Cable faces uncertain route to profits

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Operators installing fibre-optic networks under the streets still have hurdles to overcome. Mathew Horsman reports

South Wales Electric and International CableTel yesterday bid £100,000 a year over 15 years to win a local delivery cablelicence (LDL) in South Wales, adjacent to its existing franchise in Cardiff, Newport and West Glamorgan.

It is the latest in the moves to mop up what is left of the UK cable market. With the major centres now divided up among 15 cable operators, companies are looking to fill in areas adjacent to their existing franchises.

"Certainly we are all now looking for economies of scale," said Eugene Connell, chief executive of Nynex CableComms, franchise holder for Manchester and other northern sites.

When it comes to franchise areas, the cable industry is finally reaching the level of maturity so long hoped for by its promoters. But it now faces a series ofhurdles: completing expensivefibre-optic networks, convincing customers to sign up, establishing a firm hold in telephonybefore British Telecom is allowed to compete in the cable market, and promoting new sources of television programming in competition with the traditional terrestrial channels and Rupert Murdoch's powerful satellite and cable broadcaster BSkyB.

The road to profitability remains a long, uncertain one. All the same, in some key franchise areas, cable installation is nearing the half-way mark, while marketing campaigns have moved into high gear. The Canadian company Videotron, which holds franchises in West London, Westminister and the City, has a residential customer base of 1.2 million. It recently reached the 500,000-level for homes passed.

Marcus Jackson, Videotron's marketing manager, says the company has spent £300m so far, and is currently spending £1m a week developing its City cable network.

But penetration rates have been somewhat disappointing. In Videotron's franchise areas, only 22 per cent of homes passed by cable subscribe. Analysts expect these rates to improve industry-wide to the 40-50 per cent level by the turn of the decade.

Cable operators collectively only recently breached the one million customer mark, compared to well over 3 million satellite subscribers.

All the same, most media analysts remain optimistic about cable's prospects, touting the UK's liberal regulatory environment and an improved funding environment which is expected to allow cable companies to fully finance £10bn worth of investments by the end of the decade.

Several UK cable companies have either listed, or intend to list, on stock exchanges in the US or the UK. TeleWest, the largest UK company, floated late last year. Nynex CableComms is expected to float within weeks, once the US Securities and Exchange Commission approves its prospectus. General Cable is now marketing its new issue.

Investors may be a bit wary of all these new listings: it could be hard to digest so many cable companies on the trot. Indeed, shares in TeleWest and Videotron, the two most recent companies to float, are now trading below their issue price.

The cable market is really three quite distinct markets: home telephony, business telephony and cable television. Cable operators have tended to stress one or another of these segments, depending on theirexpertise.

Hence Videotron, which operates a large cable network in Canada, is concentrating on residential cable, even though it has signed up 60,000 telephone customers. Nynex has targeted the residential telephony market, offering discounts of up to 25 per cent off certain BT rates.

For many, the cable industry's success will be measured by the programme services it provides. Here, the picture remains murky in the extreme. There are plenty of cable channels, from movies to sports to ethnic programming and syndicated repeats of classic comedy and drama. Cable has increased its share of national TV audiences to more than 10 percent.

But traditional television channels remain dominant, and look set to remain so for at least a decade. Moreover, cable operators face increased competition as digitised services become available, allowing terrestrial and satellite broadcasters to offer several streams of programming per channel.

TOP 10 MULTIPLE SYSTEM OPERATORS

Company Total No. homes Homes Penetration

no. homes passed connected rate %

TeleWest Comms 3,620,667 796,105 176,659 22.2

Nynex CableComms 2,497,800 624,091 121,968 19.5

Bell CableMedia 2,965,438 311,182 69,628 22.4

CableTel UK 1,480,297 - - -

SBC CableComms 1,255,799 493,528 115,071 23.3

General Cable 1,667,000 241,709 50,416 20.9

Videotron 1,174,810 420,942 92,426 22

Comcast UK Cable Partners 1,446,072 507,802 146,983 28.9

Telecential 745,630 223,879 58,845 26.3

Diamond Cable 554,000 29,527 8,021* 27.2*

* Nottingham only

Source: Independent Television Commission, cable operators, Cable Communications Association, NatWest Securities

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