Liberty Global 10-K 2008
Documents found in this filing:
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Commission File Number 000-51360
Registrants telephone number, including area code:
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act:
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No o
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-1 of the Exchange Act. Yes o No þ
State the aggregate market value of the voting and non-voting common equity held by non-affiliates, computed by reference to the price at which the common equity was last sold, or the average bid and ask price of such common equity, as of the last business day of the registrants most recently completed second fiscal quarter: $14.7 billion.
The number of outstanding shares of Liberty Global, Inc.s common stock as of February 21, 2008 was:
170,687,421 shares of Series A common stock;
7,255,853 shares of Series B common stock; and
165,643,069 shares of Series C common stock.
Portions of the definitive proxy statement for the Registrants 2008 Annual Meeting of Stockholders are incorporated by reference in Part III of this Form 10-K.
LIBERTY GLOBAL, INC.
2007 ANNUAL REPORT ON FORM 10-K
Liberty Global, Inc. (LGI) is an international provider of video, voice and broadband Internet services, with consolidated broadband communications and/or direct-to-home (DTH) satellite operations at December 31, 2007, in 15 countries, primarily in Europe, Japan and Chile. Through our indirect wholly owned subsidiary, UPC Holding BV (UPC Holding), we provide video, voice and broadband Internet services in 10 European countries and in Chile. UPC Holdings European broadband communications operations are collectively referred to as the UPC Broadband Division. Through our 51.1% indirect controlling ownership interest in Telenet Group Holding NV (Telenet), we provide broadband communications services in Belgium. Through our indirect 37.9% controlling ownership interest in Jupiter Telecommunications Co., Ltd. (J:COM), we provide broadband communications services in Japan. Through our indirect 53.4% owned subsidiary Austar United Communications Limited (Austar), we provide DTH satellite services in Australia. We also have (i) consolidated broadband communications operations in Puerto Rico and (ii) consolidated interests in certain programming businesses in Europe, Japan (through J:COM) and Argentina. Our consolidated programming interests in Europe are primarily held through Chellomedia BV (Chellomedia), which also provides interactive digital products and services and owns or manages investments in various businesses in Europe. Certain of Chellomedias subsidiaries and affiliates provide programming and interactive digital services to our broadband communications operations, primarily in Europe.
LGI was formed on January 13, 2005, for the purpose of effecting the combination of LGI International, Inc., formerly known as Liberty Media International, Inc. (LGI International), and UnitedGlobalCom, Inc. (UGC). LGI International is the predecessor to LGI and was formed on March 16, 2004, in contemplation of the spin-off of certain international cable television and programming subsidiaries and assets of Liberty Media Corporation (Liberty Media), including a majority interest in UGC, an international broadband communications provider. On June 15, 2005, we completed certain mergers whereby LGI acquired all of the capital stock of UGC that LGI International did not already own and LGI International and UGC each became wholly owned subsidiaries of LGI (the LGI Combination). In the following text, the terms we, our, our company, and us may refer, as the context requires, to LGI and its predecessors and subsidiaries.
Unless indicated otherwise, convenience translations into U.S. dollars are calculated as of December 31, 2007, and operational data, including subscriber statistics and ownership percentages, are as of December 31, 2007.
Telenet. At the end of 2006, Chellomedia indirectly owned 28.8% of the then outstanding ordinary shares of Telenet, including shares held through its then majority owned subsidiary Belgian Cable Investors. These shares represented a majority ownership interest in the Telenet shares owned by a syndicate (the Telenet Syndicate) that controls Telenet by virtue of its collective ownership of a majority of the outstanding Telenet shares. Subject to our obtaining competition approval from the European Commission (EU Commission), our majority ownership interest in the Telenet Syndicate shares gave us certain governance rights under the agreement among the Telenet Syndicate shareholders (the Syndicate Agreement) that provided us with the ability to exercise voting control over Telenet.
Competition approval was obtained on February 26, 2007, and we began accounting for Telenet as a consolidated subsidiary effective January 1, 2007. Pursuant to the rights provided us under the Syndicate Agreement, on May 31, 2007, we nominated seven additional members to the Telenet Board, bringing our total number of representatives to nine of the 17 total members.
