Thought leadership from our experts

The end of the transport model in the German cable market?

The transport model

Foreigners have long been puzzled by a peculiarity of the German cable TV market: Broadcasters have to pay cable operators for the distribution of their programs. This so called "transport model" has been the predominant business model in the German cable TV market since the German cable network was initially deployed in the 1980s by the German federal post office (Deutsche Bundespost), the predecessor of Deutsche Telekom. Even the divestiture of the so-called regional cable TV networks (Regionalgesellschaften) – Kabel Deutschland and three networks that later merged into Unitymedia KabelBW – by Deutsche Telekom in the early 2000s did not change this. Until the end of 2012 the transport model was the dominant model for the distribution of Free TV programs by the regional cable TV networks. However, the smaller cable operators that originally built the domestic distribution networks (so-called network level 4) only obtained distribution fees from the private broadcasting sector and were never able to charge these to the public broadcasters.

The paradigm change

The first difficulties in upholding the transport model began with the digitisation of the cable networks which took up speed at around the same time as the last six regional cable networks bundled in Kabel Deutschland were sold by Deutsche Telekom to the three private equity investors Providence, APAX and Goldman Sachs in 2003. The broadcasters haggled with the regional cable operators whether they should also pay for the distribution of the digital programs as they had done with regard to their analogue programs. After years of negotiations with the private broadcasting groups RTL and ProSiebenSat.1 Kabel Deutschland and the predecessors of Unitymedia KabelBW achieved a compromise and were able to transfer the transport model into the digital world. The public broadcasters ARD, ZDF, ARTE and Deutschlandradio had also agreed with the newly privatised regional networks to continue paying for the analogue and digital distribution of their programs. While they voiced quite a few reservations when the agreements came up for renewal the public broadcasters only ended this arrangement in 2012 by terminating all their distribution agreements with the regional cable networks. Kabel Deutschland as well as Unitymedia KabelBW's subsidiaries thereafter sued the public broadcasters when it became clear that they would not re-enter into distribution arrangements based on the transport model.

The court proceedings

Kabel Deutschland and Unitymedia Kabel BW took different strategic decisions on how to pursue their claims in court. While the former sued each of the regional broadcasters which together form ARD as well as ZDF and ARTE (but not Deutschlandradio) in their "home courts", Unitymedia sued all four public broadcasters in Cologne und KabelBW did the same in Mannheim. To no avail: The regional cable operators lost all of their nine proceedings initiated before eight different German district courts. While Unitymedia's and Kabel BW's appeals are still pending, with a hearing scheduled by the Higher Regional Court of Karlsruhe for May 2015, the three appeals pursued by Kabel Deutschland have been lost already and final appeals were filed with the German Federal Court of Justice.

Thus, it remains to be seen whether Germany's highest court for civil law matters will, after hearing the first cases on March 3 2015, uphold the decisions by all other courts favouring the public broadcasters

The courts' reasoning

None of the courts followed the arguments of the cable operators that the termination of the cable distribution agreements should be deemed invalid due to the public broadcasters' alleged violation of antitrust laws. First, the broadcasters could not be viewed as boycotting the cable operators by their decision to jointly terminate the distribution agreements and not to re-enter into them. The joint termination was contemplated by the respective contractual clause and ARD and ZDF only obligated themselves towards the Federal Cartel Office to not jointly negotiate cable distribution agreements in the future. Second, the broadcasters were neither obliged under antitrust nor broadcasting laws to request the distribution of their programs and pay for the service by the cable operators. Finally, the cable operators' argument that the public broadcasters had a dominant market position which compelled them to enter into new distribution agreements on antitrust grounds did not prevail. While Article 31 paragraph 2 of the European Universal Service Directive allowed the Member States to determine appropriate remuneration of the cable operators' must-carry services the German states have not introduced such concept. Thus, while most of the German public broadcasters benefited from their must-carry privilege this would not at the same time bring the duty with it to remunerate the cable operators. Since quite a few courts decided that the claim based on German (public) broadcasting law should be pursued in the German administrative courts the cable operators also filed respective claims against some of the public broadcasters the outcome of which is not yet certain. The German civil courts all upheld the termination of the distributions agreements and dismissed the claims of the cable operators to be paid for the distribution of the public broadcaster's programs.

The future of the transport model

The private broadcasters have, so far, not terminated their distribution agreements with the cable operators. Their regulatory position is much weaker since most of them do not benefit from a must-carry privilege. Unless forced to do so by the courts and / or the lawmakers the public broadcasters will no longer pay a transport fee. They, in turn, face the end of the distribution of some of their non-must-carry channels by the regional cable TV networks.

Conclusion

To sum up: The transport model has not yet and, at least in the near future, will not vanish from the German cable TV market, even though it is no longer accepted by the public broadcasters.