Canal Plus SA entered a new and glorious era in the history of television, with its launch this weekend of a digital-satellite TV package.
And what should investors do about it? Sell, some analysts say.
Over the last few months, a wave of digital-television hype has pushed up Canal Plus stock on the Paris Bourse, where it reached a 12-month high of 1,269 French francs ($254.42) Friday. Canal Plus, which is calling 1996 “the year TV changed,” has more than four million pay-TV subscribers in France and has been saying the new service will eventually allow it to sell a host of new programs, boosting average revenue per subscriber by 14%, to 200 francs from a current 175 francs.
But now that Canal Plus has begun its digital broadcasts, it’s time for a reality check.
First, the new service won’t have a positive impact on earnings for at least three years, when Canal Plus expects to reach a break-even point with 900,000 digital subscribers. This year, the company expects only 150,000 people to subscribe — not exactly a media revolution. And Canal Plus doesn’t foresee its current French customer base switching to the new product anytime soon.
Second, Canal Plus stands to lose its effective monopoly on pay-TV services in France, and its position as a participant in a similar monopoly in Germany, as digital technology seduces more and more competitors to the pay-TV arena in those countries. And with competition comes lower prices.
“Canal Plus is a monopoly with high prices for one channel,” says Laurent Carozzi, an analyst with Paribas Capital Markets, who cautions investors against being distracted by “a lot of hype” surrounding digital TV. “A single change in price in the pay-TV market will have a huge impact on Canal Plus’s cash flow,” he says.
Of course, Mr. Carozzi has been negative on Canal Plus for some time and has reason to be miffed, having missed the recent run-up. But even some bulls are sounding a note of caution.
“Digital broadcasting is important over the very long term,” says Olivier Fevre, an analyst at NatWest Sellier, “but in the short term the position is less good.”
Canal Plus has operations in more than five countries outside of France, but 80% of its revenue comes from one service. The company charges about four million subscribers 175 francs a month for a black box that decodes a single channel it broadcasts over conventional airwaves. In a market driven by films, not sitcoms, current French law gives Canal Plus a huge advantage: the pay-TV channel is allowed to broadcast movies one year after they’ve been released in cinemas, whereas France requires conventional channels to wait two years after the cinematic release before they can broadcast a film.
But no such restrictions apply to satellite services, a fact which will help dull the edge of Canal Plus’s pay-TV leadership, analysts say.
What’s more, big competitors tend to lead to lower profit margins. And Canal Plus’s competitors are nothing to sneeze at. Teaming up to compete with Canal Plus are TF1, France’s largest commercial-TV station; France Television, the state broadcaster; Cie. Luxembourgeoise de Telediffusion, the Luxembourg-based media group; M6, another French commercial broadcaster; and Lyonnaise des Eaux, a water company with cable-TV operations.
A third French group, tiny AB Sat, controlled by AB Productions, a company that produces shows that are popular among French adolescents, has already begun broadcasting its own digital-satellite service (which for now is only being picked up by some cable TV viewers in Switzerland.)
Similarly, in Germany, Canal Plus is a part owner, together with the Kirch Group of Munich and Bertelsmann AG, in Premiere, the only national pay-TV channel. But Kirch is going its own way when it comes to digital pay-TV. With a separate group of allies, Kirch is offering a digital service in Germany that will compete with a group comprised of British Sky Broadcasting PLC, Bertelsmann, and Canal Plus.
Canal Plus’s rivals in Germany seem to be moving ahead quickly with their service, but it’s not clear how successful its rivals will be in France.
Outside of the Swiss cable-TV subscribers, not many people are watching AB Sat’s service, since it hasn’t yet begun to sell the satellite dishes and decoders that individual consumers needed to receive the programming.
And companies such as TF1 and France Television — old broadcasting rivals — have no experience in pay-TV and no experience working together.
Canal Plus has some impressive advantages. For starters, as some analysts and Canal Plus executives point out, its French digital satellite rivals may never get off the ground. Canal Plus clearly has an early start in the French digital-TV marketplace, a technology that most analysts say will transform the television landscape in about ten years.
It knows how to market pay-TV, and the Canal Plus satellite offer, launched over the weekend, has some interesting features. In addition to most of the channels already available on cable, it will broadcast Disney Channel France this fall and offer various pay-per-view programs and radio services. The Canal Plus receiver — part of a closed, proprietary system that Canal Plus is hoping will guarantee it a lock on the French market — includes a slot for a credit card to facilitate payment.
But much of Canal Plus’s advantage is based on the notion that there isn’t room enough in France for a rival service, because economies of scale are needed to drive down the cost of the exotic digital-receiver equipment it developed.
Unfortunately for Canal Plus, success in the U.S., by far the largest market for digital-satellite TV, is changing that notion. DirecTV, a General Motors unit, took off last year, signing up 1.3 million customers. Telephone company AT&T jumped aboard as an investor.
Now several new players are eyeing DirecTV’s lead — including a team of News Corp. and MCI Communications an upstart called Echostar Communications and Primestar Partners, owned by a consortium of cable companies that includes Tele-Communications In all, six different companies either have entered or are saying they will compete in the U.S. digital-satellite TV market.
More than likely, that means Canal Plus’s competitors won’t have to develop their own, proprietary, digital-satellite technology, as Canal Plus did, in order to compete in France. They’ll be able to buy it from one of the American groups.