COMMENT:Cable consolidation offersreal economies of scale

After an unnerving start, cable is finally beginning to find its feet in investment terms. It was always a bit hard to see how some of these oddball collections of local franchises could be worth as much as claimed, but now a new process is at work; consolidation. This is likely to gather pace in coming months, leading to a fundamental rethinking of the business by investors. That can only be good news for those who have already bought into the UK cable revolution.

Until recently, the sector has been much maligned by many analysts, and shunned, too, by investors tired of the steady stream of newly issued cable shares. The long-term prospects may have looked reasonably good, given the combination of cable and telephony revenue streams the UK companies are able to tap. But the slow rate of penetration - barely more than 20 per cent of households that could have cable have actually signed up for it - and the huge costs associated with building the network have put off many would-be investors.

There has also been concern that the programmes offered by cable were not all that alluring. There are only really two kinds of television product that punters are willing to pay for: film and sport. The rest of it - the community programming, low-tech travel shows, and endless reruns of "classic" US and UK sitcoms - don't hold much appeal for an audience used to the superior fare available for free (or at least for the cost of a TV licence) on BBC, ITV or Channel 4.

So why should all that change with the prospect of fewer and fewer players? Very simply, there are very real economies of scale to be gained on the TV side of the cable business in the two areas that really count in the longer term - programming and advertising. Cable operators have long known this, but could not find a way of working effectively together. With fewer companies controlling a greater number of franchise areas, the prospect of weightier buying power may allow cable operators to secure better quality popular programming.

On the advertising side, the argument for consolidation is even stronger. Already, cable operators are linking up to provide regional packages for media buyers: Greater London, Manchester, Leeds and so on. With fewer players, the prospect for near-national advertising reach looks within grasp. The advantages for telephony may be just as attractive.

So after SBC, who is next? International CableTel is a likely candidate, and perhaps Telecential and Diamond. Within 18 months, there will probably be only six big operators left. There are presently 16.

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