Branson's bride will be wearing red

But Virgin's boss may live to regret the day NTL and Telewest took his name
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The Independent Online

"It's about foreplay, stupid," was the schoolboy joke doing the rounds in the City last week. The jokers were referring to NTL's offer for Virgin Mobile, a move intended to create a company offering four services: mobiles, fixed line phones, broadband and television.

The NTL/Virgin quip echoed, in turn, a remark made in the same week by the ITV chief executive Charles Allen, defending his puzzling acquisition of website Friendsreunited. The takeover was, he said, "about content, stupid".

Virgin Mobile rejected NTL's initial offer of 323p a share, valuing the company at £817m, and Sir Richard Branson was then slapped down for saying that another £25m would secure the deal. But horsetrading aside, and with little chance of a counter-bidder emerging, the deal is as good as done.

On the face of it, the merger makes sense: NTL (which is in the process of acquiring - or now possibly being acquired by - its cable rival Telewest) will rebrand itself as a Virgin company, adding the mobile string to its bow. Sir Richard, whose Virgin Group owns 72 per cent of Virgin Mobile, gets a stake in a much larger company and can beam the Virgin brand - and its other products - directly into consumers' homes.

Besides, everyone's doing it: ITV has acquired Friendsreunited; a media company (BSkyB) has bought a broadband company (Easynet); and Daily Mail & General Trust is snapping up just about every website that's going (estate agent portal primelocation.com is the latest). "Convergence" - the merging of traditional media, telecoms and technology companies - is the name of the game, just as it was before the dot-com crash in 2000.

Anything involving Sir Richard is guaranteed to get plenty of publicity. But while the NTL-Virgin Mobile deal may be sexy, it is also a sign of weakness. NTL and Telewest have a poor track record of customer service. They have spent most of their short histories trying to put each other out of business; this was a higher priority than customer care. The origins of the two companies did not help: they were formed from the consolidation of regional franchises, which at one stage left NTL alone with around 15 call centres. (BSkyB, despite its many customers, has just one.) By contrast, customer service has always been Virgin's forte.

Partly as a result of their poor track record on customer service, cable services do not have a strong brand in the UK. Since NTL and Telewest do not have national coverage, it has never been in either company's interests to run a national advertising campaign. (Even between them, they can supply services to only around half the country.)

NTL and Telewest both had to be restructured several years ago in order to stave off collapse, which has not helped their image, either. So buying Virgin Mobile will give NTL not only efficient customer services management, but also a readily recognisable brand.

But by applying the Virgin moniker to cable, Sir Richard is taking a risk. If cable is not a success, his brand suffers, as it has with the well-publicised problems - and many delays - of Virgin Trains.

"This deal is mainly about the brand," says Julian Hewett, chief analyst at Ovum consultancy. "Richard Branson wants to paint everything red. But this is high risk. He won't want to see another Virgin Trains."

A combination of NTL, Telewest and Virgin Mobile will have nine million customers under the Virgin brand. But it is not clear whether these customers will be as enamoured as NTL with the "quad play" concept of television, fixed line telephone, broadband and mobile phones. In the UK, even the "triple play" - TV, fixed-line phone and internet, which analysts call the holy grail of the cable industry - has yet to catch on. Only a quarter of NTL's existing customers take all three services. And while there are big savings in supplying these services on the same network, the only saving in providing mobile on top of that is in billing.

It is true that offering bundled services reduces "churn", the rate at which customers lapse or switch to another provider. But, as cable has shown, it is not easy to get customers signed up to start with. As media consultancy Enders Analysis points out, this is particularly the case for mobile phone users: around 85 per cent of adults in the UK already have a mobile phone, so any cross-selling would have to pull a customer away from an existing supplier. Yet as with most of its rivals, less than 5 per cent of Virgin Mobile's customers sign up online; the majority buy their phones - and packages - in shops, where the vagaries of quad plays may get forgotten in the face of competing deals.

Other cable companies have already tried to bundle services before with less than overwhelming success. Research from the Gartner consultancy in the US, where cable television is far more popular and where bundling of services is more common, shows that consumers still prefer to go to mobile phone companies for mobile services and local phone companies for fixed line services. Cable is the natural provider only for broadband and television.

When Gartner asked customers what the single most important issue would be if they were offered a triple play, cost was by far the most commonly cited. But in the cut-throat world of telecoms, everyone undercuts everyone else. It might be easier to keep customers if they have bundled services, but it's getting them to sign up in the first place that's the problem.

One analyst, who did not want to be named, warns that competition will be even tougher next year once the likes of BT and Cable & Wireless start offering video-on-demand services and BSkyB starts selling broadband through Easynet. "NTL will be on the back foot. The danger is that over the next 18 months they will be integrating when everyone else is investing," he says.

Whether Virgin Mobile's unique status as a virtual network operator (it piggy-backs on T-Mobile's network) puts it at a disadvantage against its peers is also as key question. The company maintains that not having its own network makes it more flexible, as it can always switch to another one and, in any case, it offers all the services T-Mobile does. But as new mobile services become available and 3G takes off, not having control over its own network may hold Virgin Mobile back.

There are also doubts over how willing - or able - Virgin Mobile's 4.2 million customers will be to part with their cash for the extra services offered by NTL. Most are young, in their teens and 20s, and on pay-as-you-go contracts. Virgin Mobile customers spend on average just £10 per month, compared with £24 per month for customers at Vodafone, for example. Some analysts - and Virgin Mobile - would argue that its young, thrifty customers will soon grow up, own houses and have more money to spend. But whether the City has that much patience is debatable.

On top of that, the deal represents a tough challenge for NTL's chief executive, Simon Duffy. NTL and Telewest have yet to fully integrate customers, networks and systems, which makes an attempt to merge them even harder. Add the acquisition of a third company, Virgin Mobile, and one ban-ker says: "There is huge execution risk."

Sir Rich-ard, who this weekend is overseeing Virgin's next step towards running commercial flights to the Moon, likes a challenge. With cable, which has been a story of unfulfilled potential, he's got one. NTL has no choice but to attempt to converge, or die. But is four play with a Virgin the right answer?

VIRGIN ON THE RIDICULOUS

Sir Richard's brand has been comprehensively extended, with mixed results:

HITS

Virgin Mobile (about to be sold to NTL); Virgin Radio (sold to Chris Evans after start-up); Virgin Music (sold to EMI for $1bn (£570m) in 1988); Virgin Atlantic (launched in 1992. Seven years later, 49 per cent sold to Singapore Airlines, valuing the company at £1.2bn)

MISSES

Virgin Trains (poor punctuality, cost overruns on projects but recently showing signs of improvement); Virgin Drinks (poor-tasting cola, undrinkable vodka, millions of pounds of losses); Virgin Cars (loss-making online car sales company, now discontinued);

Virgin Bride (loss-making wedding service)

MAYBE

Virgin Money (good marketing, not-so-good products); Virgin Cosmetics (made a profit in 2004)

TOO SOON TO TELL

Virgin Galactic (space travel - first flights planned for 2008); plus plans to build an oil refinery

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