During 2007, we acquired an aggregate of 26,769,047 additional Telenet ordinary shares through transactions with third parties, the conversion of warrants and the exercise of options to acquire Telenet shares from certain of the Telenet Syndicate shareholders. We also purchased from a third party the remaining 10.5% interest in Belgian Cable
Investors that we did not already own. For these acquisitions, we paid aggregate cash consideration, before direct acquisitions costs, of $930.8 million and exercised options and converted warrants with an aggregate fair value of $65.2 million. See note 4 to our consolidated financial statements.
After giving effect to these transactions, as well as the issuance of shares by Telenet to third parties upon conversion of their warrants, we indirectly own 55,861,521 shares or 51.1% of Telenets outstanding ordinary shares. Only one third-party shareholder remains within the Telenet Syndicate and our governance rights under the Syndicate Agreement and the Telenet Articles of Association allow the Telenet directors nominated by us to control all Telenet Board decisions, other than certain minority-protective decisions that must receive the affirmative vote of specified directors in order to be effective. These decisions include selling certain cable assets or terminating cable service.
JTV Thematics. On July 2, 2007, Jupiter TV Co., Ltd. (Jupiter TV), our Japanese programming joint venture with Sumitomo Corporation (Sumitomo), was split into two separate companies through the spin-off of the thematics channel business (JTV Thematics). The business of JTV Thematics consists of the operations that invest in, develop, manage and distribute fee-based television programming through cable, satellite and broadband platform systems in Japan. Following the spin-off of JTV Thematics, Jupiter TV was renamed SC Media & Commerce Inc. (SC Media). SC Medias business primarily focuses on the operation of Jupiter Shop Channel Co., Ltd., through which a wide variety of consumer products and accessories are marketed and sold. We exchanged our interest in SC Media for shares of Sumitomo common stock on July 3, 2007. See Dispositions below.
On September 1, 2007, JTV Thematics and J:COM executed a merger agreement under which JTV Thematics was merged with J:COM, with Liberty Global Japan II, LLC, our wholly owned indirect subsidiary, and Sumitomo receiving 253,675 and 253,676 J:COM shares, respectively. Sumitomo owns a minority interest in LGI/Sumisho Super Media LLC (Super Media), our indirect majority owned subsidiary that owns a controlling interest in J:COM. The J:COM shares issued in the merger of JTV Thematics into J:COM are to be voted by us and Sumitomo in the same way that Super Media votes its shares of J:COM and are subject to restrictions on transfer. See Operations Asia/Pacific Jupiter Telecommunications Co., Ltd. below, and notes 4 and 5 to our consolidated financial statements.
Telesystems Tirol. On October 2, 2007, our operating subsidiary in Austria acquired Telesystems Tirol GmbH & Co KG, a broadband communications operator in Austria, for cash consideration of 84.3 million ($119.3 million at the transaction date), including working capital adjustments and direct acquisition costs.
For additional information on the foregoing acquisitions, see note 4 to our consolidated financial statements. In addition, during 2007, we completed various other smaller acquisitions in the normal course of business.
SC Media. On July 3, 2007, pursuant to a share-for-share exchange agreement with Sumitomo, we exchanged all of our shares in SC Media for 45,652,043 shares of Sumitomo common stock with a transaction date market value of ¥104.5 billion ($854.7 million at the transaction date). During the second quarter of 2007, we executed a zero cost collar transaction with respect to the Sumitomo shares. See note 8 to our consolidated financial statements.
Melita Cable Plc (Melita). On July 26, 2007, an indirect wholly owned subsidiary of Chellomedia sold its 50% interest in Melita to an unrelated third party for cash consideration of 73.6 million ($101.1 million at the transaction date).
Redemption of ABC Family Preferred Stock. Prior to August 2, 2007, we owned a 99.9% beneficial interest in the 9% Series A preferred stock of ABC Family Worldwide, Inc. (ABC Family). Our ABC Family preferred stock was pledged as security for $345.0 million principal amount of the outstanding borrowings of one of our subsidiaries. On August 2, 2007, the ABC Family preferred stock was redeemed and we used the resulting proceeds to repay in full the related secured borrowings.
For additional information on the foregoing dispositions, see note 5 to our consolidated financial statements. In addition, during 2007, we completed other smaller dispositions in the normal course of business.
