How an Empire Fell

Debt spread like cancer through the body of the Kirch, the German media group, until no amount of financial doctoring could repair it.

It first appeared, apparently benign, in particular organs of the conglomerate. From there it spread through arteries to other parts, taking advantage of the interconnectedness that made Kirch at once powerful and vulnerable.

First a trickle but eventually a rush, red ink flowed around the group. When it started welling in one part, it flowed to another. At first this circulation provided financial managers a way to lessen the dangers of minor bleeding, but at a critical stage the debt disease turned malignant.

For a while, the bruised company still flourished on artificial life support, feeding on credit lines from major German banks, but with that Kirch’s debts only grew. By April the once-mighty group’s debt pile reportedly reached 6.5 billion euro – 2.2 billion euro of which were KirchMedia’s and 962 million euro of which came from the group’s pay-television arm, Premiere.

The group’s declaration of insolvency is admission that the body has no option but to stop fighting.

Kirch’s failed health comes as a shock to many, simply because the group was once such a powerful force, especially with the success of ProSiebenSat.1, Germany’s largest commercial free-to-air broadcaster.

But recent losses, especially from Premiere, showed that Kirch was gambling unsuccessfully in a fast-changing media industry.

Changed industry, changed strategies

The group’s strategy for profit in recent years focused on less concrete, fundamental business plans than those that made founder Leo Kirch a titan during his many winning decades.

He started in the 1950s, buying up rights to films. The first one was Frederico Fellini’s "La Strada" and worked his way up to massive supply contracts with Hollywood studios and sporting organisations.

The fundamental value of those investments still exists, which is why giant competitors are already fighting over Kirch’s remains.

"Murdoch, Berlusconi, Vivendi, TFI, Granada, Carlton, German publishing houses, you name it. It would give all of them a once-in-a-lifetime chance to get into German TV seriously," Bernard Tubeileh, media analyst at Merrill Lynch in Frankfurt told Reuters.

But even the vultures who devour bits of the group face daunting challenges. The value of a Fellini movie, for example, is fundamental but different from the days when Kirch made his first nest egg by turning a big profit with an inexpensive purchase - "La Strada". Films cost much more now, and they face complicated, ubiquitous competition.

The media industry, gigantic compared to the days when Kirch humbly began, has become a huge, competitive soup of countless images and sounds, streaming to consumers even when they don’t want them. Not to mention the scourge of pirating. This is a much harder industry to master than it once was.

Perhaps this is why Kirch relied more on risky investments and creative accounting, at the end, to stay alive. After all, the group was merely gambling as its most successful competitors do when the debt disease struck it dead.