EURO VISION

Hours after securing the deal to merge with United News, MAI chairman Lord Clive Hollick, described Europe and the Pacific Rim as “areas with exciting growth potential”. He was being economical with the truth.

MAI has been ambitious to become a major European media force for several years. But only three per cent of its turnover is generated on the Continent, and its horizontal integration deal with United will not bring its European ambitions any closer.

To make the dream come true Hollick, and indeed other UK media groups, will have to expand eastwards. However, some media observers believe it could already be too late for the Brit pack to move in on Europe.

While the ink was still drying on the MAI/United deal and speculation in UK media shares was going into a frenzy, European media groups were considering where to pounce next. In the US, a pattern of vertical integration – encouraged by a telecoms bill removing restrictions preventing companies owning both production facilities and distribution outlets – has emerged.

In just 12 months, drinks giant Seagram has bought entertainment group MCA; Rupert Murdoch’s News Corporation linked up with telecoms group MCI; Disney spent $19bn on Capital Cities/ABC and Westinghouse acquired CBS. Meanwhile, Time Warner bid $8.5bn (5.6bn) for Turner Broadcasting Systems and Microsoft struck a strategic development deal with NBC.

In Europe, the Luxembourg-based broadcaster CLT is now the focus of heated takeover speculation. Last month a three-way battle involving Disney/ABC, Rupert Murdoch and French media giant Havas – which already holds a 40 per cent stake – emerged. Disney is seeking a 25 per cent stake.

CLT’s UK interests include commercial radio stations Atlantic 252 and Talk Radio UK, and it is a member of the successful Channel 5 Broadcasting consortium. CLT’s UK presence is unusual – surprisingly, there is no other major link between the UK and fast evolving continental European media web. As a result, many question British players’ ability to make any mark.

Even major UK players Carlton and Granada have been slow starters. “While Sky takes a long-term view and can make decisions quickly, ITV companies have stood still,” says a media analyst. “Granada and Carlton held talks last year about developing joint pay-TV services, but these discussions broke down. Granada is now working with BSkyB on five new satellite channels.”

Others must follow suit. “There are too many problems in going it alone – from running out of content, to difficulties in becoming part of Sky’s multi-channels package or getting into the crowded cable network.” Buying a cable channel, which Carlton did last month when it picked up SelecTV, is “small beer”, she adds.

In fact, Carlton is building European links – including a 24 per cent stake in France Tele Films, a satellite channel owned by France Television. It has also toyed with the idea of buying a stake in the German channel Vox.

“I would love UK media owners to invest more in Europe. Granada claims its recent Forte deal does not limit its TV ambitions. Even so, both Granada and Carlton have around 70 per cent of their interests in the UK, which is quite an emphasis,” says Mandy Pooler, media director of the Ogilvy & Mather-owned The Network.

“There’s a lot British media owners could do in Eastern Europe where there’s a huge appetite for English language programming,” she adds. “But they’ve been tremendously slow, maybe because they lack critical mass to do it, or perhaps because they have been distracted by constant legal changes in the UK.”

While many European media groups would admit that vertical integration is the way forward, the shifting plates of the European media market are unlikely to mirror US patterns in the year ahead.

The US market is homogeneous, with language and tastes in media consumption relatively similar from state to state. The European market is heterogeneous, divided by language, taste, currency and media law – despite European Commission aspirations for a single European media market. “Media owners are still operating on the basis of local markets,” one London analyst observes. “They are perpetuating a divide and rule policy.”

Most of the larger media players are privately owned. They are under no pressure to make large mergers or acquisitions to boost share prices, he explains. And rather than legal liberalisation, the driving force in Europe will be digital TV. Digital broadcasting will transform European TV from a system where consumers have just a few channels to choose from, to one where they have hundreds.

“They’re all lining up, preparing for the ‘new generation TV’, asking themselves whether they want to be gatekeepers, rights owners or distributors. And depending on the answer, how best to achieve this and who best to achieve it with,” says Adam Smith, head of publications/associate director at Zenith Media, who is compiling Zenith’s 1996 Top 50 European Media Owners.