LGI Revolving Credit Facility. In June 2007, LGI entered into a $215.0 million unsecured senior revolving facility agreement (the LGI Credit Facility). The LGI Credit Facility is available to be used to fund the general corporate and working capital requirements of LGI and its subsidiaries. The final maturity date of June 25, 2009 may be extended, at LGIs option, to June 25, 2010. Amounts that are repaid by LGI under the LGI Credit Facility may be re-borrowed. At December 31, 2007, the full amount of the LGI Credit Facility was available to be drawn.
UPC Broadband Holding Bank Facility Refinancing Transactions. In April and May 2007, UPC Holdings subsidiaries, UPC Financing Partnership and UPC Broadband Holding BV (UPC Broadband Holding), as the Borrowers, entered into six additional facility accession agreements (collectively, the 2007 Accession Agreements) pursuant to UPC Broadband Holdings senior secured credit agreement (as amended and restated, the UPC Broadband Holding Bank Facility). The 2007 Accession Agreements each provided for an additional term loan under new Facilities M and N of the UPC Broadband Holding Bank Facility. In connection with the 2007 Accession Agreements, we transferred our 100% ownership interest in Cablecom Holdings GmbH (Cablecom), a broadband communications operator in Switzerland, and our 80% ownership interest in VTR GlobalCom, S.A. (VTR), a broadband communications operator in Chile, to members of the Borrower Group (as defined in the UPC Broadband Holding Bank Facility).
At December 31, 2007, the amounts outstanding under Facilities M and N aggregated 3,640.0 million ($5,308.2 million) and $1,900.0 million, respectively. The amounts borrowed under the 2007 Accession Agreements (together with available cash) were used as follows: (i) to refinance outstanding borrowings under the UPC Broadband Holding Bank Facility; (ii) to refinance certain outstanding indebtedness of affiliates of Cablecom; (iii) to fund the cash collateral account securing the senior secured credit facility for VTR; and (iv) for general corporate and working capital purposes. Amounts outstanding under each of Facilities M and N mature on the earlier of (i) December 31, 2014 and (ii) the date (the Relevant Date) falling 90 days prior to the date on which UPC Holdings existing Senior Notes due 2014 fall due if such Senior Notes have not been repaid, refinanced or redeemed prior to such Relevant Date. Any voluntary prepayment of all or part of the principal amount of Facility M (other than Tranche 4) or Facility N made on or before May 16, 2008, will include a premium of 1% such that the prepaid amount will equal 101% of such principal amount plus accrued interest. Any voluntary prepayment of all or part of the principal amount of Tranche 4 made within 12 months of the date of the last drawing under this Tranche will include a premium of 1% such that the prepaid amount will equal 101% of such principal amount plus accrued interest.
UPC Holding Facility. In June 2007, UPC Holding entered into a 250.0 million ($364.6 million) secured term loan facility (the UPC Holding Facility). The UPC Holding Facility was fully drawn on June 19, 2007. UPC Holding may, at its option, on or before May 31, 2008, require each lender under the UPC Holding Facility to become an additional facility lender under the UPC Broadband Holding Bank Facility and the outstanding commitments of the lenders under the UPC Holding Facility will be rolled over into Facility M under the UPC Broadband Holding Bank Facility (the Conversion). The terms and conditions of the UPC Holding Facility are similar to the terms of the indenture for UPC Holdings existing Senior Notes due 2014; however, in the event UPC Holding elects to effect the Conversion, the UPC Holding Facility will be part of Facility M and will be subject to the terms and conditions of the UPC Broadband Holding Bank Facility. The final maturity date of the UPC Holding Facility is December 31, 2014, unless the Conversion does not occur, in which case, it will be May 31, 2008. Any voluntary prepayment of all or part of the principal amount of the UPC Holding Facility made on or prior to May 16, 2008, will include a premium of 1% such that the prepaid amount will equal 101% of such principal amount plus accrued interest.
Redemption of Cablecom Luxembourg Old Fixed Rate Notes. On April 16, 2007, Cablecoms subsidiary, Cablecom Luxembourg S.C.A. (Cablecom Luxembourg), redeemed in full its 9.375% Senior Notes due 2014 (the Cablecom Luxembourg Old Fixed Rate Notes) at a redemption price of 109.375% of the principal amount plus accrued interest through the redemption date. The total amount of the redemption of 330.7 million ($448.1 million at the transaction date) was funded by the Cablecom Luxembourg Defeasance Account, an escrow account created in October 2006 for the benefit of the holders of the Cablecom Luxembourg Old Fixed Rate Notes in connection with the covenant defeasance of such Notes.
