Outlook: Telewest Flextech

OOPS. THE Telewest bid for Flextech failed to materialise as billed yesterday. This always makes markets a little nervous, but it appears they have nothing to worry about. The hold-up was mainly technical and legal, rather than anything more fundamental. There's still scope for the merger to come apart during the due diligence, of course, but on the face of it a deal acceptable to both sides has been all but done. For Telewest, it marks a quite profound about turn in strategy. Less than six months ago, Telewest was still hoping to pull off a consolidating merger with its cable TV rival, Cable & Wireless Communications, but at the last moment it found itself outgunned by a France Telecom backed NTL. That's the end of Telewest then, everyone said at the time. Emboldened and strengthened by the CWC takeover, NTL would soon be absorbing Telewest as well.

Nothing is certain in business, however, and NTL last month found its deal unexpectedly referred to the Competition Commission.

This has given Telewest the opportunity and time to find an alternative strategy. Flextech is it, and while this exercise in vertical integration plainly doesn't have the same cost cutting or scale benefits as merging with another cable company, it seems to have quite a lot else going for it. Certainly this is a bolder, and more adventurous approach to the future.

The problem with cable in the UK has always been poor marketing and poor content. As a distribution channel, on the other hand, its broadband networks have big advantages over any other means of delivery, including digital terrestrial, satellite, or BT's outdated co-axial network. In the new interactive age we are about to enter, the cable companies ought to be sitting pretty, but thus far there's been scant evidence of them having any idea of how to exploit their position.

This is where Adam Singer and Flextech fit in. You can argue about the quality of Flextech's "content", but it certainly has media know how and marketing acumen in spades. It also brings some very promising interactive and new media ventures to the party. Telewest has the bandwidth and the customer base; Flextech, potentially, has the product to exploit them.

To be sure, the market is being asked to take a lot on trust. This marriage of product and distribution has obvious logic on its side, but so did the not dissimilar concept of bancassurance, which in many cases has singularly failed to deliver.

All the same, if you believe the new economy story, if you believe that we are entering a brave new world of boundless digital opportunity and growth where the great bulk of transactional commerce will be conducted down the telephone line, mobile or fixed, then this deal has to be viewed positively.

In essence, what is being created is a mirror image of BSkyB, but with big advantages. Sky has great programming, but nothing can compete with broadband for speed, quality and quantity of delivery. Telewest is having to pay handsomely for Flextech's know-how, but in the end, there's no point in having all that spanking new bandwidth if you don't know how to use it. There's plenty of scope for disappointment here. By the same token, however, the potential is quite outstanding.