With communications technology evolving at a breakneck pace, and no one certain which TV system the bemused public will ultimately favor, media moguls are forced to gamble fortunes just to survive. Two of the industry's most successful gamblers--and former rivals--joined forces last week in an alliance aimed at dominating Europe's budding market in so-called digital pay television. If they succeed, they capture a prize predicted to yield $15 billion annually within a decade. Rupert Murdoch, whose tentacular publishing, TV and film empire operates on three continents, announced that his British-based BSkyB Group will join with Germany's Kirch Group, a major European player in television programming, technology and films. Together they will launch on July 28 a digital-television service called DF 1 in Germany, which is considered potentially the biggest pay-TV market in Europe.

The deal has the look of a mutually lucrative alliance. It links the buccaneering styles of Murdoch, 65, and Leo Kirch, 69, who presides over a German newspaper and television empire, including one of the biggest film libraries in Europe. Murdoch has been chafing in a four-month-old alliance with leading media group and Kirch's chief rival--France's Havas and Canal Plus, a French pay-TV operator. Frustrated at Bertelsmann's sluggish pace in the German digital-TV race, Murdoch switched his allegiances.

The sudden shake-up is a telling sign that the battle for digital pay-TV markets is heating up as the technology becomes more widely accessible. Digital TV involves the transmission of signals in the same form used by computers--a string of 0s and 1s--as opposed to the "analog" waves used by conventional broadcast-TV systems.

Besides promising a brilliant picture with a broader color spectrum, DF 1 will give viewers the ability to interact with their sets. Customers will be offered a decoder developed by Nokia of Finland that will enable the TV to be connected to a computer, and a telephone line that will receive the incoming digital signal; the system will allow viewers to switch camera angles while watching sports events, for example, or download software for games. Says DF 1's manager Gottfried Zmeck: "This multimedia terminal can adapt to technologies we don't even have yet."

Kirch brings to the new partnership his library of 80,000 hours of programming, including 15,000 feature films, which his German media rivals admit they cannot match. He is a leader in televising sports as well. Earlier this month, Kirch, along with the Swiss-based Sporis Holding, paid $2.24 billion for non-U.S. TV rights to the 2002 and 2006 World Cup soccer competitions.

That's the kind of daring bet that Murdoch appreciates. His BSkyB owes much of its success to owning the rights for English Premier League soccer, and the satellite system now boasts 5.2 million subscribers in Britain--along with vast expertise in pay television and the deep pockets of a Murdoch-backed company. Says a London financial analyst: "Between the two of them [Murdoch and Kirch], they're just so powerful. The only question is how well the consumer is going to accept digital TV and its price tag: $400 just for the hardware, with subscription costs on top of that."

The Kirch group is openly cocky about its presumed lead in the German digital pay-TV race, but it may be underestimating its rival, Bertelsmann. The 160-year-old German firm had sales of $13 billion and profits of $595 million in 1995. It also has a formidable partner; Deutsche Telekom has the money and technology to challenge Kirch when the time is ripe. For the moment, a Bertelsmann insider says, "nobody knows if there's a market for digital TV. Nobody knows what consumers will pay for it." To succeed in Germany, according to this insider, a company needs to acquire rights to Premiere (a pay-per-view channel with 1.2 million subscribers) and the cable system of Deutsche Telekom (with 16 million customers). Bertelsmann controls Premiere--Kirch owns 25%--and has an alliance with Deutsche Telekom.

If estimates are correct, Kirch has invested close to $5 billion in digital technology and programming for the service. Just to break even, says the Bertelsmann source, Kirch must gain 2 million subscribers every year between 1997 and 2001, each paying $20 a month. Kirch's rivals are dubious about that big a market that soon. The weekly magazine Stern polled Germans and found almost a third didn't know what pay TV was. A report by U.S. investment bankers Morgan Stanley shows that Germans are slow to subscribe to pay TV. Another risk is the lack of a single standard system among the competing technologies now coming forward. At the moment, Kirch and Bertelsmann are each going their own way technologically.

Still, Kirch is unfazed, convinced that he will emerge the winner because he's first on the German market. Bertelsmann, on the other hand, believes the race will go to the group that offers the most attractive content at the most reasonable prices, not just the first one out of the starting gate. Gentlemen, seize your remotes, and place your bets.

--Reported by Bruce Crumley/Paris, Helen Gibson/London, Peggy Salz-Trautman/Munich and Bruce van Voorst/Bonn