Assumption of Cablecom Luxembourg Senior Notes by UPC Holding. On April 17, 2007, Cablecom Luxembourgs 300.0 million ($437.5 million) 8.0% Senior Notes due 2016 became a direct obligation of UPC Holding on terms substantially identical (other than as to interest, maturity and redemption) to those governing UPC Holdings existing Senior Notes due 2014.
Telenet Refinancing and Capital Distribution. On August 1, 2007 (the Signing Date), Telenet BidCo NV, an indirect subsidiary of Telenet, executed a new senior secured credit facility agreement, as amended and restated by supplemental agreements dated August 22, 2007, September 11, 2007 and October 8, 2007 (the 2007 Telenet Credit Facility). The 2007 Telenet Credit Facility provides for (i) a 530.0 million ($772.9 million) Term Loan A Facility (the Telenet TLA Facility) maturing five years from the Signing Date, (ii) a 307.5 million ($448.4 million) Term Loan B1 Facility (the Telenet TLB1 Facility) maturing 78 months from the Signing Date, (iii) a 225.0 million ($328.1 million) Term Loan B2 Facility (the Telenet TLB2 Facility) maturing 78 months from the Signing Date, (iv) a 1,062.5 million ($1,549.5 million) Term Loan C Facility (the Telenet TLC Facility) maturing eight years from the Signing Date, and (v) a 175.0 million ($255.2 million) Revolving Facility (the Telenet Revolving Facility) maturing seven years from the Signing Date.
On October 10, 2007, the Telenet TLA Facility, the Telenet TLB1 Facility and the Telenet TLC Facility were drawn in full. The proceeds of the Telenet TLA Facility, the Telenet TLB1 Facility and the first 462.5 million ($654.8 million at the transaction date) drawn under the Telenet TLC Facility have been used primarily to (i) redeem in full Telenets Senior Discount Notes and the 9% Senior Notes issued by one of its subsidiaries, and (ii) repay in full the outstanding borrowings under the senior credit facility of certain of its subsidiaries.
On November 19, 2007, Telenet commenced the distribution of 655.9 million ($961.6 million at the transaction date) to its shareholders. This capital distribution was funded with available borrowings under the 2007 Telenet Credit Facility. Our share of this capital distribution was 335.2 million ($491.4 million at the transaction date).
The Telenet TLB2 Facility, which was undrawn at December 31, 2007, is available to be drawn up to and including July 31, 2008. The Telenet Revolving Facility is available to be drawn through June 2014. Borrowings under these Facilities may be used for general corporate purposes (including permitted acquisitions).
The Telenet TLA Facility and the Telenet TLC Facility are payable in full at maturity. The Telenet TLB1 Facility and the Telenet TLB2 Facility are payable in three equal installments, the first installment on the date falling 66 months after the Signing Date, the second installment on the date falling 72 months after the Signing Date and the final installment payable at maturity. Advances under the Telenet Revolving Facility are permitted to be paid at the end of the applicable interest period and in full at maturity.
Refinancing of Austar Bank Facility. On August 28, 2007, a subsidiary of Austar refinanced, amended and restated its existing bank facility to, among other things, provide for increased borrowing capacity. The amended and restated senior secured bank facility (the 2007 Austar Bank Facility) provides for (i) a term loan for AUD 225.0 million ($197.3 million), which matures in August 2011, (ii) a term loan for AUD 500.0 million ($438.4 million), which matures in August 2013, and (iii) a revolving facility for AUD 100.0 million ($87.7 million), which matures in August 2012. The 2007 Austar Bank Facility also provides for an agreement with a single bank for a AUD 25.0 million ($21.9 million) working capital facility that matures in August 2012. The 2007 Austar Bank Facility is guaranteed by Austar and certain of its subsidiaries. Borrowings under the 2007 Austar Bank Facility were advanced to Austar to fund (i) the October 31, 2007 redemption of Austars subordinated transferable adjustable redeemable securities, and (ii) Austars November 1, 2007 capital distribution to its shareholders, of which our share was AUD 160.1 million ($146.7 million at the transaction date). Borrowings under the 2007 Austar Bank Facility may also be used to fund Austars capital expenditures or for general corporate purposes. At December 31, 2007, AUD 75.1 million ($65.8 million) of the 2007 Austar Bank Facility was available to be drawn.
