A painful, necessary process at the Exchange

Comment

It seems that the only people not to realise that the once pre- eminent Stock Exchange needs to cut its copious cloth to a very different City environment are the incorrigibles who actually inhabit that grim, concrete tower on Throgmorton Street. Pre-Big Bang the Stock Exchange had an enviable position at the heart of the City establishment, enjoying - in the Square Mile at least - unquestioning respect and authority. But the world has changed and the markets with it. The Stock Exchange is left wondering about its purpose.

Under Michael Lawrence, sacked so unceremoniously from his job as the chief executive in January, delusions of grandeur lived on. True, Mr Lawrence did his bit in slimming this once bloated organisation. Numbers were reduced from 2,800 at the time of Big Bang to below 1,000. But what persisted was the arrogance of an organisation that failed to accept its importance had diminished, one that continued to believe it could boss big City firms around.

Typical of this was the frantic search for new sources of income in areas that brought the Exchange into competition with its members. The idea was to make up for the dramatic loss of revenues once Talisman is replaced from July onwards by Crest, the automatic settlement system. But the effect was just to alienate those who no longer needed the club. Those pretensions are gone now, out of the window along with Mr Lawrence. In its place is a much tougher commitment to transforming the Exchange into the lean, mean machine the City requires. The atmosphere on the board is by all accounts transformed - gone is the sniping between the big City member firms and the Exchange's executive, watched in hair-tearing dismay by the Treasury.

The cost cuts to date are only a foretaste of what is to come. Looking to the end of the century, the strategic review being finalised by the Exchange proposes that costs be cut by a third. Adjusting to reality is a long and painful process.

Cable firms ready to repay investors

The UK cable industry has had a deserved reputation for poor marketing and sluggish growth, which has led inevitably to lacklustre performance on the stock market. Worse, there have been a few further jolts to the sector - like Labour's high-profile deal with BT, which looked like sidelining cable. As a result, the two biggest London-listed companies spent the back half of 1995 languishing far below their over-optimistic issue prices. Could that be about to change? Most of the big operators have built more than half their networks, and are on schedule to complete the roll-out in the next few years. That has allowed them to start thinking about how to convince the punter to subscribe. More money is being spent on promotion and marketing, and the penetration rates are beginning to bear the fruit.

True, cable TV subscription rates are still woefully low - barely more than 20 per cent of those who can subscribe actually do so. But the pay- to-basic ratio (the percentage of those customers taking the lucrative premium programmes like Sky Sport and the Disney Channel) is creeping up. Meanwhile, telephony penetration rates, at closer to 30 per cent, look far heathier, thanks to deep discounts on BT's standard rates.

The introduction of number portability this week in one of Nynex CableComm's franchises is a sign of better times ahead. All the independent studies show that many customers were reluctant to give up their old BT numbers, even to save money on their bills. By the end of the year, at least two, and probably all three, of the listed companies will be offering portability.

Farther down the road, we are likely to see concrete proof of cable's obvious technical advantage - its broadband capability. When the cable operators bring their cable modems to market, Internet users will be able to tap into the world "network of networks" with great ease and at vastly increased speeds. There is huge growth still to come in the Internet market in the UK, and the cable industry will reap more than its share.

Telewest and Nynex, the leading operators, were far too aggressively priced when they came to market. It was assumed that the roll-out of cable in the UK would mirror the experience in the US, where 40 per cent penetration rates were easily achieved even without the added bonus of being able to offer TV and telephony together. It did not.

But the sell-off last year was probably overdone, and the City is beginning to accept that fact. Telewest yesterday managed to raise pounds 1.2bn in bank funds at attractive rates. Meanwhile, Kleinwort Benson has issued a research note to clients, arguing that a substantial re-rating may be in the offing. With number portability, the Internet, digital TV and the critical mass that comes with a network 50 per cent in place, the cable industry is finally ready to pay back its patient investors.

Chill wind in the offing at C&W

Dick Brown, the American with the job of forging a coherent whole out of Cable & Wireless's loose federation of telecom alliances, will need to be re-christened the Yank with the Bank if he succeeds in making even a half-decent fist of it.

The rewards on offer for his job are truly mouth-watering; the basic salary may be a measly pounds 650,000 (the chairman Brian Smith thought he would have to pay more). But Mr Brown stands to double that under the obligatory bonus scheme. Then, of course, there are the share options worth a cool pounds 2.6m.

Perhaps it is just as well he is being incentivised so handsomely since, if Mr Smith is correct, the C&W management can no longer be stimulated by the threat of takeover. The failure of the BT merger showed, he says, that C&W is, to all intents and purposes, bid-proof, not least because all its licences around the globe depend on there being no change of ownership. There are poison pills galore.

For all C&W's talk about the benefits of its federation, it remains hard to see how the whole adds up to more than the sum of the parts. The real goldmine - Hongkong Telecom - faces an uncertain future with the Chinese taking over next year and growth in traffic on the mainland depressed by Peking's no-nonsense approach to economic management.

Back at home Mercury looks to have got off the invalid's trolley only to run into a brick wall. Top line growth is in decline and if the trend continues, helped by a clobbering from the regulator Don Cruickshank, it could stop altogether.Continental Europe may possess promise but all C&W has thus far got to show for its expensive foray into Germany is a pounds 20m loss. If anyone was bold enough to bid it would be like "buying a block of ice that melts as you get your hands on it," says Mr Smith. But unless C&W decides to break itself into bits it is shareholders who will feel the chill.