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February 10, 2011
Deutsche Telekom and Sky Deutschland are close to agreement which would see them jointly launch a B2B wholesale TV product targeting the level 4 German cable market. Deutsche Telekom will provide the infrastructure required for the signal distribution and integration with last-mile operators, with Sky Deutschland providing the content for the service.
The new service, which will provide a roughly 25-channel basic bouquet, will compete head-to-head with the key level 3 cable companies Unity Media, KDG and Kabel BW, as well as Eutelsat's KabelKiosk service, for the chance of providing content to the roughly 1000 housing associations and last-mile cable operators which make up the level 4 cable market and control the access to consumers.
The service would be independent to Deutsche Telekom's Entertain IPTV service, which is distributed over the company's own fibre and copper infrastructure direct to consumers; however, if launched, will rely on Deutsche Telekom's fibre infrastructure to transport the TV feeds to the last mile before interfacing with the level 4 providers' coax cables. Last mile integration will be assessed on a case-by-case basis, with Deutsche Telekom intending to integrate with a level 4 operator only if a clear path to a return on investment can be demonstrated.
The return to the cable market from Deutsche Telekom, which once controlled the country's entire cable infrastructure, will be a back-to-basics move, and will see the company having to establish from scratch relationships with the level 4 cable operators.
Both Deutsche Telekom and Sky Deutschland have struggled to make significant headway in the cable-dominated German pay TV market, with high service pricing putting off the typical price-sensitive German consumer. A B2B strategy aims to sidestep their direct consumer uptake issues, targeting an already-existing pay TV household base. Although German cable ARPUs are low (at approximately €10 per month), and this is typically split 50:50 between the level 4 and level 3 operators, on this basis, such a move could still provide Sky and DT with €5 monthly revenues per end-household to divide between them.
Furthermore, despite recent moves from the level 3 cable companies to consolidate the last mile operators under their direct control, the level 4 market remains large in volume, with over 4m households unconnected to the big 3 cable operators, and a further 9m homes supplied, but not directly owned by KDG, Unity Media and Kabel BW.
For Sky, which under heavier News Corp control, is seeking a rapid route to profitability, the move will allow the company not only to take a share of the basic 24-channel package revenues from the end-consumers, but also improve the likelihood of a full Sky TV service upsell. Sky currently has deals with the major cable operators for its services to be distributed via cable - roughly half of its 2.6m subscribers take their signal from a cable network. A new distribution arrangement to cable homes with Deutsche Telekom will act to boost its chances in growing further the number of Sky subscriptions via cable.
Nonetheless, any deal between Deutsche Telekom and Sky to supply the cable market will be subject to regulatory scrutiny. Deutsche Telekom was ordered to sell off its cable network a decade ago due to competition concerns. A return to the market it was ordered out of will certainly raise questions; however the company having to rebuild the B2B relationships required for the venture to be a success will certainly act as a mitigating factor.
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