MAY 8, 2002
The collapse of KirchPayTV
The insolvency filing on Wednesday in Munich will not affect the ownership of the Formula One group because Kirch's shareholding in SLEC, the Formula One Holding company, is held by another company, known as Kirch Beteiligung GmbH & Co. This is in deep trouble as well but has yet to seek protection from the courts.
Kirch PayTV will now be taken over by a legal administrator to see whether the business can be kept alive as a going concern or whether the assets should be sold off to pay creditors.
The big problem for Formula One is that Kirch is the source of a significant proportion of the company's TV revenues and has been since the middle of 1996 when Kirch became the first TV company to sign up for the F1 digital television service. That deal was for 10 years. The exact figures are not known but it was known that Kirch was the second biggest contributor to F1 finances (behind Canal Plus). When it was trying to launch its Eurobond a few years ago, the Formula One group revealed that in 1998 $227m came from 62 TV companies and estimates suggested that this would rise to $424m by 2001 and then start to tail off as existing TV deals ran out. The prospectus revealed that by 2003 there would be only six deals left, worth $181m. Kirch was one of these.
Whatever the exact figure is, the Formula One group is going to lose at least $30m a year in revenues from Kirch which means that the money available for the teams will be reduced by just over $15m. This money is not divided up equally but as a rough guide it is fair to say that they stand to lose around $1m each as a result. The teams lost out a few years ago when Canal Plus insisted on renegotiating its original contract to reduce the costs.
The collapse of Kirch is more significant however as it marks the end of any credible arguments that pay-per-view is going to be a success. All over the world pay-TV companies are going out of business or struggling having discovered the unpleasant reality that people will not pay extra money to watch sports - at least not enough off them well. Formula 1 has made it easier for people to say "No" because the racing has been available free-over-air, although the quality of the programming has been no match for the F1 "Supersignal".
The only logical response to this is for the Formula One authorities to accept the situation and turn the available technology and experience to good effect by producing a much higher quality free-over-air feed. Many of the companies currently covering the sport have been deeply frustrated by the poor quality of the "world feed" from the host broadcasters. There has been very little in-car footage and none of the clever gizmos which have been seen on the F1 Supersignal.
This will involve Formula 1 taking over the TV coverage from the local companies. This is essential to guarantee continuity of direction. One of the biggest problems for the local directors is that they cover a Grand Prix only once a year. The Formula One directors are doing it every two weeks.
Turning away from pay-per-view television will not solve the problem of the car manufacturers threatening to start their own series but it will help. They have made it very clear that they feel it is essential that the sport remains free to the public and therefore anything that moves in that direction is a good idea.
A better service will also encourage the local TV companies to pay more for what they are getting and so some of the money that is being lost from pay-per-view revenues can be replaced by traditional broadcasting rights fees.
Formula One is still waiting for broadband technology to reach a point at which it can use the technology it has developed to cover other sports and so generate money from assets that exist. That will eventually happen and so the business can make more money from diversifying into other sports.