BT, EE Put Squeeze on Broadband Rivals
It's not just the UK's mobile community that BT has sent into a spin with its £12.5 billion ($19 billion) move for EE. Players in other parts of the communications market are feeling just as queasy at the thought of a merger between the country's biggest fixed and mobile operators. (See BT Offers $19.5B to Buy EE, Why BT + EE Makes More Sense.)
While 3 , Telefónica UK Ltd. (O2) and Vodafone UK fret that BT Group plc (NYSE: BT; London: BTA)'s fixed-line firepower will give EE a weapon of mass mobile destruction, companies like Sky (NYSE, London: SKY) have been worrying that without a mobile offer they could lose appeal -- and customers to boot (ouch!).
So in this second installment of our brief guide to the players affected by the BT move, we look at BT's big broadband rivals. That means Sky, TalkTalk and, of course, Virgin Media Inc. (Nasdaq: VMED), which is where we'll begin. (See BT & EE Spur UK Sector Shake-Up.)
Virgin Media
Bought by John Malone's Liberty Global Inc. (Nasdaq: LBTY) for a whopping $24 billion in mid-2013, Virgin Media is typically cast as the UK's "other" infrastructure player, after BT. That means, of course, it's the only broadband operator that doesn't rely on BT's network to offer services. Like the incumbent, Virgin gets to sell retail services and keep all of the dough. (See Liberty Spies Greater Virgin Synergies.)
Table 1: Virgin Media at a Glance
FY 2014 YoY change
Revenues £4.1B 0.0%
Operating profit £0.2B -77.6%
Net loss £0.4B N/A
Capital expenditure £0.7B -6.4%
Long-term debt £8.2B 40.1%
Customers
−Broadband 4.4M 2.3%
−TV 3.7M -2.6%
−Mobile 3.0M 0.0%
Source: Virgin Media
The downside is that only half of UK homes and businesses have the option of subscribing to Virgin's cable technology. Where it is available, however, it is an Usain Bolt next to BT's portly jogger (a point that Virgin has emphasized in its advertising), working twice as fast as the incumbent's broadband service (if you compare the premium offers from each player). No wonder BT is looking to the G.fast standard to boost the performance of its network. (See BT Puts G.fast at Heart of Ultra-Fast Broadband Plans.)
Virgin also happens to be one of only two UK players that have already taken the quad-play plunge. Like broadband rival TalkTalk, it has been renting capacity on a mobile operator's network to provide mobile services under its own brand. Even if Virgin's MVNO origins go back many years, rising quad-play competition appears to have spurred BT CEO Gavin Patterson to make his move for EE.
Where this all gets even more interesting is in the identity of Virgin's mobile operator partner. Using EE, of course, gives Virgin access to the UK's biggest mobile network, but it also means Virgin could soon find itself paying wholesale fees to its biggest quad-play rival -- in other words, in a similar position to the UK's other broadband operators.
Patterson has insisted that BT will honor EE's wholesale commitments, but does Virgin really want to be dependent on BT? While no one has so far suggested Virgin is in the market for a mobile network of its own, Vodafone was rumored to be eyeing a takeover of Liberty Global businesses in the run-up to Christmas. That seems far-fetched -- Vodafone CEO Vittorio Colao was quick to dismiss the story -- and yet both Vodafone and Liberty Global must appreciate the potential benefits of a UK tie-up. Heck, one year ago, a BT takeover of EE would have seemed improbable. (See Eurobites: Vodafone Squashes M&A Speculation.)
TalkTalk
Having started out as a mere irritant to BT, TalkTalk has grown into its third-biggest broadband competitor, behind Sky and Virgin. It still functions mainly as a local loop unbundler, installing equipment in exchanges the incumbent has been forced to open up to rivals, but has ambitions to be a major infrastructure player in its own right. It's also emerged as a UK cheerleader for quad-play and is expanding its mobile offer into 4G territory through an agreement with O2 it signed late last year.
Sky
What BT is to fixed-line telecoms, Sky is to pay-TV. In March last year, when it reported results for its 2013/14 financial year, some 10.6 million households subscribed to one of its TV deals. Virgin Media, its closest rival in this market, had just 3.7 million on the same date, while BT had then barely crossed the 1 million threshold. Just as Ofcom has leant heavily on BT in the fixed telephony and broadband markets, so the regulator has been tough on Sky in the pay-TV sector.
