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British Cable's Poor Picture (Int'l Edition)

International -- Int'l Business: BRITAIN


With viewers unimpressed, a shakeout looms

It has been dubbed the Channel Tunnel of the TV industry. Since the early 1990s, phone and cable-TV operators from around the world--among them Nynex, Bell Canada, and Jones Intercable--have spent $7.5 billion digging up British streets to install state-of-the-art cable-TV systems that can simultaneously deliver video and voice signals. By decade's end, the price tag could swell to $18 billion. No matter. As a succession of British cable companies have gone public in the past 18 months, the issues have been oversubscribed by investors seeking to cash in on the dazzling promise of the world's most advanced Information Superhighway.

But the wiring of Britain resembles the troubled Chunnel in more than just its colossal costs. Fewer people are subscribing to cable TV than had been expected, losses are deepening, and management teams are in an upheaval. British Telecommunications PLC, long assumed to be an easy target, is turning into a marketing tiger. The fallout is most evident in the stock market: The shares of three of the five largest public British cable companies are trading below their initial offering prices. "The industry's initial progress has been disappointing," says a major institutional shareholder. "If we had another two years of this, I'd regard it as a disaster."

BURST BUBBLE. That's not the way it was supposed to to be. As one of the first nations to let companies transmit cable and telephone signals over the same lines, Britain is the front line for U.S. and European operators who are just starting to face telecom deregulation at home. This is where the world's cable and phone carriers would prove that competition, not to mention an expensive multimedia network, would pay off, thanks to all the British consumers who would rush to buy their communications services from someone other than BT. "When we first invested in Britain, our attitude was: `Build the network, and they will come,"' says Daniel E. Somers, CEO of No.3 cable operator Bell CableMedia.

But Britain has been no field of dreams. The cable industry has discovered "what a tough battleground it is out there," says Somers. And the industry is girding for a massive shakeout, with the number of operators likely to shrink to three or four from the dozen there now. In fact, investors betting on possible acquisition targets are the main reason cable stocks are rising from the record lows they hit earlier this year. The first to go: Canada's Le Groupe Videotron is putting its 56% stake in Videotron Holdings PLC up for sale.

Life wasn't always so tough. For the first few years that cable operators were grabbing TV and phone customers, British Telecom and Rupert Murdoch's BSkyB satellite TV service, which controls an estimated 75% of pay-TV programs, did little to counteract the competition. But with the cable industry signing up some 50,000 phone customers a month by offering rates as much as 25% cheaper than BT's, Britain's dominant carrier started fighting back last year. BT has been sending out battalions of salespeople on a door-to-door campaign to woo back former customers, and it has borrowed a page from U.S. partner MCI Communications Corp. by offering discount calling plans with names such as Premierline, Friends & Family, and Surprise Saver.

What the cable industry really fears, though, is the combined muscle of BT and BSkyB. The two teamed up to cross-market to people who want both cable TV and telephony. Both companies are cutting prices and promoting special deals: BSkyB offers purchasers of a 42 cents Kit-Kat candy bar, for instance, the chance to win 30 days of free satellite TV. It doesn't help that the cable industry can't seem to unite against the two giants. The two largest cable operators--TeleWest, a joint venture of Tele-Communications and U S West, and Nynex CableComms--stunned the industry late last year by cutting their own four-year programming deal with BSkyB. The move effectively torpedoed the industry's collective attempt to loosen BSkyB's grip on programming by developing its own content.

An even bigger disappointment is the industry's stubbornly low subscription rate. It has been stuck at an average 22% penetration in the areas where cable has been available for the past three years, roughly one-third the sign-up rate in the U.S. cable market. Critics blame the low take-up on poor marketing, poor service, and such tacky programming as a topless darts show.

There are signs that the industry's fortunes may be improving. Operating cash flows are turning positive for the first time. Nynex, Bell Cablemedia, and TeleWest have overhauled their management teams, sending in executives with badly needed marketing skills. And on June 3, Britain's telecom regulator unveiled higher-than-expected rate ceilings for BT that should ease up pressure on the cable operators to cut their own phone rates. This is one area cable operators can boast about: As many as 37% of cable subscribers in some areas have signed up for phone service, too.

KICKBACKS? Still, the good news is tough to hear amidst all the bad. Take Bell Cablemedia, the third-largest operator, which is 42% owned by Bell Canada, 13.4% by Denver-based Jones Intercable, and 12.8% by Britain's Cable & Wireless. Its losses doubled in 1995, and the company is suing its former construction director for fraud in an alleged kickback scheme. Nynex CableComms, the industry's No.2 player, axed 310 jobs in January--almost 10% of the workforce. And its construction costs are about 18% higher than the industry average, estimates Goldman, Sachs & Co. CableComms is also the subject of constant takeover speculation. Nynex and TeleWest did discuss a possible merger in May, says TeleWest CEO Alan Michels, but those talks are on hold. As for Nynex, "we are very clear on our commitment to this market," says CableComms Chairman Richard W. Blackburn.

Tougher competition from BT and BSkyB could weaken that resolve. "U.S. companies are being pressed by shareholders to round up resources and get ready for the fight at home," says Michael Villaneau, executive vice-president of France's Compagnie Generale des Eaux, majority owner of General Cable Ltd. Indeed, "if the industry does not turn the corner within the next 12 to 18 months, it will be in very serious trouble," warns David Cleevely, managing director of British consultant Analysys Ltd. It's not easy being out in front on the Information Highway.By Julia Flynn in London, with William C. Symonds in Toronto and bureau reportsReturn to top

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