After 44 years in the media business, Leo Kirch has finally managed to make his long term dream come true: becoming the biggest player in Germany’s competitive free-to-air television market. By combining Pro Sieben Media, which operates TV channels Pro 7, Kabel 1 and N24 with Sat 1, the second most-watched commercial television broadcaster after RTL, the future Pro Sieben Sat 1 Media will be Germany’s largest television company, relegating Bertelsmann/CLT-UFA with its RTL channel family into second place.

The move considerably strengthens the market position of the Kirch-owned TV channels. They can now profit from large synergies. For example N24, the 24-hour news service Pro 7 launched in January, will provide the channels with tailored news broadcasts, ending the need for separate news departments for each service. The plan has been critisised by media union IG Medien as “a further loss of diversity of opinion and information”. Secondly, the channels can now place a stronger focus on their target audience by limiting overlapping programme scheduling, a strategy which the members of the RTL channel family have already been profiting from for several years. For example Sat 1 and Pro 7 will finally be able to avoid the simultaneous screening of expensive Hollywood blockbusters as has happened so often in the past.

By differentiating their audiences, the channels of the new TV group will aim for more distinct audience sectors, making it easier to sell their commercial slots to an advertising industry which preferes niches over an anonymous mass audience.

It is expected that Pro 7 will stay the main channel for young viewers between 14 and 29 years by screening premium movies and popular US series like The Simpsons with tabloid- style current affairs magazines and some inhouse produced comedy shows such as TV Total in between. General interest channel Sat 1 will focus on a slightly older audience consisting of adults aged from the mid-20s to 40 years by showing more family-orientated programmes. It is expected that Kabel 1 will continue in its current role as a rerun channel showing movies and series from the large Kirch stock and the Sat 1 archive, targeting an older audience of viewers aged over 40.

It has also been confirmed that the Internet presences of the TV channels involved will be combined into a large portal with a strong focus on multimedia services that also includes the existing Internet services operated by Kirch New Media such as the large sports offer http://www.sport1.de. Urs Rohner, currently chairman of Pro Sieben Media and designated chairman of the new TV conglomerate, said that the unification of Sat 1 and Pro 7 lays the foundation stone for future growth and lasting extension of the market position. “All participants are convinced that the company value of all companies involved will considerably increase by the combination”. Rohner outlined that the yearly potential of the synergies created amounts to more than DM200 million. “Together we can considerably increase the efficiency of all channels,” he explained. According to Rohner, the advantages are based on combining the marketing of the advertising airtime of all channels, joint productions and the joint acquisition and exploitation of programme rights.

The merger was made possible after Leo Kirch took over a majority share in Pro Sieben Media in October 1999 from his son Thomas Kirch. For years there had been arguments over whether Pro 7 should in any case be counted amongst Kirch senior’s media holdings. Immediately after the sale, speculation began that Kirch might combine his existing commercial TV broadcaster Sat 1 with the Pro 7 channels to create a powerful channel family that equals the RTL conglomerate. Kirch Media, Kirch-Group’s free-to-air television holding, took over Thomas Kirch’s 58.4 per cent stake in Pro Sieben in return for a 7.31 per cent stake in Kirch Media. The media watchdogs and the cartel authority did not block the deal as they had in their various previous decisions always rated the channels of Leo and Thomas Kirch as one unit.

The combination of Pro Sieben group with Sat 1 valued the Pro Sieben share at 72 per cent and Sat 1 28 per cent. The foundation capital amounts to E194,486,486,00. The main shareholder in Pro Sieben Sat 1 Media AG is Kirch Media with 88.52 per cent. Publishing house Axel Springer Verlag will hold 11.48 per cent. Currently, Kirch owns 59 per cent in Sat 1, Springer holds 41 per cent. Rewe, currently a 41.6 per cent shareholder in Pro Sieben, won’t directly form part of the new TV company, instead the large supermarket chain will become a 6 per cent shareholder in Kirch Media. The unification process is expected to be completed the end of this year, provided that the media authorities and cartell office approve it, which is widely expected. In 1999, the assets of Pro Sieben Sat 1 Media in 1999 reached a total turnover of approximately E2 billion with a pre-tax profit of E200 million.

There remain several questions left unanswered; first of all the role of Axel Springer Verlag.

Although Springer’s chairman Ralf Kogeler stressed that the inclusion of the previously independent Sat 1 into the ‘channel family’ would “strengthen the channel which would have in isolation not been able to remain a serious competitor to RTL group”, it remains unclear how long the publisher will keep its minority share in the new TV company. Springer’s board members, when asked about further TV plans and the duration of the participation in the Kirch-dominated channel family, declined to comment during the recent main shareholder meeting. There had been strong rumours ahead of the announcement that Springer intends to completely retreat from the TV market by selling its Sat 1 shares for around DM1.8 billion to Kirch to gain money for further extension of its prospering Internet, multimedia and TV production subsidiaries.

The second uncertainty centers around the future role of Deutsches SportFernsehen (DSF). The Munich-based free-to-air channel has not been included into the TV holding despite being owned 100 per cent by Kirch Media. According to Kirch executives, DSF will “not form part of the TV group, but will be closely associated with it”. There are two possible reasons for that decision. The channel that was launched in 1993 as a successor to the loss-making entertainment-focused Tele 5 still has to reach financial break-even. Although break-even is envisaged for next year, the channel still suffers from a low audience market share of around 1 per cent with losses expected this year to amount to a two-figure DM million number.

Therefore, as a loss-maker it wouldn’t have increased the attractiveness of Pro Sieben Sat 1 Media to further potential investors and the stock market and, in consequence, it was not included. The second possibility lies in Kirch’s internal future plans with DSF. If the channel is for example shifted onto Kirch’s digital pay-TV platform Premiere World would profit from subscriber fees and, on the other hand, a nationwide analogue cable channel would become vacant that could be used by N24 which still has only low cable coverage due to its late start and the limited capacity on Deutsche Telekom’s networks. A comparable scenario could happen to TM3, owned 100 per cent by Rupert Murdoch’s News Corp. Since he became a 24 per cent shareholder in Premiere World, Murdoch is believed to have lost his interest in Europe’s most competitive free-to-air television market. Kirch is said to be keen on taking over the Munich-based broadcaster that launched as a women channel in 1995. A decision is expected to be imminent.

The alternative to closing down TM3 completely, thereby vacating cable channels for N24, would be the continuation of the channel as a rerun service that screens old series and movies from Kirch’s large archive. TM3 has plans to launch several thematic digital channels like a cookery, a gardening and a fitness and health service that would perfectly fit onto Kirch’s Premiere World platform. Independently from what will happen, the creation of Pro Sieben Sat1 Media AG has further consolidated the German TV market. There are now only two groups that control the major TV networks: Kirch Group on one side, RTL Group on the other. The chances for a third major player entering the market are almost nil. It remains to be seen how the two sides use their power.