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Liberty Global explains how it will grow in the UK

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Liberty Global is confident it can take over one of the best performing cable operators in Europe in one of the most competitive Pay TV markets in the world and achieve additional growth and profit for its target acquisition, Virgin Media, without being able to rely on exclusive content as a differentiator. One of the reasons for this confidence is quad-play, and the fact that Virgin Media has a market-leading position for this important service bundle, but there are plenty of others.

The fact that Virgin Media is pioneering super-fast broadband on a network bursting with potential is a major reason. Another is the next-generation TiVo television platform, which gives the UK cable operator a powerful weapon against OTT and a way to differentiate itself in the Connected TV market, with a notably better user experience for finding and consuming content. Virgin has 1.1 million TiVo customers, accounting for 30% of its customer base.

Other factors behind the confidence are: The sheer size of the UK market, which is considered big enough to accommodate strong competition and still provide room to grow for companies with the right scale and strategies; Scale, which comes from being part of the pan-European Liberty Global International (LGI) group and results in reduced  operating and capital expenditure and better leverage with programmers and technology suppliers. It is predicted that savings of $180 million a year in capex and opex will be possible upon full integration.

These were the key points that came out of the investor call yesterday when Mike Fries, President and CEO of Liberty Global, and Neil Berkett, CEO at Virgin Media, took questions about the proposed $23 billion dollar merger of their companies. It was noted that while there is strong competition in the UK, demand for media and communications services is also strong. Fries prefers markets where there are strong and rational competitors to those where there is irrational business behavior, anyway.

Liberty Global is confident that in a market with rational competition and therefore healthy pricing, the company can do what it does well: Harness its scale in a capital intensive industry;  Innovate in an incremental fashion; Time that innovation well and reduce any redundant costs. This is how the company intends to grow value from the acquisition.

Mike Fries emphasized: “This is not about toppling other players but finding your way and finding your share of the pie and we believe that with Virgin Media we have a great opportunity to do that. When you look at the broadband strategy and the great content on a sophisticated platform, and the quad-play that nobody else is offering, and the impact of this on both revenue and churn, we feel that Virgin Media will have its slice of this strong and growing pie.”

The success Virgin Media has had in converting customers to quad-play subscribers is one of the lessons Liberty Global wants to export to its other markets. Sixteen per cent of Virgin subscribers take video, voice, broadband and mobile. “We have a lot to learn as we roll out our own mobile offers and we will take full advantage of Virgin’s expertise over the next years.”

Assuming the deal is agreed (both boards have accepted it unanimously, so now it requires shareholder and regulatory approvals), the combined company will have 25 million customers. It will be slightly bigger than Comcast, making it the largest cable company in the world.

“Some people are asking ‘So what?’ Well, scale matters a great deal and it matters even more in the fragmented European market,” said Fries. “The scale will enable us to drive efficiencies and have greater leverage with programmers and with technology providers and it facilitates new product development.”

Fries views Virgin Media as a perfect fit for the cable group, given their similar technology and product strategies, which includes an emphasis on super-fast broadband and next-generation TV platforms. Liberty Global’s Horizon platform delivers the same kind of universal content and navigation experience, including more apps and OTT content, as TiVo. Both companies view multi-screen TV and companion screen experiences as a unified extension of the main TV service. There is also a shared focus on marketing product bundles.

Fries concludes: “This is a powerful combination and it hits the mark in every strategic and operating criteria we have established for our company. You should always strive to do more of what you do well and this transaction provides that. This is a business we understand well. This deal is right down the middle for us.”

Both Liberty Global and Virgin Media were growing before this deal and the only big question mark around the merger seems to be whether LGI can deliver more growth on top of an already well managed business that has been successful at cross-selling services. The 85% of Virgin customers who take more than one service is viewed as a great target for the rest of LGI.

The question of additional growth is where Guy Bisson, Research Director, Television at IHS Screen Digest, has focused his analysis of the deal.

Bisson says: “Liberty has previously focused on countries with a high cable penetration and relatively low ARPU, with upside growth coming from the migration of those markets from basic analogue cable to digital Pay TV, in combination with competitive fast Internet and IP telephony. The UK cable market is almost the exact opposite of this, with relatively low cable penetration but high ARPU, traditionally driven by telecoms services.

“In addition, many of Liberty’s core markets have limited satellite competition, with the main competitive focus being the incumbent telco. Liberty is now entering a market that is home to the most successful satellite Pay TV platform in Europe and an aggressive and powerful competitor in the form of Sky.”

Bisson notes how Sky has ensured exclusive movie and sport contracts for another three years and made major investments in its own production. This leaves Liberty with a limited opportunity to make a big content play in the near term, although he predicts that with John Malone leading Liberty Global and his expertise in content and long experience dealing with US studios, it is inevitable that Virgin will start to become more active in the content market.

Despite the challenges, Bisson points to the size of the market that Liberty Global is buying into. IHS Screen Digest says the UK Pay TV market generates EUR 7.2 billion in revenue annually, making it far larger than the next biggest markets of France (EUR 4.7 billion) and Germany (EUR 4.2 billion). At EUR 3.3 billion, the UK is the second largest market in Europe for cable revenue, behind Germany at EUR 4 billion.

Bisson does not think Virgin Media’s expertise in business services and mobile – highlighted as important considerations to investors – justify the transaction alone. “It is likely that Liberty may in fact be thinking a little further ahead to the opportunities that IP and OTT delivery could offer cable as a differentiator, both inside and outside the home,” he comments.

He refers to the similar strategies for high-speed broadband and next-generation platforms in the form of Horizon and TiVo. He also notes that the acquisition creates a swathe of infrastructure through the centre of Europe for the company.


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