Will Teutonic pay TV ever pay off?

Premiere cuts operating costs, increases subscriptions

BERLIN — Can better financials and savvier marketing turn Germany’s only pay TV operator into a going concern?

While media analysts are still skeptical that a paybox will ever catch on in this country — over-the-air stations air hundreds of movies a year — new management at Premiere is energetically taking up the challenge.

To begin with, no-nonsense exec George Kofler recently wielded the threat of bankruptcy to persuade Hollywood majors to renegotiate megabuck output deals with the paybox.

Kofler also used the grim reaper ax to slash about 1,000 jobs from Premiere’s bloated workforce of 2,400 — an astonishing bloodletting in Germany, where strict job protection laws make it extremely difficult to lay off staff.

“We now have the healthiest cost structure of all the pay TV channels in Europe,” Kofler boasted recently after surprising analysts and Hollywood suppliers with strong first-quarter earnings data.

The figures showed operating losses slashed to e9 million ($10 million) from $196 million a year earlier, while sales jumped 30% to $264 million. Subscriptions were also up 10% to 2.6 million while the cancellation rate was nearly halved to 12%.

Kofler also forecast the number of subscribers would rise to 2.9 million by the end of 2003, and that would lead the company to the long-elusive land of profitability by the first quarter of next year.

Rosy scenarios and hopelessly unrealistic growth targets were always part of Premiere during the shadowy Kirch era, when financial data were treated like state secrets.

But Kofler has clearly put the long-struggling channel that was once losing some $ 2.2 million each day on a firm footing thanks in no small part to the renegotiated Hollywood output deals that cleared the way for the rescue by Permira.

The Frankfurt-based equity investor acquired a 65% stake for $159 million, with Kofler taking 10% himself and creditor banks getting about 24%.

“They’re on the right track, but I still am not entirely convinced that pay TV has a future in Germany,” says Stefan Weiss, a media analyst at WestLB in London. “I was very negative and now I’m slightly less skeptical. That Kofler has made so much headway so quickly in cutting costs shows how lousy the cost structure was under Kirch.”

Using the leverage of the looming bankruptcy, Kofler fought hard to win deep discounts from Hollywood majors on the deals signed by Kirch in the no-holds-barred era of the mid-1990s.

Disney, Warner, Sony, MGM, Paramount, DreamWorks, Universal and Fox were all forced to make concessions or risk not seeing any payments at all. Hollywood execs said the reductions in payments were on the order of 15% to 20%; German sources put the figure much higher, at 50% to 60% less than the going rate in the earlier output deals.

Florian Leinauer, a media analyst at Helaba Trust in Frankfurt, says the cost-cutting gave Premiere a new lease on life but wonders whether the company would ever win over enough subscribers.

“Premiere was clearly paying far too much for the subscription base it had, and Kofler used the leverage of the insolvency effectively to renegotiate better deals,” Leinauer notes. “The costs are now under control, but the subscription growth is still less than inspiring.”

Unlike Kirch, Kofler has bullets in his gun to back up his forecast that the subscription level will rise to 2.9 million by the end of the year.

Aside from the marketing gimmicks that have swept aside the somewhat elitist aura of the company in the past, the former Pro-7 exec has declared war on the estimated 1.2 million pirates who watch the pay TV channel without paying a cent: Coming up this year will be the rollout of a software upgrade.

Pay TV has never made money in Germany, which is western Europe’s largest and wealthiest nation.

Unable to match the success of Britain’s BSkyB, which has more than twice as many subs, Premiere has struggled in a market cluttered with 30 free-to-air stations and the reluctance of German consumers to pay more than the mandatory $17 per month fee required for the pubcasters.

Kofler attacks those German shortcomings with tantalizing prices, starting as low as $5.50 per month to lure newcomers, aggressive marketing and improved programming.

If nothing else, Kofler has brought an open style of business to the company that was once so secretive. A recent report revealing the popularity of each segment showed most viewers tuned into Premiere’s seven film channels, just ahead of the sports programs.

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