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Waiting for the Plus in Canal+


He hobnobbed with Steven Spielberg at an Oscar party in Hollywood, then jetted to Osaka for the opening of a Universal Studios theme park. Now, lighting a cigar before a wall of TV screens in his Paris office, Pierre Lescure looks every inch the media mogul. Indeed, it has been a heady few months for Lescure, the longtime chief of European pay-TV company Canal+. After the merger last year of Vivendi, Seagram, and Canal+, he now heads the film and TV division of Vivendi Universal, the world's No. 2 media conglomerate after AOL Time Warner. For now, Vivendi Universal's Hollywood operations are purring along smoothly. Universal Pictures raked in $1 billion in U.S. box-office revenues last year and shared in Oscars for Gladiator and Erin Brockovich.

But Canal+? That's another story. When Vivendi and Seagram sealed their merger, Lescure and Vivendi Universal CEO Jean-Marie Messier extolled Canal+ as a pipeline that would stream high-value content--everything from video downloading to interactive TV shows--into millions of living rooms across Europe. "For Canal+, it's an infinite opportunity to expand its geographic footprint and reinforce its programming," Lescure says.

But what's flowing at Canal+ these days is red ink. The company has posted losses for the past three years as it spent heavily to expand across Europe, secure costly sports broadcasting rights, and invest in digital technology. Some losses were anticipated. But they have lasted longer than expected, because operations outside France have performed poorly and digital-TV revenues haven't grown as fast as hoped. Analysts figure Canal+ will lose at least $100 million this year on sales of $4.2 billion. To reach breakeven next year, Lescure is under pressure to cut costs.

The belt-tightening has already begun. To reduce costs 10% in France, Canal+ will broadcast fewer sports events and trim programming. It's selling off money-losing businesses such as GameOne, an interactive video channel, and looking to economize by forming partnerships, such as a possible merger of its sports-broadcast rights unit with that of Bertelsmann's RTL television.

MURDOCH MERGER? Canal+ hurts most outside France. Its foreign operations have not turned a profit since the mid-1990s. The biggest problem is Italian subsidiary Telepi?, which analysts say loses at least $200 million a year, in part because the Telepi? equipment has proven vulnerable to piracy. Messier and Lescure are talking with Rupert Murdoch, chief owner of No. 2 Italian pay-TV operator Stream about a possible merger of the two operations.

The picture certainly isn't all bleak at Canal+. It has 15 million subscribers paying at least $26 per month for service. Lescure says he's confident that the heavy spending of the past few years was necessary to keep the company at the industry's forefront. "Canal Plus will still be the biggest by far in Europe, even after these [planned] economies," he says.

But the big payoff that Vivendi Universal is expecting from Canal+ won't come quickly. By next year, the company says, it will unveil a new generation of set-top boxes capable of storing downloaded video. But fewer than one-third of Canal+ subscribers have the satellite or cable service necessary to use the new boxes. "Investors will have to get accustomed to the idea that their dream of immediate extra spending from subscribers is not tomorrow's story--it's going to take years," says media analyst Edouard Tetreau of Cr?dit Lyonnais Securities in Paris. For now, Lescure may have to count on Hollywood to deliver the blockbusters. By Carol Matlack in Paris, with Ronald Grover in Los Angeles and Gail Edmondson in Rome


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