U.K.'s NTL, Telewest Gang Up on BSkyB

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London— The United Kingdom's two big cable operators, NTL Inc. and Telewest Communications plc, have learned how to work together to fend off their common enemy — direct-to-home satellite operator British Sky Broadcasting Group plc.

On May 9, NTL announced that Telewest subsidiary Flextech would exclusively handle all NTL ad sales across all platforms, including digital interactive TV, its electronic programming guide, the Internet (TV and PC) and broadband cable-modem service.

At the time, NTL managing director Stephen Carter called it "another example of NTL and Telewest working together following the success of Front Row," their jointly owned premium movie channel.

And most recently — on July 9 — the two companies announced the July 28 launch of a £4 million ($5.7 million), six-week joint advertising campaign aimed at promoting "broadband Britain."

NTL and Telewest dominate Britain's cable market. NTL, which became the UK's largest MSO in April 1999 following its buyout of the Cable & Wireless plc consumer arm, ConsumerCo, now passes 8 million homes in the U.K. and 800,000 in Ireland. Telewest passes 4.9 million.

But these numbers didn't come cheap. Since 1996 — when it was effectively formed under its present guise — NTL has spent $14 billion to build and update its U.K. cable infrastructure. Over that period, the company has laid 700,000 miles of fiber and 100,000 miles of coaxial cable.

In July 1999, NTL launched a major rebranding effort designed to make its attractions clear and publicize its name through major sports sponsorships. NTL claims the $47.4 million campaign has increased its public awareness from 20 percent to its current high of 86 percent.

The public might be aware of NTL's brand, but analysts at Jupiter MMXI said they aren't buying its service in any significant numbers.

As of March 31, NTL's digital subscriber count was barely one-tenth of that of BSkyB. The News Corp.-owned DTH service dominates the market with just over double the combined numbers of OnDigital (rebranded ITV Digital this month), Telewest and NTL.

It doesn't take a Harvard Business School professor to figure out why. To paraphrase former President Clinton, "It's the content, stupid."

When it comes to the content that really matters — sports and movies — BSkyB has got it and NTL and Telewest can't afford it.

That might be a tad harsh, but the fact remains that in June 2000, NTL announced a three-year, £427 million ($620 million) deal for pay-per-view rights to English Premiere League soccer games. Three months later, NTL CEO Barclay Knapp declared his "disappointment" with the company's inability to complete negotiations with the Premiere League, and the consequent collapse of the deal.

No explanation was ever given by either party, but most commentators suggested the pot had got a little too rich for NTL's blood.

Similarly, when Front Row launched in March 1998, much was made of the service as a potential rival to BSkyB's Sky Movies. Although Front Row has secured deals with most of the Hollywood majors such as Warner Brothers, Disney and Universal, it has never remotely threatened the DTH service's hegemony.

THE 'RETURN PATH' ACE

So why would this insipid performance inspire the two companies to team up on a joint advertising campaign? The answer lies in the campaign theme — "Broadband Britain" — and its aim "to accelerate the take-up of always on, high-speed Internet services."

BSkyB might have a lock on the majority of the sport and movies that the punters crave, but NTL and Telewest are betting that they've got something that the public can be persuaded they want just as much, if not more — a return path.

Granted, this seems a little dry compared to, say, the Ryder Cup or Sharon Stone, and no one would suggest it's an easy sell. But the aspiration is clear.

As Telewest CEO Adam Singer said at the launch: "This campaign is designed to bring the benefits of broadband Internet to life. The combination of high speed, always-on, services and rich content means that home surfers can start enjoying the Internet the way it should be."

Broadband service really only started to exist in the U.K. in late 2000, and its current penetration levels are low. NTL has 11.6 million homes in its U.K. franchise area; of those, it passes 8 million. Of those, 4.7 million are broadband-enabled (and a further 500,000 have broadband access through set-tops in a new scheme in the Northwest of England announced July 2).

Of the 5.2 million broadband-enabled homes within NTL's footprint, only 26,300 have so far signed up for the service.

The story is similar with Telewest. It passes 4.9 million homes, of which 4.3 million are broadband enabled and just 18,600 are broadband-compatible. The only other significant player in the U.K. broadband market is telco British Telecom plc, with its Openworld digital subscriber line service, currently a sniff in front at 27,000 subscribers.

Put all three together and you've got a very decent football crowd.

DATA FORECAST: SLIM

It's not just subscribers that are thin on the ground either: Predictions of future growth are almost non-existent. NTL predicts that by 2002, it will have enabled 6.6 million homes in its franchise areas, and Telewest reckons to have 5 million upgraded homes by the same date. NTL has a numbers advantage because its territory includes London.

But neither company will predict how many of its enabled homes will have signed up for the brave new world of broadband. Presumably, they hope it will be somewhat more than the 326,000 across all U.K. providers that research firm Ovum, in conjunction with Point-Topic.com, projected for 2002 as recently as February.

Jupiter MMXI analyst Dan Stevens cites three reasons for the low uptake and shaky expectations: cost, the industry's lack of appreciation of the benefits of broadband and technical problems.

This campaign clearly addresses all three concerns to a certain extent. The £4 million ($5.7 million) budget seems to indicate Singer and Carter have a clear understanding of what broadband could potentially do for their two companies.

The price point — a £25 ($36) per month fee for high-speed broadband — compares favorably with the £14.99 ($21) that both America Online and British Telecom charge for narrowband Internet, and the £39.99 ($57) a month BT charges for asynchronous digital subscriber line (ADSL) service.

The allies have a clear technical advantage as well, offering an access speed of 512 kbps, nearly 10 times the standard 56 kbps.

Is this strategy going to work for the two giants of U.K. cable? One or two things are already clear.

The first is that the MSOs' main rivals — BSkyB in video and BT in broadband — have taken notice. Two days after the NTL-Telewest announcement, the companies announced an alliance of their own, also designed to "further drive the take-up of digital television in the U.K."

BT's residential customers will now get a discount of £30 ($43) off the cost of a Sky subscription regardless of which package they choose. (The lowest starts at £10 ($14) per month and packages run through to £34 ($48) per month). The discount is off the total annual cost of the subscription.

One more thing also is pretty clear — the prize is worth having. In the fourth quarter of 2000 NTL's average revenue per subscriber for an ordinary digital subscriber was £42.60, ($61). For "Triple Play" customers, who signed up to the full package including broadband being promoted by this campaign, the ARPU figure rose a mouth-watering 57 percent, to £66.9 ($95).

One last certainty exists in this scenario. One six-week campaign, no matter how innovative, isn't going to deliver the penetration levels that are required. That raises an intriguing question as NTL and Telewest launch more campaigns, and find ever more reasons to cooperate: will cooperation turn into cohabitation and, eventually to marriage?

No one is talking of nuptials just yet, but as Jupiter's David Stevens says, "You can't deny that it would make sense."

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