German TV Shakeup Means Opportunity for U.S. Firms

The takeover of a big chunk of Deutsche Telekom's TV cable assets by AT&T's LibertyMedia opens a new front in the struggle for domination of set-top boxes for digital TV. The German homegrown software company BetaResearch, whose software is largely confined to Germany's digital TV decoders, looks lost. But for U.S. software companies such as OpenTV, Liberate and possibly Microsoft, this means an opportunity to tap a 10-million-customer market.

Last week, DT and LibertyMedia announced that Liberty will acquire 100 percent of DT’s remaining six regional cable TV operations. The announcement revises a previous agreement in which a consortium of Liberty and the U.K. investor Klesch would have purchased a 55 percent stake. (Klesch keeps an option to buy 25 percent under the new agreement.) This concluded the sale of the network, which had been forced upon DT in 1999 by the European Commission.

At the same time, DT announced that it will withdraw its plans to form a joint venture with BetaResearch, the technology arm of media giant Kirch Gruppe that is producing software for interactive TV. "This investment doesn’t make any strategic sense anymore when we are exiting the cable TV network," a spokesman for DT said. BetaResearch’s software is now running in the boxes of most Germans who already have interactive TV – the 2.3 million customers of KirchGruppe’s pay-TV network Premiere World.

DT’s TV cable network, by far the largest in Germany, is now divided into three consortia. Callahan Associates of Canada has a majority stake in two regions, with 6.4 million households; Klesch of the U.K. owns a majority in one region, with 1.2 million; and Liberty covers the remaining six regions, with more then 10 million households. The fourth-largest operator is Primacom (in which Liberty holds an indirect stake, as well), with another million households.

All new owners are investing billions of euros into upgrades to make their networks multimedia-ready, an effort which likely will last years. Part of the upgrade will be the deployment of interactive set-top boxes, small computers that decode digital programs and can provide functions from program guides to online banking, shopping, e-mail and chats.

With DT's exit from both the cable and BetaResearch, Kirch's software looks abandoned. BetaResearch has virtually no customers except its owner Kirch, and its software is not competitive, according to experts.

This emerging market probably will be left to U.S. players. Klesch's network in Hessen last week announced that it will use Liberate, the San Carlos, Calif.-based company backed by investors such as Oracle, Sony and AOL Time Warner. Primacom has chosen OpenTV of Mountain View, Calif., whose founding investors are Thomson of France and Sun Microsystems.

LibertyMedia and Callahan, the biggest players, have yet to announce their partner of choice. Liberty is an investor in OpenTV, but this doesn’t mean the decision is already made – the Liberty-controlled cable operator UPC has deals with Liberate, OpenTV and even Microsoft, and Liberty's owner AT&T is equipping its set-top boxes with Liberate and Microsoft.

Much in this struggle will depend on how the software companies deliver on their promises. Microsoft has learned this the hard way, when AT&T postponed the shipping of MS-boxes this month, saying that Redmond was late with its software.