British TV: If You Can't Beat 'Em, Merge

How two cable operators may survive in Britain's fierce TV market

Britain's cable guys are having a tough time of it. Satellite service British Sky Broadcasting rules the airwaves with its massive selection of over 500 radio and TV channels, while Freeview, BBC's digital-TV service, has attracted nearly 5 million households since its launch in 2002. So last fall, Telewest Global, the country's No. 2 cable provider, upped the ante. The London outfit launched a three-part package of cable, broadband, and phone service for just $55 a month, saving consumers about $7 monthly. Dubbed "3 for GBP 30," the plan was such a hit that rival NTL, the No. 1 cable provider, started offering the same deal two months later.

The episode illustrates just how cutthroat Britain's TV market has become. In a country where 35% of households still get by with five free broadcast channels, the competition for paying customers is intense. Britain's cable companies were already having a tough time peeling away subscribers from BSkyB, the service headed by James Murdoch. BSkyB's packages, which run from $25 to $75 a month, are a channel surfer's delight. Then NTL Group Ltd. and Telewest began losing customers to Freeview, a digital-TV service with over 30 TV channels and 20 radio stations that are, as the name says, free (aside from the one-time charge of $100 or less for a set-top box). "Freeview has intensified the competition," says Thomas Eagan, senior analyst at Oppenheimer & Co. in New York.

So what are two embattled cable companies to do? NTL and Telewest are expected to announce soon that they will join forces in a deal worth some $9 billion. Momentum for a potential merger has picked up now that both have hired advisers. The move would create a company with more than 3 million subscribers and over $6 billion in annual revenues. The two cable players, which trade on NASDAQ, have recently come out of financial restructurings after taking on too much debt during the go-go 1990s. In the first quarter, NTL reported a profit of $30 million, with Telewest coming in at $44 million. The merger talk has bolstered Telewest shares by 8% since mid-May, to about $20. NTL's stock has risen 3%, to about $64.

Industry insiders say this is a bit of an arranged marriage. American bond investor Bill Huff, a major shareholder in both companies, has been quietly pressing for a tie-up. Huff, who invested in NTL when it was distressed, has helped the company turn itself around. He served as interim chairman in 2003 and is still a director on the board.

Even if the two make it down the aisle, though, they face a rough road. Last year, according to Oppenheimer & Co., NTL and Telewest subscribers made up just 14% of all British households. That's well below BSkyB's 30% and the 21% Freeview has racked up since since it was launched in October, 2002. To pick up customers, a newly merged NTL/Telewest would have to work hard to differentiate its offerings. The 3-for-1 cable-phone-broadband packages are a good start. Telewest, meanwhile, has been pushing a video-on-demand service since January and hopes to have 1 million customers by early next year. Barry R. Elson, Telewest's acting chief executive, told analysts on May 12: "This should give us a competitive edge vs. Sky and Freeview and should improve both customer acquisition and loyalty."

BSkyB fans say otherwise. Take Christopher Snelling, a 30-year-old who switched from NTL to BSkyB in 2002. Snelling, a senior associate in the London office of APCO, a communications consulting firm, says he isn't tempted by cable's new offerings. "I'm happy with Sky,"he says.

Winning over the likes of Snelling will be tough. Still, with the average Briton watching more than 22 hours of TV a week, the cable guys have a better shot at building share if they join forces. Britain's TV wars are far from over.

By Laura Cohn in London

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