Table 3: Sky at a Glance
FY 2013/14 YoY change
Revenues £7.6B 7.0%
EBITDA £1.7B -1.0%
Net profit £0.9B -3.3%
Capital expenditure £0.5B 19.6%
Net debt £1.2B 2.5%
Customers
−Broadband 5.2M 6.1%
−TV 10.6M 2.5%
Source: Sky
Not tough enough, according to Sky's competitors, and a recent update from Ofcom contains some worrying data. Sky still claims more than 80% of market revenues from the supply of key sports channels, said the regulator, noting that its dominance could be harmful to competition.
BT has been doing its utmost to create a less one-sided contest, splashing out on expensive rights to screen Champions League soccer matches, and the off-pitch action is hotting up. Last week, the two players went head-to-head in an auction of TV rights to English Premier League matches. The results of that auction are not yet known, but analysts cited in the UK's Guardian newspaper believe the rivalry between BT and Sky could drive income from three-year concessions to as much as £4.4 billion (£6.7 billion), up from £3 billion ($4.6 billion) currently. At the moment, BT holds only 25% of Premier League rights, with Sky controlling the remainder.
But it's not just in TV that Sky is a force to be reckoned with. In 2013, its acquisition of broadband businesses owned by O2 saw it overtake Virgin Media to become the UK's second-biggest broadband operator. Like its partner and rival TalkTalk, Sky unhappily relies on BT to provide broadband services. Yet the packaging of broadband with TV has given it an enticing offer to dangle in front of consumers using or thinking of using BT. (See BSkyB Buys Telefónica Unit.)
About the only thing Sky has lacked is a mobile string to its bow, and that clearly became a concern when BT began touting its mobile plans last year. With the cost of recent acquisition activity in Europe ruling out any UK M&A, Sky decided to follow the example of TalkTalk, signing an MVNO deal with O2 in January and planning a service launch for next year. Quad-play is coming. (See Sky Opens Tie-Up Talks With O2 – Report.)
Table 2: TalkTalk at a Glance
FY 2013/14 YoY change
Revenues £1.7B 3.4%
EBITDA £0.2B -27.0%
Net profit £61M 53.8%
Capital expenditure £0.1B 2.9%
Net debt £0.5B 26.5%
Customers
−Broadband 4.2M 3.3%
−Fiber 207,000 184.0%
−TV 917,000 299.0%
−Mobile 284,000 53.5%
Source: TalkTalk
BT's Patterson mentioned TalkTalk in the same breath as Virgin when highlighting his quad-play challenges, and the merger between BT and EE would have no bearing on TalkTalk's arrangement with O2. Unfortunately, though, TalkTalk's broadband ties to BT are becoming increasingly strained. Unbundling is an option only in the case of old-fashioned copper broadband services, which means TalkTalk is effectively just reselling a BT service when it comes to the higher-speed fiber stuff. (See BT Locks Down £12.5B EE Takeover Deal.)
Judging by TalkTalk's last earnings announcement, this isn't working out too well. While TalkTalk is growing, it isn't advancing as quickly in the UK's superfast broadband market as BT. It's no wonder, says TalkTalk, because BT is a greedy and unfair landlord, charging way too much in rent and then having the effrontery to open a discount retail outlet next door. With that kind of "margin squeeze" going on, how is TalkTalk supposed to make a profit? (See Quad-Play Cheerleader TalkTalk Falls Further Behind BT.)
TalkTalk is hoping that life will get tougher for BT as a result of new margin-squeeze regulations, but it would obviously prefer to cut the cord entirely. In the city of York, in northern England, it may soon get its chance. Through a partnership with Sky and an infrastructure company called CityFibre , TalkTalk is rolling out an FTTH network that will go live in 2015. The deployment will cover only 20,000 UK homes, but the partners plan to introduce FTTH services to another two cities and TalkTalk has said it could ultimately address as many as 10 million homes across the country. (See CityFibre Aims for BT's Wholesale Business and TalkTalk's Small Fiber Beginnings.)
In the meantime, the operator has been talking up its quad-play success, claiming to have beaten Vodafone on SIM card activations in December. Should 3 pull off a merger with O2, TalkTalk may gain access to the UK's biggest mobile network thanks to its MVNO agreement with the latter. Dependency on others, then, is still very much its modus operandi. (See Hutchison Offers $13.9B for UK's O2, Hutchison in Talks to Buy UK's O2 – Report and Could Li Ka-Shing Crash BT's M&A Party?.)