LGJ Holdings Credit Facility. On October 31, 2007, LGJ Holdings LLC, our wholly owned indirect subsidiary, entered into a senior secured credit facility agreement with a syndicate of banks (the LGJ Holdings Credit Facility). The LGJ Holdings Credit Facility provides for an initial term loan of ¥75.0 billion ($655.0 million at the transaction date), which was fully drawn on November 5, 2007 (the Closing Date). The proceeds were used to make a distribution to the sole member of LGJ Holdings LLC and to pay fees, costs and expenses incurred in
connection with the term loan. This term loan is to be repaid in two installments: (i) 2.5% of the outstanding principal amount four and one-half years from the Closing Date and (ii) 97.5% of the outstanding principal amount five years from the Closing Date. The LGJ Holdings Credit Facility is guaranteed by our subsidiaries that are members of Super Media (J:COM Holdcos). In addition, the LGJ Holdings Credit Facility is secured by pledges over shares of the J:COM Holdcos and the membership interests in LGJ Holdings LLC. In connection with the LGJ Holdings Credit Facility, we entered into a limited recourse guarantee, which guarantees the payment of interest, certain costs and expenses and, under certain limited circumstances, the payment of principal and other obligations under the LGJ Holdings Credit Facility.
For a further description of the terms of the above financings and certain other transactions affecting our consolidated debt in 2007, see note 10 to our consolidated financial statements.
Pursuant to our stock repurchase programs and our January 2007, April 2007 and September 2007 self-tender offers, during the year ended December 31, 2007, we repurchased a total of 24,119,005 shares of LGI Series A common stock at a weighted average price of $36.66 per share and 26,843,180 shares of LGI Series C common stock at a weighted average price of $36.39 per share, for an aggregate cash purchase price of $1,861.0 million, including direct acquisition costs. As of December 31, 2007, we were authorized under the November 2007 stock repurchase program to acquire an additional $60.6 million of LGI Series A and Series C common stock, which was fully utilized in January 2008.
On January 7, 2008, we announced the authorization of a new stock repurchase program under which we may acquire an additional $500.0 million of our LGI Series A and LGI Series C common stock through open market transactions or privately negotiated transactions, which may include derivative transactions. The timing of the repurchase of shares pursuant to this program is dependent on a variety of factors, including market conditions. This program may be suspended or discontinued at any time. At February 21, 2008, the remaining amount authorized under this program was $170.7 million.
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Certain statements in this Annual Report on Form 10-K constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. To the extent that statements in this Annual Report are not recitations of historical fact, such statements constitute forward-looking statements, which, by definition, involve risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. In particular, statements under Item 1. Business, Item 2. Properties, Item 3. Legal Proceedings, Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations and Item 7A. Quantitative and Qualitative Disclosures About Market Risk contain forward-looking statements, including statements regarding business, product, acquisition, disposition and finance strategies, our capital expenditure priorities, subscriber growth and retention rates, competition, the maturity of our markets, anticipated cost increases and target leverage levels. Where, in any forward-looking statement, we express an expectation or belief as to future results or events, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the expectation or belief will result or be achieved or accomplished. In evaluating these statements, you should consider the risks and uncertainties discussed under Item 1A. Risk Factors and Item 7A. Quantitative and Qualitative Disclosures About Market Risk, as well as the following list of some but not all of the factors that could cause actual results or events to differ materially from anticipated results or events:
The broadband communications services industries are changing rapidly and, therefore, the forward-looking statements of expectations, plans and intent in this Annual Report are subject to a significant degree of risk.
These forward-looking statements and such risks, uncertainties and other factors speak only as of the date of this Annual Report, and we expressly disclaim any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained herein, to reflect any change in our expectations with regard thereto, or any other change in events, conditions or circumstances on which any such statement is based.
Financial information about our reportable segments appears in note 21 to our consolidated financial statements included in Part II of this report.
