Cable companies' hard sell puts BT in a bind

LUNCH with Gene Connell, the American chief executive of Nynex CableComms, is quite an experience. Imagine Walter Matthau playing an overactive car salesman whose annual bonus depends on clinching the deal - and you get a rough picture of Connell. He's a compulsive salesman, clutching at one's arm with evangelist fervour. He is convinced of the golden future that awaits the British cable television industry in general and his own company in particular.

CableComms is floating on the London and New York stockmarkets in the next two months. It will have a market value of around £1.5bn and will therefore be knocking on the door of the FTSE-100. It is Connell's job, helped by his adviser S G Warburg, to persuade institutions to untrouser around £400m in fresh money.

Shell-shocked after 90 minutes of hard sell, I have to admit that he has a great story to tell. CableComms seems to hold all the aces. It is big, with 2.69 million homes in its franchise areas, and well able to exploit scale efficiencies. Its franchises are more contiguous than most - it has greater Manchester tied up, the most populous region served by a single system after Hong Kong. It has the lowest "churn" - the proportion of customers cancelling subscriptions. And it has some imaginative marketing ploys to get customers to sign on the dotted line: they are cunningly offered free local phone calls to other CableComms customers.

Of course, a proper assessment of the company will have to wait till the prospectus arrives and the issue price is struck. But the clutch of cable companies flogging shares in London over the next few months - General Cable and Bell Cablemedia are also in the flotation queue - may well alter City perceptions about the UK cable industry. If Connell and co are even half-right about the prospects for cable, then BT faces a horrendous onslaught on its traditional business.

For the cable business is increasingly about telephony, not television. Cable companies are able to provide homes and businesses with a telephone service the equal of BT's - but cheaper. BT has been losing around 30,000 customers a month, and the trend is accelerating. This year the cable industry is on track to win 700,000 residential telephony lines and perhaps 300,000 business lines.

The scope for further growth is vast. Sixteen million of the 22 million UK homes are in areas franchised for cable. Of these, four million are actually passed by cable. Of these around one million subscribe so far. Penetration is bound to increase: the question is how far and how fast.

Even for the most conservative phone user, switching to cable makes a pretty compelling case, although the quality in some franchise areas is patchy. There are some horror stories about repair times and even simple things like access to directory inquiries.

BT is fighting back. In locations where the cable companies are active, it is sending in what it calls Cable Action Teams - sales platoons specifically aimed at preventing customers defecting. In one fortnight recently in Bristol one team managed to sell £600,000 of extra lines and equipment to residential and business customers.

But there is only so much BT can achieve. The inescapable fact is that cable companies are offering up to 25 per cent off the prices charged by BT. Because of the wording of its licence, BT is unable to slash its prices where it faces cable competition: it has to charge the same prices nationwide. Naturally it is being cherry-picked in the big conurbations, where the cost per customer is lowest.

The solution would be for BT to operate a differential pricing tariff. Of course, the political stink would be horrendous if BT were to increase charges for rural customers, say, and cut them for townies. But that must one day happen. Otherwise BT is doomed to an ever-dwindling customer base. That too would cause a stink: BT's 2.7 million shareholders also have a voice.

On the buses

THE bus service industry is consolidating faster than you can say "Any more fares, please." Two of the biggest operators, Badgerline and GRT, last week announced plans to merge. The combined operation will have 13.5 per cent of the bus passenger market, making it the number two player behind Stagecoach.

Bus operating may still not be Big Business, but it is no longer run by the small local operators envisaged when the industry was deregulated and privatised. The state-owned National Bus Company was broken up into more than 40 separate operating companies, each of which was laboriously privatised in 1987. That was a waste of time and money. Most of those companies have long since joined up again in larger groupings.

The irony is that the bus industry does not yield great scale economies. The efficiency gains from merging are tiny. A bus company's main operating costs are the labour of drivers and mechanics, which have to be supplied locally. There's no scope for cost-cutting through centralisation. The successful companies tend to be those devolving responsibility to local subsidiaries. Mergers where there might be big cost savings - with companies covering the same territory - are ruled out on competition grounds.

But mergers beef up the balance sheet. That helps in making new investment, for example in greener buses and vehicles with lower floors, increasingly demanded by the elderly and the child-encumbered. More importantly, it gives bus companies the muscle to compete on routes where there is more than one operator. It's called predatory pricing. The big operator shoulders a loss until the smaller rival goes to the wall, succumbs to takeover or pulls off the route.

Passengers benefit from cheap fares while there are still minnows to be swallowed. But when the consolidation phase is complete, the remaining players are left to operate an effective cartel. Time for a monopolies investigation, perhaps?