Broadband Cable in Germany 2005 Market Overview
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Broadband Cable in Germany 2005 Market Overview Executive Summary The German cable market is characterized by a large customer base but relatively low revenues per subscriber. Reason is the low degree of diversification. New services such as Digital TV, Internet and telephony will however lead to a turnaround. The slow consolidation process reduces the current market fragmentation. The access market has a volume of 2.1 bn €. After a slight decline, the number of subscribers has stabilized in 2004. The introduction of KDG’s „Kabel Digital Home“ offer has created a new impulse for both Digital TV as well as Pay TV services. Cable Internet and telephony offers are increasingly successful, upgrade level and marketable base are however still rather low. Main competitors for TV access are Satellite and increasingly DTT, in the future TV over DSL is expected to increase the competitive pressure. Satellite Amplifiers Splitters D Up-link radio C D station A/B D Master TV-tower Head-end Hub head- (AMTV and (“üBK”) Coax- or fibre („bBK“) Coax A-, B-lines Coax C-, D-lines TV studio end fibre network (Hk-network) (VzK-network) Home signal (Vk-Network) connection distribution) point Network level 1Network level 2 Network level 3 Network level 4 TV studios Regional distribution network Local distribution network In-House network © 2005 Solon Management Consulting 1. Market volume: International comparison German cable market offers More than 70% of the nearly 38 million TV households in Germany are technically able to attractive customer base… receive television signals over the cable TV network. Almost 21 million households are actually connected to the networks of the various cable operators. Consequently, the German cable TV market has not only more subscribers than any other market in Europe (see Figure 1), it also is the second-largest cable TV (CATV) market worldwide. Only the USA with its 73.5 million homes connected count more subscribers. Figure 1: Cable Households and Revenues in European Countries1 4,000 25 3,500 20 3,000 2,500 15 2,000 1,500 10 Revenues (m €) 1,000 5 500 HH) (m connected Homes 0 0 DNLB FGBCHS PDKFINA E NIRLI Homes connected (m HH) Revenues (m €) …but below-average revenues However, the size of Germany’s cable market is only partially reflected by its revenues. With 2.3bn € in annual revenues, Germany’s cable TV market ranks second after Great Britain (3.5bn €) in Europe. The discrepancy between the number of homes connected and the actual market size be- comes even more evident by looking at the average revenue per cable household. Here, the German cable market ranks second to last in Europe. Figure 2: Average Monthly Revenue per Cable Household (€ per month; net; includes digital TV, Internet and Telephony)2 87.8 84.8 59.4 41.5 32.9 28.3 26.6 25.4 24.6 20.3 19.5 19.3 16.6 9.6 9.3 GB E I DK A NL F P IRL NL CH B S D FIN 1 Advanced Television (2004); ANGA (2004); Germany: Solon analysis. Page 3 Unlike in most other European cable markets, German cable operators have so far failed to German cable operators expand their product range into innovative new services. In most European markets only are poorly diversified about 60% of cable revenues are generated from basic access fees, whereas in Germany still more than 90% of CATV revenues originate from this source. The German cable market has not kept pace with its European peers for several reasons: The considerable delays in divesting the large Level 3 (L3) operators Kabel Deutschland, ish, Kabel BW and iesy by Deutsche Telekom resulted in postponing investments necessary for future services, such as creating attractive Digital TV packages or upgrading the networks to provide bidirectional services and higher bandwidth. The complex, both structurally and regionally fragmented market structure in Germany has aggravated efforts to upgrade the cable networks even after the divestment from Deutsche Telekom. Consequently, large portions of the German cable networks do not fulfill the technical prerequisites for offering interactive services such as Internet or Telephony. Due to unclear demand forecasts, L3 operators have so far made only cautious attempts to enter the digital TV market. Figure 3: Revenue Share of Different Services (% of total cable revenues)3 100% 80% 60% 40% 20% 0% DIRLSDKNFCHNLFINPBAGBEI Basic TV Digital Pay TV Internet Telephony ...but on the right track with Last year’s development, however, points out a trend reversal, which will show positive regard to Digital TV and effects in the upcoming years: Internet With its successful introduction of a mid-tier Digital Pay TV program, Kabel Deutschland proved that considerable demand exists for high-quality, value-added TV programs, despite broad Free TV offerings and rather high TV licence fees (”GEZ fees”) for German public broadcasting. Kabel BW’s new marketing and investment strategy is an important first step in upgrading the cable network. Within one year, the company upgraded 700,000 L3 households and achieved an average penetration of 6%, in some regions up to 20%, of the marketable base of upgraded homes connected. 