As Italy celebrates the 10th anniversary of pay-TV, Tele+ is getting ready to merge with rival operator Stream, in order to create a single Italian DTH satellite platform. Branislav Pekic in Rome assesses the market

Subscription-based TV services have played a crucial role in the penetration of digital TV in Italy, the first country in Europe to introduce the new transmission technology. In November 1995, pay-TV operator Tele+ started transmitting its three existing premium channels via satellite and in March 1996, launched a dedicated digital bouquet via the Eutelsat Hot Bird satellite. Tele+ opted for digital in order to anticipate the perceived threat posed by the alliance between incumbent operator Telecom Italia and public broadcaster RAI, who had announced a common digital platform in a deal that later fell apart. Initially Tele+ suffered from slow take up due to the cost of the digital decoder and the rich free-to-air offer, however things changed for the better in 1997, when Canal+ became the majority stakeholder. The French group introduced a new marketing strategy, based on renting the reception equipment, and steered Tele+ towards its premium channel model. In 1999 Fininvest sold its 10 per cent Tele+ stocks back to Canal+, who invited RAI to join the stakeholders group with a 1 per cent share, with an option of rising to 10 per cent.

The second digital pay-TV operator in Italy is Stream, which started off as a cable-only service in September 1996, but two years later began broadcasting its bouquet via the 13 degrees East orbital position. During the first two and a half years of its life, Stream suffered a lack of strategy and commitment on behalf of Telecom Italia.

In May 1999, a deal for the relaunch of Stream was reached, with Rupert Murdoch’s News Corp film producer and distributor Cecchi Gori Group and the SDS consortium (set up by football clubs Roma, Lazio, Parma and Fiorentina) coming on board as shareholders, with Telecom Italia keeping the remaining 35 per cent share. However in April 2000, CGG and SDS sold their stakes to the remaining two shareholders, Telecom Italia and News Corp that each now hold 50 per cent.

Market development

D+ benefited from the privileged position of being the first and only satellite digital operator in the country, a situation that lasted until mid-1998, when Stream launched its satellite service. The entrance of Stream in the satellite market constituted a menace to Tele+ since its market share began to progressively erode (from 81.6 per cent to 72 per cent in the period March 1999-March 2001). The development of the Italian digital TV market was certainly hampered by the uncertainties arising from the single digital platform negotiations, which lasted throughout 1997 until May 1999. Tele+ succeeded in signing exclusive deals with most of the Hollywood majors and especially six-year deals with 10 leading football clubs. Competition for content rights

between the two satellite platforms became a major issue during 1998-1999. In March 1999, the Italian Senate approved a law which set the cap on ownership of pay-TV football rights to 60 per cent of football teams.

According to official data from the end of 2000, there were an estimated 2.5 million subscribers in Italy. Market leader Tele+ reported over 2,500,000 subscriptions, 1,720,000 subscribers (1,370,000 digital and 370,000 analogue) and more than 4,300,000 orders for its Palco PPV service. Based on these figures, Tele+ now claims it is the third pay-TV platform in Continental Europe, behind only Canal Satellite (France) and Premiere World (Germany). For its part, Stream has roughly 1,300,000 subscriptions (360,000 of them added during 2000) and 758,000 subscribers (76,000 of them on cable).

Two major factors that contributed to Stream’s growth over the past year have certainly been live football (Serie A and Champions League) and 24-hour coverage of Grande Fratello, the Italian version of Big Brother. In regards to the difference in the number of subscriptions and subscribers, it is worth pointing out that both Italian pay-TV operators consider each option (football, Formula One, thematic channels which are sold separately) as a separate subscription.

Italy’s two leading broadcasters – pubcaster RAI and commercial network Mediaset – have set up special units (RaiSat and Medidigit) dedicated to the production of both free-to- air and pay-TV thematic TV channels.

Decoder issues

In April 2000, Italy’s Communications Authority issued a directive forcing all digital TV operators to unify their decoding standards. Up till then, two Conditional Access Systems (CAS) were in use: the Canal+ MediaGuard system, adopted by Tele+ and Irdeto, chosen by both Tele+ and Stream. Due to disadvantages for the subscribers generated by this situation (two different decoders needed to watch league football matches), the national regulator decide to break the stalemate and made the so-called compulsory in Italy from July 1, 2000.

One year on, the two operators have still not succeeded in unifying their decoding systems. On top of that, one month after the Authority decision, Stream introduced a new API, a variant of Open DTV developed by NDS, which is incompatible with the OpenTV specifications adopted by Tele+. As a reaction, Tele+ decided in September 2000 to close the access to football programming through Irdeto and in May 2001, definitely abandoned Irdeto on all of its channels. The decision was motivated by the relatively high number of system violations by non-authorised users which have been reported. Tele+ offered special incentives to its 40,000 Irdeto subscribers – a free 12-month lease on the proprietary GoldBox (MediaGuard) decoder. But this moved penalised the estimated 500,000 Irdeto clients of rival Stream which, for its part, confirmed on several occasions that it plans to stick with Irdeto. However, it is worth noting that the overwhelming majority of new subscribers are opting for an NDS subscription that also includes a decoder lease.

