Most comment on the acquisition of Virgin Media by Liberty Global has focused on the obvious: “It will create the world’s biggest cable operator.” “Richard Branson will get a nice lump sum.” “Malone and Murdoch can slug it out in a new market.” “To be successful Liberty will have to sell more bundles and upsell more TV and broadband.” Ho hum…
The question all the other players in the UK’s pay-TV, broadband and mobile markets need an answer to though, is will the new company behave differently? How will it change as a competitor?
To understand this, it is worth looking at the profile and personality of the Liberty Global business. What sort of company is it now? How does it operate? What are the capabilities of the new business?
Many of the clues for what the UK market can expect are evident in the merger presentation. Virgin Media has been better than Liberty Global at selling bundles – and especially at selling mobile services. Virgin was perceptive in getting in as an MVNO early and striking a good deal with its network operator partner. Early subscriber acquisition (based on innovative pricing) was a huge factor in its success. Liberty’s MVNO business in Europe, meanwhile, is much less well-developed. Virgin Media has also been better at selling to business customers, generating 16% of revenues from business customers, compared with Liberty Global’s 6%.
By buying Virgin Media, Liberty Global can leverage the UK provider’s experience to drive up the revenue it is earning from its continental European assets. And that’s why it makes sense to put the HQ in the UK too, as the staff with that critical expertise are all nearby.
Virgin Media does not get any of those benefits. What it might get is improved network availability in European markets, and thereby the potential to enhance the solutions and commercial offers it can make to UK companies with a strong European presence.
The scale of the new Liberty Global group should enable it to secure better equipment deals with suppliers. Its scale is not game changing; but it will help the bottom line.
Don’t expect to see a vast amount of new investment in UK networks though. In the merger presentation it was pointed out that Virgin Media was moving into a less capex intensive phase. And the proportion of revenue Liberty Global has been spending on capex is lower than the proportion spent by Virgin Media. And the group is focusing on driving up operating cash flow – that is not compatible with a large scale capital spending spree.
Liberty has additionally gone on record as saying it does not plan to go up against BSkyB in terms of premium content creation – which again would be an expensive activity.
Finally, Liberty Global cites as a benefit the rising prices for broadband in the UK - so there is no obvious appeal in starting a price war.
Virgin Media looks a stronger competitor for BT, BSkyB, Telefonica O2 and the other big UK telecoms operators, but it will still need to buy the same wholesale services, and it does not look like its retail strategy will change too much.
The real benefit for Virgin Media shareholders is a good acquisition price – one that comes at a substantial premium to stock market valuations at the time the deal was announced.
So what does the Liberty acquisition of Virgin Media mean for UK telecom? Not much.