International -- Finance: INVESTMENT
THE WIRING OF BRITAIN (int'l edition)
For investors keen on the Information Superhighway, Britain seems the land of opportunity these days. A $660 million offering by U.S. cable operator Telewest on the London Stock Exchange and NASDAQ was oversubscribed by six times last fall. Now, several other U.S., Canadian, and European companies are turning to the market to raise capital for the wiring of Britain--a $15 billion project to lay thousands of kilometers of fiber-optic cable to carry data, video, and telephone calls by the decade's end.
But this time, investors might want to take care. The cable industry in Britain is suffering growing pains. Although construction is moving at breakneck speed, sales are lagging. And the market, one of the few in which companies are allowed to transmit phone and television signals down the same lines, is already ferociously competitive. The mostly foreign-owned cable companies are up against two tough British players: British Telecommunications PLC, the phone giant, and Rupert Murdoch's British Sky Broadcasting (BSkyB) network, which controls the industry's supply of TV shows. As a result, the cable industry is heavy on costs and light on profits.
The foreigners are barreling into Britain because they see it as a test case for deregulation and for establishing services such as cable telephony and other features of the Info Highway. Companies from Nynex to Bell Canada to Compagnie Generale des Eaux are laying cable and offering services in Britain that they may one day sell at home.
Ironically, British customers aren't nearly as excited as the cable operators. In the past decade, operators have installed cable running past 4.5 million British homes. This year alone, the industry plans to pass 2.6 million more households--doubling last year's rate. But the percentage of homes that hook up after cable is available has stagnated at about 22% for three years running. And a third of the households that sign up later change their minds.
That squeezes profits. It costs cable operators about $1,600 to lay the cable and install it in each home. They are also signing up about 50,000 telephone customers a month with rates that are up to 15% cheaper than BT's. A household getting both TV and telephone through cable will pay about $72 a month--but at least half of those revenues, after equipment costs, go to suppliers such as BSkyB and BT for programming or to connect phone calls.
Telewest, the biggest operator, boosted its subscribers by 50% last year. But it suffered a net loss of $93 million, vs. a $60 million loss in 1993. "BT is a very powerful competitor," says Telewest CEO Alan Michels. "It controls our pricing through its interconnect charges."
NO-LOSE SCENARIO. And that's just the start. BT is also planning to march onto the cable operators' turf this summer with expanded video-on-demand trials involving 2,500 households. That may be a way for it to break into entertainment services, which it is banned from offering on its network until 2001. Cable executives charge that BT is trying to dampen interest in their upcoming initial public offerings, which aim to raise a total of nearly $1.2 billion on the London Stock Exchange and NASDAQ (table). Counters Alan W. Rudge, BT's deputy group managing director: "We didn't plan our trials to hurt their stock launches."
Meanwhile, Murdoch seems to be in a no-lose position. His BSkyB dominates Britain's satellite distribution system, which competes with cable, and controls an estimated 75% of pay-TV programs. So even if cable takes away market share from BSkyB's satellite service, Murdoch probably still gains. Explains John Sheridan, chief operating officer for rival Bell Cablemedia Management Ltd., "the bigger we get, the more money Murdoch makes," since BSkyB's programming revenue from cable operators is based on how many customers they have.
Britain's Office of Fair Trading has moved to roll back Murdoch's clout. BSkyB can no longer force cable companies to buy an entire package of Sky programs to get a discount. But that hasn't stopped Murdoch from finding a new way to take on cable operators. BT and Murdoch have decided to work together; Murdoch's BSkyB will market BT's telephone services to customers who want their TV and phone together.
For Stafford Taylor, BT managing director for personal communications, the agreement marks "the start of a long-term cooperation between our two companies." But for cable companies and potential investors, it's also a sign of how tough it may be to get ahead in Britain.By Julia Flynn in London