Cable firms struggle to carve out a market

Telewest and NTL have done lots of takeovers but failed to create any value for shareholders
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The Independent Online

It was another busy day in Britain's embattled cable television industry yesterday. Shares rose 6 per cent at Telewest, the second-largest cable company, despite a flat denial that it is in talks with US firm Callahan Associates that could lead to it agreeing a £6bn takeover. Callahan also said there was no truth in the rumour.

It was another busy day in Britain's embattled cable television industry yesterday. Shares rose 6 per cent at Telewest, the second-largest cable company, despite a flat denial that it is in talks with US firm Callahan Associates that could lead to it agreeing a £6bn takeover. Callahan also said there was no truth in the rumour.

Meanwhile, NTL completed the joint purchase of a 49.9 per cent stake in Noos in a deal that values the French cable group at $2.4bn (£1.6bn). Tomorrow NTL announces second-quarter results, amid speculation that NTL itself might have an eye on Telewest.

For many observers, the day's activities highlight one of the cable industry's defining features - it is long on takeover talk but short on the delivery of value. For example, shares in Telewest have plunged from 527.5p in March to just 170p due to a combination of the fading telecoms boom and deteriorating City sentiment. Shares in NTL have not exactly been setting Nasdaq alight either.

The fundamental problem has been the companies' failure to deliver in terms of subscriber numbers. "BSkyB is miles ahead," one City analyst said.

It was not supposed to be like this. A few years ago cable was being hailed as the big gorilla that would establish itself as the dominant force in the delivery of our digital future. In a broadband world, cable's superior bandwidth, speed and quality of potential interactive services were supposed to make Sky's slower satellite version look like an old black-and-white television in the age of colour.

But the dream has never come true. Sky now has 4.5 million direct-to-home subscribers, of which 3.8 million are on its digital platform. NTL has 3 million subscribers but only 230,000 are digital. Telewest has 1.1 million subscribers, of which 223,000 are digital. Telewest warned last week that its digital expansion would be hit by a shortage of so-called "flash chip" set-top boxes. It is now aiming at 500,000 digital subscribers by the first quarter of next year, instead of by the end of December. NTL has been forced to downgrade its target of 700,000 digital subscribers by the end of the year to 500,000.

Where did cable go wrong? A major factor is that the cable industry has proved better at digging up roads to build its network than at marketing its product and developing customer service. Marketing is virtually non-existent in some areas, and follow-up services such as converting free trials into paying customers are weak.

David Brown, head of European pay-television consultants European Media Strategies, said: "They have demonstrated an inability to market themselves, and once you have a reputation for poor service it is very difficult to shrug it off. Sky is way ahead of them."

A second problem is lack of scale. The cable companies were established as franchise operations in the 1980s and have only begun to consolidate via major mergers relatively recently, with deals such as NTL's takeover of Cable & Wireless Communications and Telewest's merger with Flextech. So, while Sky could market nationally and exploit its scale, NTL and Telewest were hampered by the legacy of their regional past. The quest to consolidate has been a distraction for management.

A third issue is lack of content. Cable's offering has traditionally been little more than Sky's package on a cable platform. The main advantage has been that subscribers did not need an unsightly satellite dish.

NTL has begun to address the content issue with new moves, like its £328m deal with the Premier League for rights to screen 40 games on a pay-per-view basis. Telewest's merger with Flextech at least gives the group access to Flextech's programming, though re-runs of George and Mildred and 1987 EastEnders episodes may not be everyone's idea of quality.

Some experts wonder why the cable TV companies bother at all with content provision. Mr Brown at MES said: "Cable should really be about providing the distribution for other people as well as interactive services. It can then take a fixed fee or a percentage of the revenue generated."

A fourth problem has been cable's tendency to shout a bit too loudly about its prospects. Christian Maher, telecoms analyst at Investec Henderson Crosthwaite, said: "The industry put out very aggressive targets to start with. In the past they thought they were going to dominate the world. But consolidation slowed it down, and Sky slowed it down, too."

However, Mr Maher believes that reports of cable's death are greatly exaggerated. He points out that cable's penetration rates are higher than Sky's. Cable's total UK subscriber base of 4.6 million comes from a "target market" of just 13 million homes - the number of houses passed by the network. That gives a penetration rate of 35 per cent. Sky has 4.5 million subscribers from a potential 23 million homes, a penetration rate of just under 20 per cent.

Mr Maher believes cable's unique selling point of television, plus telephony and high-speed internet access remains compelling, if it can only find a way to leverage it. "Has the window of opportunity disappeared? I don't think it has. In 10 years' time a penetration of rate of 45 to 50 per cent is still possible."

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