Cable operators bury their heads in the sand

COMMENT: `All the hype that surrounded what were supposed to have been some of the sexiest investment prospects of the 1990s has come to nought'
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Both as a business and an investment, Britain's nascent cable TV industry is proving little short of a disaster. Things may change, but right now our main cable companies are failing to deliver the penetration rates promised at the time of flotation, or the financial performance to match. All the hype that surrounded what were supposed to have been some of the sexiest investment prospects of the 1990s has come to nought, with all three UK-listed operators trading well below their issue price. Even General Cable, which came to the market at a much scaled-back price is still trading 2p below its launch level.

What's gone wrong? The US and Canadian experience with cable stocks was vastly different. As operators across the pond built out their networks and added subscribers, investors got rich on the ride. In the UK, returns have been risible. They look even worse when set next to an otherwise rising stock market.

The answer is threefold. The first problem has been in marketing. Cable companies have generally been managed at the top by American executives who know more about digging up streets and connecting the local loop to the neighbourhood network than they do about selling Britons on the advantages of cable. Only in recent months have a few of the operators brought on marketing people with real ability, and many of these still lack acumen on the doorstep, where it really counts.

A few figures tell the tale. The industry as a whole is well on the way to building out the planned networks, having laid sufficient cable to pass 5 million homes. But the penetration rate is a measly 20 per cent industry-wide. That means only one in five who could actually take up the service has done so. Most of these, moreover, have taken the service not for its underlying raison d'etre, cable TV, but because it offers cheaper telecommunications than BT.

That brings us to the second problem. Cable has not been able to differentiate itself from other providers of telephone services and entertainment. BT is a formidable competitor, true. But cable ought to be able to make much of its David status to BT's Goliath, offering better service, lower prices and more flexibility. That might be easier once number portability is introduced, allowing BT customers to keep their own numbers when they switch, but nothing the cable industry has done so far gives much faith in its ability to profit from this important concession.

When it comes to programming, cable companies have performed lamentably. It is almost as if TV and entertainment is no more than an afterthought. There is little if any of the interactive services promised by the information age and, as for TV, hardly anything the punters can't get elsewhere (on "free" television, or on Rupert Murdoch's satellite service). Why shell out pounds 15 a month for cable TV if it cannot offer you anything?

Cable has of course come up against a formidable competitor in the form of Mr Murdoch. His stranglehold on subscription TV, ranging from dominance of sports and Hollywood film to the technology used to scramble and unscramble pay-TV signals, is so tight few can take him on. As a result, the two biggest cable operators, Telewest and Nynex CableComm, have given in, agreeing long-term supply arrangements with Mr Murdoch's BSkyB to ensure a steady supply of quality programming. Needless to say, nobody makes much of a margin off Mr Murdoch.

The smaller operators have responded by complaining to the regulators, claiming that BSkyB enjoys an unfair advantage. While they could make some progress with the Office of Fair Trading, now investigating BSkyB's terms of supply to the cable industry, merely complaining won't be enough. The industry needs to band together, helping to finance new sources of cable-exclusive programming to compete with Mr Murdoch's offerings. That does not look like happening, however, until TeleWest frees itself from the iron grip of TCI, which for the time being remains a commercial ally of Mr Murdoch.

Investor in cable can only hope that the economics of the industry will cause the long-heralded consolidation to occur quickly. Right now, there are too many small operators running too many tiny franchises. If, as many analysts expect, six to eight large companies end up dominating the market, there may be more room for economies of scale, bigger budgets for programme acquisition and keener marketing campaigns. From the investors' point of view, the best returns could be had from those companies on the receiving end of the consolidation. Sadly, that excludes the listed companies, which are much more likely to be predators than prey.

Tosh high on the menu in Forte takeover battle

An awful lot of nonesense is being written and said about Granada's pounds 3.5bn bid for Forte as the battle approaches what looks destined to be the traditional nail-biting finish. None more astonishing, however, than yesterday's leader in the London Evening Standard. Since this presumably reflects the view from inside the crumbling walls of fortress Forte, it bears some repeating.

Granada's bid is described as a piece of "commercial vandalism". Its purpose is characterised as self-aggrandisement by Gerry Robinson, Granada's boss, while the outcome, the newspaper laments, will be decided by a small group of rich City professionals (the Carol Galleys of this world) with only the short-term financial interests of their clients at heart. What's good for British catering industry goes by the board while there is not a scintilla of evidence to suggest that a Granada takeover will benefit hotel guests or motorway service users.

What tosh. The idea of Forte as lone defender of standards in British catering and hotel keeping is as ludicrous as it is mistaken. Why even the City and Business Editor of the Independent can produce a better fry- up than Little Chef. But even if you happen to like Forte's particular style of food and beds, as many apparently do, nobody could surely support the idea of Forte being afforded some kind of special protection from those evil money men in the City. Even Tony Blair's stakeholder economy might have some difficulty with that.

Hotel and catering is like any other business; those who don't deliver the goods find their customers go elsewhere. The City's problem with Forte is that rightly or wrongly it believes Forte has served its customers and shareholders poorly in recent years. The free market is a harsh task master and doesn't always get it right, but until someone comes up with a credible alternative, it is the best safeguard we have of efficient, value-for-money service.

So, please, no waterworks for the grand old name of Forte. If City fund managers get it wrong over Forte, backing Granada's break-up bid when the best course would have been to give Forte a second chance, it will be they who lose most. What they see is an opportunity to get out of a poorly performing investment at a reasonable price. Who can blame them for that?

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