Cable companies look to consumers - Industry Trend or Event

CommunicationsWeek International, August 13, 2001 by Joanne Taaffe

Europe's cable industry faces an uncertain future as companies race to generate revenues to overcome debt and consolidation.

Even given the misfortunes of telecoms companies over the last year, Europe's cable operators have taken a battering. Moody's Investors Services now rates all of Europe's major cable operators in the "speculative" range and foresees further downgradings.

Meanwhile, the share price of Europe's largest cable operator, United Pan-European communications NV, of Amsterdam (UPC), fell as low as [euro]0.92 in recent weeks, from a high of [euro]33.20 in the last year (see box, bottom). And NTL Group Inc., of Farnborough, England, last month announced it would cut some 7,000 jobs over the next two years (2,300 this year).

Performance in the European cable sector differs from operator to operator and country to country, but all the major cable players face the same struggle: how to succeed in providing Internet, telephony and television services at prices that both lure customers and soothe investors. Although initially bankrolled by large U.S. cable concerns, today the European cable industry faces very high levels of debt across the sector (see table), putting pressure on them to roll out lucrative services quickly.

Focus on ARPU for success

"They're going to have to increase average revenues per user [ARPU] quite quickly to set off huge debts," said Paul Robertson, research analyst at Kagan World Media, in London.

Cable operators and analysts alike have long seen digital networks as the key to securing higher revenues per customer: two-way digital networks enable Internet services and interactive television, in addition to voice and standard television services. In this way, cable operators can bundle Internet, telephony and television services and offer end users a single bill.

But the progress of network digitalization across Europe is patchy. While U.K. operators Telewest communications plc, of Working, and NTL have largely upgraded their networks for two-way digital traffic, German operators that recently acquired cable networks from Deutsche Telekom still have analog, one-way networks on their hands.

Moody's therefore expects absolute debt levels of cable operators to grow over the coming years, as operators across Europe are forced to introduce new services, and build new networks.

But there is a ray of hope for cable: unlike in North America, very few Europeans yet have broadband connections. Only 3.3% of homes in Europe have broadband access, compared to 14.1% of North American homes, according to Pyramid Research Inc., of cambridge, Massachusetts.

And despite the gloomy prognosis of increased deb., Moody's Research, Dominion Bond Rating Service (DBRS) Ltd., and Pyramid Research all agree in recent reports that cable operators will be able to generate revenues and increase cash flow by introducing new services on digital networks--provided they "execute in the near term," cautions DBRS.

Skeptical of broadband benefit

There are question marks over just how much the addition of broadband digital services can do to lift ARPU across Europe. So far, new digital subscribers in the United Kingdom have had little effect on ARPU, according to Moody's, despite the fact that NTL and Telewest have upgraded to digital networks and initially had high expectations of revenue growth from premium digital services. Indeed, even though in the U.K., NTL and Telewest count incite telephone customers than television viewers, 85% of cable revenues still come from basic television services, according to Pyramid Research.

Nonetheless, DBRS is optimistic about NTL's future. "NTL has done an excellent job in bundling telephony services with its pay tv and Internet. Its prospects will improve," says the company.

Telewest, too, is determined to buck the trend after announcing better-than-expected first-half results and a record quarterly EBITDA of [pound]74 million for the three months that ended 30 June 2001. Telewest insists it is funded to reach profitability.

Shareholder brawn

Then there is the strength of the large shareholders behind UPC, Telewest and NTL. Those backers include France Telecom, with an 18% share in NTL; Liberty Media corp., of Englewood, colorado, which owns 25% of Telewest and 38% of UPG; and Microsoft, with ownership in Telewest (25%), UPG (8%) and NTL (2.5%).

In May, UPC received a $1 billion loan from Liberty Media. Although the deal disappointed UPC's investors, who had been hoping for a rights issue, it nevertheless gave UPC access to funds (it also gave Liberty Media a stronger hold over UPC).

Despite these positive notes, DBRS is cautious of cable operators' ability to perform and warns that their ratings will remain below investment grade "until they show substantial profitability, reduce debt and show ability to finance operations through internal operational cash flow."

Bundled service offers hope

And, however persuasive the bundled service of television, voice and Internet prove to be in the longer term, analysts agree that cable operators will face stiff competition from DSL providers as incumbent operators across Europe finally begin to unbundle their local loops, cable operators such as UPC that were busy expanding regionally have not necessarily been quick enough to upgrade networks to capture customer share in the nascent high-speed Internet market, they say.