Partnerships forged now will decide rankings into the new century. The stakes are high with the total value of the global market expected to rise to $67bn (44bn) by the end of the decade. The total value of the global TV market is $58bn (38bn), up from $56.1bn (36.9bn) in 1993, according to a MarketLine global TV report published last month.

The US market dominates, accounting for $28bn (18.42bn) in 1994 – 48.2 per cent of total TV advertising revenue. The UK is the third largest $4.6bn (3.8bn) with Japan in second position ($14.8bn) (9.73bn). Germany is experiencing the fastest growth – thanks to reunification which significantly boosted the number of TV households.

So how will European companies compete? English-language broadcasters have a definite advantage. One City analyst observes: “There is significant potential for growth within Europe but there is a major constraint – consumer demand. While there is an insatiable appetite for US output throughout, there is not such a demand for “local” language product – for example, interest in German programming in France.”

Another limiting factor is European Commission legislation. “A major problem is tenacious EC competition commissioner Karel van Miert,” says Ross Parsons of CIT Publications. “He always looks likely to jump on any move towards domination of the European market, as he did when Deutsche Telekom, Bertelsmann and Kirch first tried to get together to form Media Service to exploit pay-TV possibilities.” More recently, the EC blocked a proposed satellite get-together between Kinnevik/Tele Danmark and Telenor.

With UK players still catching up, the focus is on major continental players, such as Bertelsmann which is rumoured to be interested in CLT. Groupe Bruxelles Lambert, CLT’s principal shareholder, has confirmed it may offload its 59.5 per cent stake. Bertelsmann hopes to build a huge European TV group with French partners, Canal Plus and Havas. The company recently struck an alliance with Canal Plus to develop pay-TV in Europe. It is also a partner in Germany’s only pay-TV channel, Premiere, along with Bavarian media mogul Leo Kirch.

Kirch, the largest holder of copyright in Germany has, like CLT, Nethold, BSkyB and Canal Plus, announced plans for digital television channels to be funded by subscription and distributed via satellite.

Last year, it took a ten per cent stake in Fininvest; now it is thought to be interested in increasing its 35 per cent stake in the Axel Springer publishing group. It is also keen to develop decoder boxes, and in December, joined forces with Deutsche Telecom and Bertelsmann to develop this technology.

The current jewel in the crown is CLT because of its truly pan-European interests. Run by Belgian financier Albert Frere, the remaining 40 per cent is held by Havas. It is one of Europe’s biggest broadcasters and its radio and TV interests span Germany, France, the UK and Benelux countries.

Germany accounts for more than half CLT’s annual turnover. CLT wants to launch 20 digital TV channels in France and Germany by this spring. It sees Channel 5 as a bridge to the US, enabling it to buy up lucrative overseas rights.

Other European players, like Reed Elsevier are strong only in one or two countries – like most larger European players, it has “patchy coverage”, analysts claim. So, only through vertical integration can the European players wield more clout. Not everyone is convinced. Pearson, for one, believes the industry is content-driven – creativity is not governed by size, but by talent, it says.

This may be true. But ownership of rights is increasingly critical in building a successful, European media business. European players, however, face a problem because Hollywood will inevitably determine their fortunes.

In the short term, the winners will be those negotiating the best deals. In the longer term, while studio bosses may want to sell to the highest bidder, the media groups which own them increasingly want to launch their own channels. This has already happened with Disney Channel Europe and established player MTV which is owned by Viacom. Viacom also owns Paramount, which recently launched its own UK satellite channel.

These companies want their product to stay on their own channels and for their channels to be part of Europe’s future “digital bouquets” of TV and other services.

As a result, US groups will avoid long-term rights deals. If access to content is restricted it will make the foundation of any vertically integrated European group even more difficult. But at least some of the continental European groups are addressing the issue, while their UK counterparts seem to be still concerned with domestic issues.