It's not just the UK's mobile community that BT has sent into a spin with its £12.5 billion ($19 billion) move for EE. Players in other parts of the communications market are feeling just as queasy at the thought of a merger between the country's biggest fixed and mobile operators. (See BT Offers $19.5B to Buy EE, Why BT + EE Makes More Sense.)
While 3 , Telefónica UK Ltd. (O2) and Vodafone UK fret that BT Group plc (NYSE: BT; London: BTA)'s fixed-line firepower will give EE a weapon of mass mobile destruction, companies like Sky (NYSE, London: SKY) have been worrying that without a mobile offer they could lose appeal -- and customers to boot (ouch!).
So in this second installment of our brief guide to the players affected by the BT move, we look at BT's big broadband rivals. That means Sky, TalkTalk and, of course, Virgin Media Inc. (Nasdaq: VMED), which is where we'll begin. (See BT & EE Spur UK Sector Shake-Up.)
Virgin Media
Bought by John Malone's Liberty Global Inc. (Nasdaq: LBTY) for a whopping $24 billion in mid-2013, Virgin Media is typically cast as the UK's "other" infrastructure player, after BT. That means, of course, it's the only broadband operator that doesn't rely on BT's network to offer services. Like the incumbent, Virgin gets to sell retail services and keep all of the dough. (See Liberty Spies Greater Virgin Synergies.)
Table 1: Virgin Media at a Glance
FY 2014 YoY change
Revenues £4.1B 0.0%
Operating profit £0.2B -77.6%
Net loss £0.4B N/A
Capital expenditure £0.7B -6.4%
Long-term debt £8.2B 40.1%
Customers
−Broadband 4.4M 2.3%
−TV 3.7M -2.6%
−Mobile 3.0M 0.0%
Source: Virgin Media
The downside is that only half of UK homes and businesses have the option of subscribing to Virgin's cable technology. Where it is available, however, it is an Usain Bolt next to BT's portly jogger (a point that Virgin has emphasized in its advertising), working twice as fast as the incumbent's broadband service (if you compare the premium offers from each player). No wonder BT is looking to the G.fast standard to boost the performance of its network. (See BT Puts G.fast at Heart of Ultra-Fast Broadband Plans.)
Virgin also happens to be one of only two UK players that have already taken the quad-play plunge. Like broadband rival TalkTalk, it has been renting capacity on a mobile operator's network to provide mobile services under its own brand. Even if Virgin's MVNO origins go back many years, rising quad-play competition appears to have spurred BT CEO Gavin Patterson to make his move for EE.
Where this all gets even more interesting is in the identity of Virgin's mobile operator partner. Using EE, of course, gives Virgin access to the UK's biggest mobile network, but it also means Virgin could soon find itself paying wholesale fees to its biggest quad-play rival -- in other words, in a similar position to the UK's other broadband operators.
Patterson has insisted that BT will honor EE's wholesale commitments, but does Virgin really want to be dependent on BT? While no one has so far suggested Virgin is in the market for a mobile network of its own, Vodafone was rumored to be eyeing a takeover of Liberty Global businesses in the run-up to Christmas. That seems far-fetched -- Vodafone CEO Vittorio Colao was quick to dismiss the story -- and yet both Vodafone and Liberty Global must appreciate the potential benefits of a UK tie-up. Heck, one year ago, a BT takeover of EE would have seemed improbable. (See Eurobites: Vodafone Squashes M&A Speculation.)
TalkTalk
Having started out as a mere irritant to BT, TalkTalk has grown into its third-biggest broadband competitor, behind Sky and Virgin. It still functions mainly as a local loop unbundler, installing equipment in exchanges the incumbent has been forced to open up to rivals, but has ambitions to be a major infrastructure player in its own right. It's also emerged as a UK cheerleader for quad-play and is expanding its mobile offer into 4G territory through an agreement with O2 it signed late last year.
Sky
What BT is to fixed-line telecoms, Sky is to pay-TV. In March last year, when it reported results for its 2013/14 financial year, some 10.6 million households subscribed to one of its TV deals. Virgin Media, its closest rival in this market, had just 3.7 million on the same date, while BT had then barely crossed the 1 million threshold. Just as Ofcom has leant heavily on BT in the fixed telephony and broadband markets, so the regulator has been tough on Sky in the pay-TV sector.
