iesy Repository GmbH - Irish Stock Exchange

separation of the Level 3 network and the Level 4 network in Germany continues to impact the German cable television
market in that it may impede the roll-out by Level 3 operators of new products and services, such as premium cable television
and Internet services via the cable network. For it to be economically sound, any upgrade of the Level 3 network necessary
for the launch of new products requires a sufficient number of subscribers to which new products can be marketed. The
interposed Level 4 operators and housing associations limit the ability of Level 3 operators to market their new products and
services directly to end consumers, because they do not provide access to the end-user without seeking additional rent for
such access. Moreover, the upgrade of particular parts of the Level 3 network would be futile if the pertinent Level 4 network
is not upgraded to meet the technical requirements to carry the new products and services.
DTAG (or its predecessor) as the operator of the Level 3 network and, after the regionalization of the Level 3 business,
the regional Level 3 operators, used to deliver signals to thousands of such Level 4 operators. Due to regulatory constraints
prior to the deregulation of the cable network market in 1996, the Level 4 operators initially focused on the construction and
operation of the Level 4 infrastructure in multiple-dwelling units where the relevant housing association or property owner
did not have the desire or capital to invest into the cable infrastructure.
Housing associations are responsible for the management of multiple-dwelling units. They vary in size and may be
responsible for the management of anywhere from a few to thousands of apartments on a local, regional or national level.
Historically, the housing associations have either constructed their own Level 4 infrastructure and connected to the relevant
regional Level 3 operator’s network or outsourced cable television services to Level 4 operators. Housing associations
include customers that not only own and operate their own internal Level 4 networks, but may also operate and administer
the networks of other housing associations and, accordingly, display certain characteristics of professional Level 4 operators.
However, in some cases large housing associations with significant subscriber clusters have been sourcing television signals
via satellite solutions, sometimes after previously having been connected to a cable network.
Level 4 operators typically enter into long-term contracts with housing associations, which limits opportunities to win
new customers and may hinder iesy’s and ish’s efforts to market its services effectively to housing associations.
Over time, several Level 4 operators have consolidated to form larger entities, the most significant of these being Tele
Columbus (approximately 2.6 million subscribers as of September 30, 2004), BN (estimated at approximately 1.3 million
subscribers in 2004), PrimaCom (approximately 1.0 million subscribers as of September 30, 2004), and EWT (approximately
0.7 million subscribers as of December 31, 2003), all of which operate on a nationwide basis. In early 2005, EWT acquired
BN, and BN has since been operating as ewt breitbandnetze gmbh.
Typically, Level 3 operators supply Level 4 operators with broadcasting signals. Fees for receiving signal are typically
based on the Level 3 operator’s rate card, which is regulated by RegTP. Professional Level 4 operators also often negotiate
additional long term signal supply contracts, which allow for further discounts to the regulated rate card. However, Level 4
operators can integrate vertically by building their own headends to receive signals directly, provided that the number of
customers to be serviced reaches a critical mass. In a similar fashion, yet at a smaller scale, Level 4 operators (and housing
associations) are able to run SMATV (Satellite Master Antenna TV) systems, a satellite system used to distribute television
signals to households located in one or more adjacent buildings, primarily serving urban and suburban multiple-dwelling
units, using the television signals supplied via satellite for direct-to-home (DTH) and distributing these via cable to their
customers.
Professional Level 4 operators also seek opportunities to overbuild the Level 3 network, especially in the event of price
increases for access to the Level 3 network. BN, for example, started overbuilding the Level 3 network in the city of Kassel
in 2002. Following consolidation, such as BN’s recent acquisition by EWT, a Level 4 operator may reach the economies of
scale needed to combine a larger number of its Level 4 networks by overbuilding the Level 3 network. In addition, smaller
Level 4 operators can combine through cooperation agreements to try to provide a competitive alternative to iesy’s Level 3
network.
Competition from professional Level 4 operators could increase in the coming years as the industry undergoes
ownership changes and potentially consolidates. In addition, professional Level 4 operators may have certain competitive
advantages over iesy’s business, including a lower level of regulation of their pricing.
Satellite
A major competitive force in the German television market is satellite television, which can be divided among three
types of access: (i) FTA satellite, (ii) SMATV, and (iii) premium satellite television. As it relates to FTA satellite, residential
subscribers in single or small dwelling units may install a satellite receiver to view a large number of programs without
paying subscription fees. Regarding SMATV, Level 4 operators and in certain cases larger housing associations may install a
satellite receiver and headend equipment to provide satellite television to their subscribers or tenants, as the case may be, on a
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