Suddenly it's time to take the cable sector seriously

News Analysis: The cable industry has staged a remarkable comeback, leaving British Telecom and BSkyB looking warily over their shoulders

WHAT IS going on in the cable industry? Early last year, Britain counted more than 10 cable companies, each with heavy debt loads, poor service levels and - in the case of the ones with stock market listings - abysmal share price performances. Cable was a laughing stock, a black hole of an industry that had swallowed up cash but was never likely to offer its investors any kind of decent return.

A little over 12 months on, the picture has changed dramatically. Tuesday's pounds 1.4bn swoop by NTL, the aggressive US operator, on its smaller rivals ComTel and Diamond effectively reduces the number of players in the cable industry to three. Suddenly, cable is being talked of as a serious competitor to British Telecom and British Sky Broadcasting. And, for the first time in living memory, share prices are rising again.

NTL's acquisition is the latest in a string of deals in the sector. First off the mark was Cable & Wireless, which merged its Mercury long-distance operator with cable operators Nynex, Bell Cablemedia and Videotron to form Cable & Wireless Communications. That was followed by NTL's acquisition of rival operator Comcast for pounds 600m earlier this year. And then Telewest beat NTL in the battle to take control of General Cable with a pounds 649m bid.

The result is that the cable industry now consists of three companies, each with franchises covering large swathes of the country. NTL, the smallest, has over 5m homes under its control while CWC has more than 6m.

That said, cable operators still have a lot to prove. Since 1984, when the government first parcelled the country up into hundreds of small franchises and sold them off, more than pounds 7bn has been spent digging up roads and uprooting front gardens to bring cable to every home. Experts reckon it will cost at least another pounds 5bn to complete the job.

Operators have little to show for all that effort. Even though they have switched from providing just cable television - for which there was little appetite - to offering telephone lines as well, just one in five of the homes which have access to one or more of the services currently takes it.

This is partly for historical reasons. When cable was first introduced, operators only offered television on the assumption that it would enjoy the same success as it had in the US. Telephone lines were only added after 1991, when the Government opened up the domestic telephone market.

However, cable operators also have themselves to blame for their travails. In their drive to lay cable as quickly and cheaply as possible, serving the customer was often an afterthought. "This was an industry run by civil engineers and accountants," says one industry veteran. As a result, many people who connected to the service soon became disillusioned and switched off again.

Slowly the focus is changing. A new generation of managers have been brought in to raise service levels, and operators are also improving penetration levels by bundling together a telephone line with a basic package of cable television channels.

That combination has allowed NTL to increase penetration levels to around 40 per cent - roughly double the industry average.

"We started listening to our customers," boasts Barclay Knapp, NTL's chief executive. "We didn't try to cram more trashy American television down their throats."

Industry executives are even more bullish about the future. They argue that the UK cable network is, in effect, the information superhighway so beloved of New Labour. By laying fibre-optic cable, the cable companies are now able to offer high-speed access to the internet and interactive television, with all the related services such as home shopping and home banking.

This means that, for the first time, cable operators have an advantage over competitors such as British Sky Broadcasting, who do not have access to a fixed network when offering interactive services.

"Everybody is looking for the silver bullet that will drive penetration," says Richard Woollam, managing partner of the consultancy European Communications Network. "The fact is that cable is the perfect delivery mechanism for broadband services."

This does not mean that the cable industry is out of the woods, however. Analysts suggest that operators still have a lot to do attract business users, whose use of telephone lines is more intensive and therefore more profitable. They also argue that the number of cable companies may have to shrink even further to two or maybe even just one, in order to fully exploit the efficiencies of having a national network.

Nothing is likely to happen soon, however. All three cable companies still have to digest their most recent acquisitions. NTL and Telewest are also heavily burdened with debt which makes it hard for them to pursue further mergers.

Consolidation is also complicated by the companies' shareholding structures. Cable & Wireless, which has a controlling stake in CWC, would be reluctant to see its shareholding diluted if the company chose to issue shares. Meanwhile, Telewest's destiny is largely in the hands of its major shareholder, the telecom operator US West.

"There clearly is a logic for more consolidation but the real question is on whose terms it will take place. In our view it should be CWC's because of its much strong financial position," says Chris Godsmark, telecoms analyst at stockbroker Henderson Crosthwaite.

Nevertheless, the cable industry's return from the dead still amounts to a major achievement. The companies will now have to prove that, with the outlook more rosy than it has ever been before, they can finally start to make a return for their long-suffering investors.