Virgin Media Developments
A couple of events from the Virgin Media – BskyB battle field over the past week have kept me amused and thinking about the consequences.
The first of these events was the announcement that Virgin Media and C&W are getting into bed with one and another to offer an ADSL unbundled based product set. “Beyond Cable” is probably the Virgin marketeers biggest challenge, well, since they signed up to help turnaround a financially challenged cable group with a historic reputation for appalling service.
The key problem for me is the message: “Beyond” implies an improvement in cable, where the offering obviously isn’t. Cable broadband is sold at a premium price to ADSL on the basis that it is better – the success in the marketplace of the product despite the extra price implies the Great British Public also view it as a premium product. Admittedly bundling Freeview with a PVR is appealing to a certain segment of the population, but these people would not have been subscribers to the cable TV triple play in the first place – I cannot see anything in the TV element of the package which would stop a cable TV customer moving into a new area from churning to Sky.
After all this is the published raison d’etre of the service – to stop people who are moving house churning onto Sky. The Virgin Media supplied monthly estimate of movers is 1% which equates to a potential movers market of around 144k/quarter on the customer base of 4.8m. If we now look at coverage: total UK households were 25.3m at Dec-06 according to the latest OFCOM digital TV takeup figures; Cable Triple Play Coverage is around 11.8m households (47% coverage); the additional coverage provided by “Beyond Cable” is 4m homes (16%) coverage; and therefore 37% remains non-Virgin territory. Assuming a normal distribution of movers amongst the areas, the maximum number of potential sales is 23k/quarter. Even with a 100% conversion which is doubtful given the inferiority of the product and the almost blanket coverage of payTV from Sky, 23k/quarter will hardly set the uk communications market on fire. The logic of “Beyond Cable” as an anti-churn mechanism obviously doesn’t stack up.
The other big problem in the service is non-C&W covered areas – what does Virgin Media do in this case? How does a customer know which area he is in? I think this lack of coverage issue is probably the main reason why BT Wholesale won the Vodafone contract rather than C&W. C&W announced plans to cover 800 exchanges by Sept ’06 and given the sale of Bulldog, I seriously doubt whether the footprint has extended beyond this. Given that Sky has already unbundled more exchanges than this, Sky probably has a larger coverage right now and also has a clearer marketing message on the non-bundled exchanges – the payTV and phone elements are exactly the same, but you have to pay extra for broadband and the speed is not as fast (8-meg max) It is all very messy before we get into the complexities of provisioning and support.
We should also not forget how much investment C&W has placed in the unbundling network: cash outflows for C&W Access of £57m, £163m and forecast £155m in 2004/5, 2005/6, 2006/7 respectively is a lot of investment. Excluding the cumulative EBITDA losses of £218m still leaves around £167m on the C&W balance sheet. C&W must have been close to shutting down C&W Access without the Virgin Media win and even with the win there must be a big questionmark over certain of the overlapping coverage areas.
However, the deal certainly is of interest in tying the fortunes together of the #2 and #3 fibre networks in the UK together. Where dark fibre is available at UK exchanges, the backhaul options are usually limited to either C&W or Virgin Media – BT prefers to rent expensive circuits. Given that all the unbundling competition: Sky/Easynet, Carphone/Opal, O2/Be, Orange and Tiscali will all be asking for dark fibre from the same people – I’d certainly be thinking it is about time for an extremely large co-ordinated price increase.
The most intriguing element of the deal is whether the wholesale deal could be a precursor for a full merger. Certainly, a full merger would be appealing to both sides. Strategically for C&W shareholders they have since the beginnings of Mercury in the UK always looked for a reasonable sized consumer segment to balance the business segment and provide enough scale to compete with BT. For C&W management, it offers a great opportunity to cash in now on their huge bonus packages without actually having to complete the hard work of turning the UK business around. For Virgin Media shareholders, it offers a great opportunity to shore up the balance sheet and with a bit of financial engineering magic and staggered disposal of C&W international properties frequent cash injections into the business.
My hunch is that a deal with C&W makes a lot more sense than the mooted Private Equity approach: being a natural born cynic – private equity approaches always seem to appear in the press when the Virgin Media share price is under pressure. I can’t see what the added value of a private equity approach is: Virgin Media is already fully leveraged and even with a complete replacement of the management team there is no silver bullet to kill off the UK competition. The biggest problem with a Private Equity approach is Richard Branson himself: he has spent decades trying to get into the UK TV scene and is not going to give up at the first sign of trouble. Richard Branson crossed the rubicon with the ntl:/Virgin Mobile deal and probably knew as well as anyone the size of the task ahead.
In fact the biggest trouble Virgin Media face is Sky. Sky are certainly crafty and yet again released on a Friday evening news which will have ruined many a Virgin Media’s Executives weekend - remember the ITV spoiler investment was also announced at 6pm on a Friday evening.
The offer by James Murdoch to split the difference on contract negotiations which came to £5m was always going to be rejected by Virgin Media, however it probably hit home if the weekend press is anything to go by:
The first of these events was the announcement that Virgin Media and C&W are getting into bed with one and another to offer an ADSL unbundled based product set. “Beyond Cable” is probably the Virgin marketeers biggest challenge, well, since they signed up to help turnaround a financially challenged cable group with a historic reputation for appalling service.
