The owners of the two French direct-to-home satellite television platforms, Canalsat and TPS, are on the verge of combining their efforts in the increasingly competitive pay-TV market in France.

Vivendi Universal, which owns Canalsat, and TF1 and M6, the owners of TPS, have confirmed they are in discussions about merging the Canal+ Group with TPS. The combined satellite entity would have about 4.5 million subscribers, making it the second largest platform in Europe behind BSkyB of the United Kingdom.

“In France, we have heard almost every year about this possible merger about Canalsat and TPS,” Florence LeBorgne, a media analyst at IDATE, told Satellite News. “Until now, it was just rumors. It is the first time that they have announced that they will speak together and find an agreement.”

Facing More Competition

Competition in the French pay-TV market has heated up recently, with several different platforms now competing for subscribers. Digital terrestrial television (DTT) service was launched in March, and TV over DSL has made a very encouraging start with France Telecom, Neuf Cegetel and Free all making an impact on the market.

While TPS and Canalsat have done deals with telcos so that their content is available on DSL, such deals could ultimately have an adverse impact on their satellite business. Guy Lafarge, the CEO of Canalsat told Satellite News recently that 20 percent of its new subscribers were coming via DSL, rather than DTH.

“Everybody knows it is quite difficult for TPS and Canalsat this year to recruit new subscribers,” LeBorgne said. “This is due to the successful offers on ADSL platforms. So, of course, part of the subscribers on ADSL are subscribing to TPS or to Canalsat offers. But for TPS and Canalsat, they are losing control of their subscribers. When you subscribe to TPS through Neuf Cegetel, you are subscribing to the ADSL platform and not to TPS, for example. The telco directly controls the subscriber and the set-top box.”

TPS Losing Market Share

Canalsat, which surpassed 3 million subscribers at the beginning of 2005, most likely will be the dominant player in the merger talks, as the overall prospects for TPS have been declining throughout the last year. TPS has seen a slight erosion in its subscriber numbers, which fell from 1.35 million at the end of 2004 to 1.31 million at the end of June, and generating new subscribers has become more difficult for TPS since Canal+, the majority owner of Canalsat, grabbed the exclusive rights from TPS in January to broadcast French professional soccer .

“I think after Canal+ won the football rights, [TF1] would take a year to see what would happen.” Matthieu Mouly, a media equity analyst at CDC-IXIS Securities said. It is a year since Canal+ won the football rights. TPS subscriber numbers are declining, and they have a problem.”

TF1, the majority owner of TPS, likely is pushing for the merger so it can focus more on its channel business going forward rather than a satellite platform, Mouly said. “The challenge is on the DTT side rather than satellite,” he said. “Having a satellite platform is not a good idea for a FTA (free-to-air) channel provider. They need to develop DTT channels, as well as new channels offers on ADSL. This asset is not as strategic as it was before for TF1.”

A spokesman from Canalsat declined to comment on the merger talks.

–Mark Holmes

(Matthieu Mouly, CDC-IXIS Securities, mmouly@ixis-sec.com; Florence LeBorgne, IDATE, f.leborgne@idate.fr)