This lack of the single decoder has caused many problems for the Italian government and to the Authority, since Tele+ and Stream are therefore currently operating in open violation of the existing legislative requirements. The Authority has since applied several fines on the two operators, but it now seems that the single decoder will finally come in force on August 26, just in time for the start of the new football season in Italy. Both Tele+ and Stream conducted public demonstrations proving their readiness for the introduction of the single decoder. Once the system becomes fully operative, Stream subscribers with Italtel NDS proprietary boxes and Tele+ subscribers with GoldBox decoders will be able to access the offer of the other pay-TV operator. However, the adoption of Simulcrypt, will still not permit the reception of PPV and interactive services due to partial interoperability between the two APIs – MediaHighway (Tele+) and Open TV/NDS (Stream).

Despite the impending merger of the two platforms it seems likely that two distinct offers will remain for at least the next six months while the proposals pass before Italian and European regulators. With Vivendi being the dominant platform it is not unreasonable that it will try to impose its own technology leaving the Seca Goldbox, and its MediaHighway API, as the dominant system, probably offering incentives for Stream’s existing Irdeto subscribers to make the switch in order to close down Irdeto all together. Simulcrypt will remain in place for some time to come.

Tele+ and Stream merger

On July 4, News Corp. gained full ownership of Italian pay-TV service Stream by acquiring the remaining 50 per cent stake from Telecom Italia, paving the way for Stream’s merger with Vivendi Universal’s Tele+. Telecom Italia and News Corp also agreed to cover Stream’s financial requirements until December 31, 2001 up to the amount of E206 million. In the event that the Stream-Tele+ merger receives the blessing of the Italian regulators, Telecom Italia will have the right to exercise its right to sell its stake in Stream for 110 per cent of the total amount effectively paid. However, should the planned merger fail to obtain the approval of the relevant authorities, News Corporation will repay Telecom Italia 50 per cent of the total funding provided up to a maximum amount of circa E103 million.

Previously, on April 24, Vivendi Universal and News Corp announced the merger of their respective Italian pay-TV units to create a single operator called Tele+. As part of the agreement, News Corp will sell to Vivendi Universal 50 per cent of the stake in Stream previously owned by Telecom Italia. As a result of this transaction, the Tele+ shareholders (Canal+ and RAI) will own 75 per cent and News Corp will own 25 per cent of the new platform, but with the option of increasing its share to 50 per cent over the next three years. The board of directors of the new company will be chaired by Emmanuel Gout, currently chairman of Tele+, while Olivier Gerolami, currently CEO of Tele+, will head the new platform.

The deal was seen as inevitable because the Italian pay-TV market is too small for more than one player. Last year, Stream racked up losses of E400 million, while Tele+ was in the red for E220 million. The financial woes stem from the high cost of rights to Italian league football – and a merger would eliminate all competition, by pushing down the prices. Both pay-TV operators have made clear that all contracts with football clubs will be respected: the majority of Tele+’s contracts will expire in June 2002, while part of Stream’s contracts will cease in 2006. At that point, football clubs will have to re-negotiate new contracts, but this time with a sole pay-TV operator. It seems that football is no longer the “killer application” as it was when pay-TV launched in Italy. The figures speak for themselves: the percentage of subscribers who have chosen the football option has fallen in the past two years from 46 to 28 per cent, while 68 per cent opt for movies (more than half ordering adult movies).

Presuming the regulators are satisfied some consolidation of the channel line-up van be expected; some channels are already being transmitted by both Stream and Tele+ (Discovery Channel, Eurosport, Cartoon Network) so they will certainly not double-illuminate for long. Interspace expects there will be a major overhaul of the movie channels – there are currently 10 of them – Interspace anticipates Stream’s Cinema Stream, Cine Movie to merge with the Tele+ channels (+Bianco, +Nero, Cine Cinemas, etc). Some channels such as Stream Verde, the countryside and environmental channels to disappear alltogether. A merger between Comedy Life (Stream) and Happy Channel (Tele+) is also likely since both are produced by Mediadigit and both air comedies (TV series and movies). Last but not least, there will certainly be a major overhaul of the PPV offering of both pay-TV operators – Stream’s Primafila, Campionato Stream and Sport Stream will most probably be merged with Tele+’s Palco service. Tele+ has already made known that it will continue its co-operation with RaiSat, Sitcom and Multithematiques which will continue to produce thematic channels for its pay-TV bouquet. Stream and Tele+ have also been damaged by high rates of piracy – estimates of the number of pirate cards in circulation range from 600,000 to 1,5 million. The pirate card market is estimated to be worth around E413 million, with wafer cards being sold at prices of around E181. Tele+ has taken several counter measures, including the dropping of the Irdeto encryption system as well as constant software updates for its Goldbox receivers. Italian police have also made several successful raids, seizing counterfeit smart cards and programming kits, as well as breaking up networks of pirate card dealers. Rival Stream has put salt in Tele+’s wounds by strongly criticising the MediaGuard system, pointing out that it is “prone to piracy” and does not provide the same degree of security as its own NDS system.