The key problem for me is the message: “Beyond” implies an improvement in cable, where the offering obviously isn’t. Cable broadband is sold at a premium price to ADSL on the basis that it is better – the success in the marketplace of the product despite the extra price implies the Great British Public also view it as a premium product. Admittedly bundling Freeview with a PVR is appealing to a certain segment of the population, but these people would not have been subscribers to the cable TV triple play in the first place – I cannot see anything in the TV element of the package which would stop a cable TV customer moving into a new area from churning to Sky.
After all this is the published raison d’etre of the service – to stop people who are moving house churning onto Sky. The Virgin Media supplied monthly estimate of movers is 1% which equates to a potential movers market of around 144k/quarter on the customer base of 4.8m. If we now look at coverage: total UK households were 25.3m at Dec-06 according to the latest OFCOM digital TV takeup figures; Cable Triple Play Coverage is around 11.8m households (47% coverage); the additional coverage provided by “Beyond Cable” is 4m homes (16%) coverage; and therefore 37% remains non-Virgin territory. Assuming a normal distribution of movers amongst the areas, the maximum number of potential sales is 23k/quarter. Even with a 100% conversion which is doubtful given the inferiority of the product and the almost blanket coverage of payTV from Sky, 23k/quarter will hardly set the uk communications market on fire. The logic of “Beyond Cable” as an anti-churn mechanism obviously doesn’t stack up.
The other big problem in the service is non-C&W covered areas – what does Virgin Media do in this case? How does a customer know which area he is in? I think this lack of coverage issue is probably the main reason why BT Wholesale won the Vodafone contract rather than C&W. C&W announced plans to cover 800 exchanges by Sept ’06 and given the sale of Bulldog, I seriously doubt whether the footprint has extended beyond this. Given that Sky has already unbundled more exchanges than this, Sky probably has a larger coverage right now and also has a clearer marketing message on the non-bundled exchanges – the payTV and phone elements are exactly the same, but you have to pay extra for broadband and the speed is not as fast (8-meg max) It is all very messy before we get into the complexities of provisioning and support.
We should also not forget how much investment C&W has placed in the unbundling network: cash outflows for C&W Access of £57m, £163m and forecast £155m in 2004/5, 2005/6, 2006/7 respectively is a lot of investment. Excluding the cumulative EBITDA losses of £218m still leaves around £167m on the C&W balance sheet. C&W must have been close to shutting down C&W Access without the Virgin Media win and even with the win there must be a big questionmark over certain of the overlapping coverage areas.
However, the deal certainly is of interest in tying the fortunes together of the #2 and #3 fibre networks in the UK together. Where dark fibre is available at UK exchanges, the backhaul options are usually limited to either C&W or Virgin Media – BT prefers to rent expensive circuits. Given that all the unbundling competition: Sky/Easynet, Carphone/Opal, O2/Be, Orange and Tiscali will all be asking for dark fibre from the same people – I’d certainly be thinking it is about time for an extremely large co-ordinated price increase.
The most intriguing element of the deal is whether the wholesale deal could be a precursor for a full merger. Certainly, a full merger would be appealing to both sides. Strategically for C&W shareholders they have since the beginnings of Mercury in the UK always looked for a reasonable sized consumer segment to balance the business segment and provide enough scale to compete with BT. For C&W management, it offers a great opportunity to cash in now on their huge bonus packages without actually having to complete the hard work of turning the UK business around. For Virgin Media shareholders, it offers a great opportunity to shore up the balance sheet and with a bit of financial engineering magic and staggered disposal of C&W international properties frequent cash injections into the business.
My hunch is that a deal with C&W makes a lot more sense than the mooted Private Equity approach: being a natural born cynic – private equity approaches always seem to appear in the press when the Virgin Media share price is under pressure. I can’t see what the added value of a private equity approach is: Virgin Media is already fully leveraged and even with a complete replacement of the management team there is no silver bullet to kill off the UK competition. The biggest problem with a Private Equity approach is Richard Branson himself: he has spent decades trying to get into the UK TV scene and is not going to give up at the first sign of trouble. Richard Branson crossed the rubicon with the ntl:/Virgin Mobile deal and probably knew as well as anyone the size of the task ahead.
In fact the biggest trouble Virgin Media face is Sky. Sky are certainly crafty and yet again released on a Friday evening news which will have ruined many a Virgin Media’s Executives weekend - remember the ITV spoiler investment was also announced at 6pm on a Friday evening.
The offer by James Murdoch to split the difference on contract negotiations which came to £5m was always going to be rejected by Virgin Media, however it probably hit home if the weekend press is anything to go by:
- it portrays Sky as the party trying its best to solve the impasse in negotiations, whereas Virgin Media is being increasingly seen as being litigious: ultimately the war will be won in the consumers minds not in any court of law or politicians;
- diverts attention from the “beyond cable” proposals; and
- provides a nice contrast with the Virgin Media Board decision to increase the dividend by 50% despite deteriorating results – this move alone will cost another US$13m in 2007 -assuming the dividend remains constant in all the other quarters.
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