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The German Television

The German Television Market INDUSTRY The German television market is the largest in Western Europe, with approximately 36.2 million television homes and a combined cable, satellite and terrestrial penetration rate of approximately 92.6% based on approximately 39.1 million households (as of March 2004). However, the German television market in general is less developed than most other European television markets. For example, in 2004, Germany generated approximately €1 billion of premium subscription revenues, compared with France and the UK which each generated over €2 billion, despite having smaller populations. In addition, in 2003 television’s share of total advertising spend in Germany amounted to only 24% while the European average was 31%. The German television market has two distinctive features that distinguish it from most other television markets: (i) the prevalence of the so-called transport model in the cable television market, and (ii) the separation of the cable networks into two distinct levels (called Level 3 and Level 4) that historically have been under different ownership. Under the transport model, the operators of distribution platforms, such as cable networks, merely provide the infrastructure and related services required to distribute the television signal from the content providers to end-users. We believe this has led to a disproportionate distribution of value among industry participants. Cable television, as the leading television signal distribution platform, receives only a fraction of the total market value. The separation of cable networks into two levels, on the other hand, impedes the marketing of new products and the delivery of new services. The German basic television market comprises the provision, distribution and reception of program offerings that are financed by public license fees and advertising revenues. End-users pay for the license fees that support the public broadcasters and for the reception of television signals. Content providers lease transponder capacity from satellite operators, pay for the costs of the terrestrial transmission infrastructure and pay carriage fees based on subscribers to cable network operators. The following chart illustrates these relationships: Customer Relationships for Satellite, Terrestrial and Cable Television in Germany (1) (1) Data included in this chart is based on management estimates and various industry sources. (2) “Gebühreneinzugszentrale” (GEZ) is a public authority that collects mandatory monthly fees on behalf of the public broadcasters. Such fees are levied on all homes with a radio or television receiver to finance public broadcasters. 136

Content Providers Basic Television The German basic television market is characterized by a large offering of “free-to-air” (FTA) television channels dominated by two groups of content providers: (i) the public broadcasters and (ii) the commercial broadcasters. German Viewing Market Share—2004 (14-49 Demographic) German Gross Advertising Revenue Market Share—2004 Source: P7S1 March 2005 company data. Germany’s total advertising market is the third largest in the world, but television has an unusually low share of total advertising expenditure. This is partly due to the fact that most German newspapers are local or regional with few direct competitors, and are able to charge relatively higher prices for advertising space than they would be able to if they all had to compete with each other. German AdSpend Breakdown—2004 Source: ZenithOptimedia. Public broadcasters. Public broadcasters source funding from the public license fee and advertising, but are predominantly financed through statutory monthly license fees that are levied on all homes with radio and/or television sets irrespective of the transmission provider (cable, satellite or terrestrial) being used as access technology by the individual end-user. The license fee is levied monthly through a special agency known as “Gebühreneinzugszentrale” or GEZ and amounts to €5.52 for radio reception and €17.03 for both radio and television as of April 1, 2005. The license fee is set jointly by the parliaments of the German Federal States (Bundesländer) for a period of up to five years following a recommendation by the Commission for the Assessment of the Financial Needs of the Broadcasting Companies (“Kommission zur Ermittlung des Finanzbedarfs der Rundfunkanstalten” or KEF), an independent panel of experts. Revenues from television and radio license fees represented over 80% of the public broadcasters’ revenues in 2003 and amounted to approximately €6.8 billion in 2003. Advertising airtime is restricted to just 20 minutes per working day and 12 minutes per hour, and no commercials are allowed on Sundays or national holidays and after 8.00 pm of any other day. The public broadcasters’ combined share of the gross television advertising market in 2004 (approximately €4.0 billion) was 5.2%. 137