Table 3: Sky at a Glance
FY 2013/14 YoY change
Revenues £7.6B 7.0%
EBITDA £1.7B -1.0%
Net profit £0.9B -3.3%
Capital expenditure £0.5B 19.6%
Net debt £1.2B 2.5%
Customers
−Broadband 5.2M 6.1%
−TV 10.6M 2.5%
Source: Sky
Not tough enough, according to Sky's competitors, and a recent update from Ofcom contains some worrying data. Sky still claims more than 80% of market revenues from the supply of key sports channels, said the regulator, noting that its dominance could be harmful to competition.
BT has been doing its utmost to create a less one-sided contest, splashing out on expensive rights to screen Champions League soccer matches, and the off-pitch action is hotting up. Last week, the two players went head-to-head in an auction of TV rights to English Premier League matches. The results of that auction are not yet known, but analysts cited in the UK's Guardian newspaper believe the rivalry between BT and Sky could drive income from three-year concessions to as much as £4.4 billion (£6.7 billion), up from £3 billion ($4.6 billion) currently. At the moment, BT holds only 25% of Premier League rights, with Sky controlling the remainder.
But it's not just in TV that Sky is a force to be reckoned with. In 2013, its acquisition of broadband businesses owned by O2 saw it overtake Virgin Media to become the UK's second-biggest broadband operator. Like its partner and rival TalkTalk, Sky unhappily relies on BT to provide broadband services. Yet the packaging of broadband with TV has given it an enticing offer to dangle in front of consumers using or thinking of using BT. (See BSkyB Buys Telefónica Unit.)
About the only thing Sky has lacked is a mobile string to its bow, and that clearly became a concern when BT began touting its mobile plans last year. With the cost of recent acquisition activity in Europe ruling out any UK M&A, Sky decided to follow the example of TalkTalk, signing an MVNO deal with O2 in January and planning a service launch for next year. Quad-play is coming. (See Sky Opens Tie-Up Talks With O2 – Report.)
Table 2: TalkTalk at a Glance
FY 2013/14 YoY change
Revenues £1.7B 3.4%
EBITDA £0.2B -27.0%
Net profit £61M 53.8%
Capital expenditure £0.1B 2.9%
Net debt £0.5B 26.5%
Customers
−Broadband 4.2M 3.3%
−Fiber 207,000 184.0%
−TV 917,000 299.0%
−Mobile 284,000 53.5%
Source: TalkTalk
BT's Patterson mentioned TalkTalk in the same breath as Virgin when highlighting his quad-play challenges, and the merger between BT and EE would have no bearing on TalkTalk's arrangement with O2. Unfortunately, though, TalkTalk's broadband ties to BT are becoming increasingly strained. Unbundling is an option only in the case of old-fashioned copper broadband services, which means TalkTalk is effectively just reselling a BT service when it comes to the higher-speed fiber stuff. (See BT Locks Down £12.5B EE Takeover Deal.)
Judging by TalkTalk's last earnings announcement, this isn't working out too well. While TalkTalk is growing, it isn't advancing as quickly in the UK's superfast broadband market as BT. It's no wonder, says TalkTalk, because BT is a greedy and unfair landlord, charging way too much in rent and then having the effrontery to open a discount retail outlet next door. With that kind of "margin squeeze" going on, how is TalkTalk supposed to make a profit? (See Quad-Play Cheerleader TalkTalk Falls Further Behind BT.)
TalkTalk is hoping that life will get tougher for BT as a result of new margin-squeeze regulations, but it would obviously prefer to cut the cord entirely. In the city of York, in northern England, it may soon get its chance. Through a partnership with Sky and an infrastructure company called CityFibre , TalkTalk is rolling out an FTTH network that will go live in 2015. The deployment will cover only 20,000 UK homes, but the partners plan to introduce FTTH services to another two cities and TalkTalk has said it could ultimately address as many as 10 million homes across the country. (See CityFibre Aims for BT's Wholesale Business and TalkTalk's Small Fiber Beginnings.)
In the meantime, the operator has been talking up its quad-play success, claiming to have beaten Vodafone on SIM card activations in December. Should 3 pull off a merger with O2, TalkTalk may gain access to the UK's biggest mobile network thanks to its MVNO agreement with the latter. Dependency on others, then, is still very much its modus operandi. (See Hutchison Offers $13.9B for UK's O2, Hutchison in Talks to Buy UK's O2 – Report and Could Li Ka-Shing Crash BT's M&A Party?.)
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