Why NTL Likes Virgin


The ink wasn't yet dry on NTL's merger with rival British cable operator Telewest when the former stunned the market on Dec. 5 with an audacious $1.4 billion bid for Virgin Mobile (VGMHF). Founded by Sir Richard Branson's Virgin Group in 1999, Virgin Mobile is now Britain's largest mobile virtual network operator, with 5 million subscribers. Branson's Virgin Group, which owns 72% of Virgin Mobile, will emerge with a seat on the new company's board and a shareholding of 14%, making Virgin the single biggest shareholder.

If consummated, the deal will create a powerhouse in the rapidly converging telecom and media industries, all under the Virgin brand. "This move could change the landscape in Britain, where it is one of the most significant telecom deals we've seen in the last five years," says Bob House, senior vice-president with telecom consultancy Adventis in London. "This gives NTL a breadth that, at the moment, no one else can match."

QUADRUPLE PLAY. That's because the takeover will enable the new company to offer what is seen as the Holy Grail in the industry: the so-called quadruple play package of mobile and fixed line phone service, broadband, and TV. The plan, analysts say, is dependent in the long term on introducing next-generation handsets that will seamlessly switch from mobile networks to fixed-line networks, depending upon the customer's location. These new handsets -- which could also be used to download content, watch TV, or surf the Net -- are still at least 18 months away.

In the meantime, the new venture's big selling point is that it will be the first quadruple play in Britain and one that analysts say is unique in providing an easy one-stop billing for a bundle of services under one well-known brand. In theory, customers would be able to get cheaper rates by singing up for the full package of multiple services, enabling the new company to undercut rivals that are unable to offer the full range of services.

Although quadruple play is in its infancy in the U.S., where a handful of companies such as Sprint Nextel (S) have forged deals with cable operators, the new NTL-Virgin business will be the first, analysts say, to offer the package under one brand and with one bill. Moreover, analysts say it is powerful evidence that the much ballyhooed convergence wave is finally taking off in Europe.

COMPETITIVE EDGE. The deal promises to intensify competition in Britain, where it will give the new company an edge over rivals such as telecom giant BT Group (BT) and Rupert Murdoch's satellite broadcaster BSkyB. While BT has recently introduced BT Fusion, a mobile phone service that works on both fixed and mobile networks, it does not yet offer the full range that NTL is planning. Similarly, BSkyB recently acquired broadband provider Easynet, but it is not able to offer customers mobile phone service.

"This allows NTL to offer voice and potentially other entertainment services such as mobile TV over a mobile phone network through Virgin, enabling them to add another technology platform and another set of products to their offering," says Ian Fogg, senior analyst at Jupiter Research in London.

For NTL, the deal offers other benefits. The cable operator, which is already in the process of merging with rival Telewest to create a $5.9 billion giant, will gain access to the Virgin brand, whose image as hip and offering good value plays well with younger customers. "The Virgin brand gives the new company credibility," says Julian Hewett, chief analyst at IT and telecom consultancy Ovum in London. It will also give NTL badly needed customer service expertise, something Britain's cable operators are sorely lacking.

INTEGRATION ISSUES. Still, the challenges in integrating NTL, Telewest, and now Virgin are immense. The danger, analysts say, is that the new company could find the task of integration a distraction. "NTL can't afford to take its eye off the ball, as each of the markets it operates in -- television, broadband, and telephony -- are extremely competitive," says Jupiter Research's Fogg.

While most analysts believe the overall strategy behind the new venture is sound, the execution challenges are biggest risk. "NTL will have to execute the integration very carefully so as not to damage the Virgin brand," says Adventis' House.

At the same time, the new company will need to figure out ways to generate value from convergence. Although television and video over mobile phones is proving popular in some markets, such as Korea, it is still early days.

THREE-YEAR HORIZON. Analysts say there is no real evidence -- at least in Europe -- that any one company has come up with the killer offering. Lastly, while it will be relatively easy sell to bring Virgin mobile to NTL's existing customers, it might prove tougher convincing Virgin's predominantly lower-spending prepaid users to sign up for the quadruple play offering.

There's no doubt that, if agreed upon, the deal will take at least two years to three years before it is fully integrated. In the meantime, cable, telecom, and broadcast companies the world over are watching.

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