2 Advanced Television (2004); Germany: Solon analysis, based on end customer revenues, excluding signal delivery fees of L4 and L3 operators. 3 Advanced Television (2004); Solon calculations. Page 4 These developments are revealing first signs of a permanent transformation of the German cable market from a low-growth utility business into a diversified growth industry. 2. Network and market structure The market structure is A key factor for understanding the German cable market is the separation of cable networks determined by the network into four different levels. This separation determines both, market structure and value chain structure (see Figure 4). Figure 4: Structure of the German Cable Network Satellite Amplifiers Splitters D Up-link radio C D station A/B D Master TV-tower Head-end Hub head- (AMTV and (“üBK”) Coax- or fibre („bBK“) Coax A-, B-lines Coax C-, D-lines TV studio end fibre network (Hk-network) (VzK-network) Home signal (Vk-Network) connection distribution) point Network level 1Network level 2 Network level 3 Network level 4 TV studios Regional distribution network Local distribution network In-House network Level 1 is served by TV broadcast companies like ARD/ZDF, Pro7Sat1 and the RTL Group. The term “cable operator” mainly refers to Level 2, 3 and 4. Whereas Levels 2 and 3 (L2 and L3) cover signal feed at the head-end, local distribution, and transfer point in the basement of a house or building, Level 4 (L4) covers the distribution of signals within a single building or building complex all the way to the TV socket in the individual residential unit. Figure 5: German CATV market structure4 Regional L3 operators Level 2/3 (Kabel Deutschland, ish, Kabel BW, iesy) 17.4m HH Professional providers with independent Housing associations and feed-in Direct customers of ProfessionalL4 property management 3.5m HH L3 operators operators Level 4 companies 5.7m HH 4.4m HH 7.3m HH Level 3 Operators L3 operators structured Level 3 is dominated by the “big four” L3 operators ish (NRW), Kabel BW (Baden- along federal states of Württemberg), iesy (Hessen) and Kabel Deutschland (other federal states). These operators Germany deliver TV signals to both directl end customers and to professional L4 operators. Nearly 4 Advanced Television (2004); ANGA (2004); Solon research; the range of estimates for operators with own signal feed-in varies widely, extending from 3.5m [ANGA (2004)] to 7m households [FRK (2004)]. Page 5 17% of CATV households are served by the professional in-house network operators (also known as “L4 operators”), which have their own, independent signal feed. Level 4 Operators The L4 segment is served by the four L3 operators, a few large L4 operators and a considerable number of small to mid-sized L4 operators (see Table 1).5 Table 1: Leading Cable Operators in Germany6 Number of Number of direct Cable operators Level 3 / Level 4 connected customers households in L37 Kabel Deutschland mainly L3 9,720,000 3,140,000 ish (NRW) mainly L3 4,100,00 1,230,000 Kabel BW (BaWü) mainly L3 2,310,000 720,000 Iesy (Hessen) mainly L3 1,240,000 550,000 TeleColumbus mainly L4 15-20% of HH 2,600,000 EWT/ tss/ Bosch (L3)/ L4 45-50% of HH 1,780,000 PrimaCom (L3)/ L4 45-50% of HH 990,000 The L3 operators have direct access to 5.7m end customers. Another 7.3m households have a quasi-direct connection to the L3 operators: The intermediary is typically a housing association or property management company without an economic interest in the operation and marketing of cable networks. Upon approval by the building owners, the L3 operators are able to address these customers directly for purposes of marketing new products (such as Digital TV). The segment of L4 operators is dominated by three large providers, together serving about 5.4 million cable households: TeleColumbus, EWT/Bosch and PrimaCom. Additional 2.5m households are served by smaller L4 operators. Unlike the networks of the L3 operators, the networks of the L4 operators are – with the exception of some regional agglomerations - spread out all over Germany. The segment of L4 operators is currently exposed to increasing consolidation. Due to the Continued acquisition of mostly smaller L4 operators the large L4 operators have reached an average L4 consolidation annual growth rate of 4.5% over the last five years.8 This development has peaked in December 2004 with the acquisition of Bosch Breitbandnetze by EWT/ tss, a company merely half the size of the acquisition target.