film and entertainment are also higher.

There are bright spots for the company, which last year secured Bundesliga rights for another four years. It has pushed through price increases that raised the average revenue per user to $37.50 in the fourth quarter from $32.60 a year earlier. Company execs expect this to rise to more than $40.30 per user this quarter.

They remain optimistic that there is potential for a delayed impact of the 2009 marketing efforts and that the push into HD, where it has nine channels now and will soon have 13, will boost subscriber momentum.

On March 14, Sky aired Germany’s first live 3D broadcast — a Bundesliga match between Bayer Leverkusen and Hamburg SV — to select audiences in Munich.

Undoubtedly Sullivan, who is moving from the U.K. to Unterfoehring, will be studying the German market as intensely as the German language. And he’ll be doing all he can to avoid the term his predecessors heard a little too soon — “Auf Wiedersehen.”

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