German media's dark night

Michael Hedges November 17, 2008

The German economy passed an unfortunate threshold, officially entering the recession zone. German media companies noticed, worried as ever, and moved into deeper restructuring. Some of it has been long in the planning and some not.

The German Federal Statistics Office reported (November 13) the sharpest economic contraction in 12 years. Since the onset of pain in the financial sector German exports have suffered, the country's economic driver. Q3 GDP dropped 0.5% from the 0.4% drop in Q2. Forecasters expected a lower figure, but not that much.

Within German media there are, loosely, three classes; big, bigger and biggest. The largest and richest are the conglomerates, born in publishing, with subsidiaries on every media platform, typically with an international footprint. Bertelsmann AG, being Germany and Europe’s largest media company, has separate and distinct status within the class of German media giants. Also included in that financial stratosphere are Axel Springer, Heinrich Bauer Verlag, Holtzbrinck and WAZ-Mediengruppe. 

The massive Bertelsmann AG – Europe’s largest broadcaster and the world’s biggest book publisher – posted a 0.7% revenue decline for the first nine months of 2008 of € 11.4 billion compared with the same period in 2007. Net income, however, tripled to €387 million. The company’s exposure to ad markets is about 25% of total revenue. CFO blamed exchange rates and “portfolio changes” for declines in revenue. He reiterated his forecast of 5% to 10% net profit drop for the full year because of the global economic downturn.

Bertelsmann continues exchanging assets. One new investment, through Bertelsmann Digital Media Investments, is in US mobile ad company MoJiva. Bertelsmann’s broadcasting subsidiary RTL completed a long negotiated television acquisition in Serbia.

Axel Springer, releasing Q3 financials (November 12), said it has “defied the crisis.” The company boosted its net income to €560 million by selling its stake in TV broadcaster ProSiebenSat.1. CEO Mathias Döpfner congratulated himself on a fine strategy but noted “the advertising market has deteriorated significantly in the third quarter.”

Döpfner’s focus is “digitization and internationalization and its efficient structures,” said the statement accompanying the financial report. Revenues at international holdings rose 3.5%, year on year. Digital media revenue, largely web and mobile portals built on magazine brands, grew just under 25%.

A WAZ-Mediangruppe employees meeting (November 11) was unhappy, reported Die Tageszeitung. “To refrain from inevitable restructurings, only to appear socially acceptable, would be negligent,” said personal manager Joachim Kopatzki. He did not receive a round of applause from the assembled workers, 300 of whom face unemployment. WAZ has long held investment in the Balkans and recently acquired a stake in an Albanian television station.

Heinrich Bauer Verlag hasn’t issued many recent statements. After the €890 million acquisition of radio and print assets in the UK earlier this year, not much needs to be said. Germany’s media giants remain so by diversifying out of Germany, a fairly conventional strategy of leveraging cash into growth market investments. When it works – and it certainly has for German media’s stratosphere – it’s great insurance against little domestic economic downturns. 

At the next layer of big German media, life is more fragile. Less platform diverse and generally confined to Germany, these operators must face economic challenges head on.  Television operator ProSiebenSat.1 is fighting the downturn by cutting jobs and consolidating operations. The broadcaster will move Sat.1, ProSieben and kable eins operations to Munich, leaving news channel N24 and the Sat.1 news operations in Berlin.

Pay TV operator Premiere announced a €90 million Q3 loss with debt rising to €307 million, blaming signal pirates and the high technical cost of thwarting them. Premiere, with News Corporation in the boardroom, is betting the ranch on Bundesliga football rights.

Daily newspaper Sueddeutsche Zeitung is planning job cuts and shelving plans for a Sunday edition. General manager Karl Ulrich offered a telling anecdote at Munich Medientage: “In April ad sellers were reaching a deal with every fifth call. Then came the phase in which he could only make a deal after the twentieth call. Now, fifty calls and nothing. And by the time he hangs up the phone there are five cancellations.”

German media companies seem to spend time and money suing each other. RTL - owner of television channels RTL, super RTL, Vox and n-tv – and ProSiebenSat.1 were taken to court by RTL 2 – name notwithstanding, owned mostly by Heinrich Bauer Verlag and Telefunken Munich with a small stake held by RTL Germany. RTL and PreSiebenSat.1 sold ad time between 2004 and 2007 with a discounting system the competition authority Bundeskartelamt ruled illegal in 2007. Both companies were fined large amounts and ordered to change sales systems. Now RTL 2 and tele5 want damages.

The RTL sales house IP Germany and the ProSiebenSat.1 sales house Seven One Media offered free ‘bonus spots’ to media buyers. The condition seems to be that the bonus spots were offered to friends of RTL and ProSiebenSat.1. ProSiebenSat.1 now claims that changing to a new sales model has cost them money.

The third pillar of German media is the public sector. With dozens of radio and television channels funded by a combination of license fee and advertising German public broadcasting is a formidable competitor. Privately owned broadcasters have fought with the PSBs for years over a variety of issues, ranging from price fixing to State aid. Little has come of the battles as Länder governments, more or less, like having well-funded State broadcasters. License fee increases have become perfunctory. The largest of the German PSBs are heavily invested in film and television production and new media. Westdeutsche Rundfunk (WDR), one of the largest German public broadcasters and WAZ Mediengruppe recently agreed to website content cooperation.

The German public broadcasters are facing economic realities, too, and the specter of new, uncomfortable regulation brought about by European Commission rulings. Bidding wars between the public and private broadcasters for sports right ratchet up costs. The public broadcasters’ ad sales-house AS&S is constantly questioned about price dumping. While advertising is reportedly only about 10% of public broadcasters’ revenue, in an economic downturn any shortfall is noticed.

Robin Meyer-Lucht, media thinker with the Berlin Institute, sees a silver lining in these economic storms. "The financial crisis is only the catalyst for the restructuring of the industry," he said to a recent media conference. It’s true. But this dark night with rain, snow, sleet and hail will pass slowly.