Narrative Description of Business
We offer a variety of broadband services over our cable television systems, including video, broadband Internet and telephony. Available service offerings depend on the bandwidth capacity of our systems and whether they have been upgraded for two-way communications. In select markets, we also offer video services through DTH or through multi-channel multipoint (microwave) distribution systems (MMDS). Our analog cable service offerings include basic programming and expanded basic programming in some markets. We tailor both our basic channel line-up and our additional channel offerings to each system according to culture, demographics, programming preferences and local regulation. Our digital cable service offerings include basic programming, premium services and pay-per-view programming, including high definition (HD), near-video-on-demand (NVoD), and video-on-demand (VoD), in some markets. We offer broadband Internet services in all of our markets. Our residential subscribers can access the Internet, generally via cable modems connected to their personal computers, at faster speeds than that of conventional dial-up modems. We determine pricing for each different tier of Internet service through analysis of speed, data limits, market conditions and other factors.
We offer telephony services in all of our broadband communications markets. In Austria, Belgium, Chile, Hungary, Japan and the Netherlands, we provide circuit switched telephony services and voice-over-Internet-protocol (VoIP) telephony services. Telephony services in the remaining countries are provided using VoIP technology. In select markets, including Australia, we also offer mobile telephony services using third party networks.
We operate our broadband distribution businesses in Europe through the UPC Broadband Division of Liberty Global Europe, NV. (Liberty Global Europe) and Liberty Global Europes indirect subsidiary, Telenet; in Japan through J:COM, a subsidiary of Super Media; and in the Americas through VTR and Liberty Cablevision of Puerto Rico Ltd. (Liberty Puerto Rico); and our satellite distribution business in Australia through Austar. Each of Liberty Global Europe, Super Media, VTR, Liberty Puerto Rico and Austar is a consolidated subsidiary. Except as otherwise noted, we refer to Liberty Puerto Rico and the countries of South America collectively as the Americas.
The following table presents certain operating data, as of December 31, 2007, with respect to the broadband communications and DTH systems of our subsidiaries in Europe, Japan, The Americas and Australia. This table reflects 100% of the operational data applicable to each subsidiary regardless of our ownership percentage.
Consolidated Operating Data
December 31, 2007
With respect to Chile, Japan and Puerto Rico, residential multiple dwelling units with a discounted pricing structure for video, broadband Internet or telephony services are counted on an EBU basis. With respect to commercial establishments, such as bars, hotels and hospitals, to which we provide video and other services primarily for the patrons of such establishments, the subscriber count is generally calculated on an EBU basis by our subsidiaries (with the exception of Telenet, which counts commercial establishments on a per connection basis). EBU is calculated by dividing the bulk price charged to accounts in an area by the most prevalent price charged to
non-bulk residential customers in that market for the comparable tier of service. On a business-to-business basis, certain of our subsidiaries provide data, telephony and other services to businesses, primarily in the Netherlands, Switzerland, Austria, Ireland, Belgium and Romania. We generally do not count customers of these services as subscribers, customers or RGUs.
While we take appropriate steps to ensure that subscriber statistics are presented on a consistent and accurate basis at any given balance sheet date, the variability from country to country in (i) the nature and pricing of products and services, (ii) the distribution platform, (iii) billing systems, (iv) bad debt collection experience, and (v) other factors adds complexity to the subscriber counting process. We periodically review our subscriber counting policies and underlying systems to improve the accuracy and consistency of the data reported. Accordingly, we may from time to time make appropriate adjustments to our subscriber statistics based on those reviews.
Subscriber information for acquired entities is preliminary and subject to adjustment until we have completed our review of such information and determined that it is presented in accordance with our policies.
We own programming networks that provide video programming channels to multi-channel distribution systems owned by us and by third parties. We also represent programming networks owned by others. Our programming networks distribute their services through a number of distribution technologies, principally cable television and DTH. Programming services may be delivered to subscribers as part of a video distributors basic package of programming services for a fixed monthly fee, or may be delivered as a premium programming service for an additional monthly charge or on a VoD or pay-per-view basis. Whether a programming service is on a basic or premium tier, the programmer generally enters into separate affiliation agreements, providing for terms of one or more years, with those distributors that agree to carry the service. Basic programming services generally derive their revenue from per-subscriber license fees received from distributors and the sale of advertising time on their networks or, in the case of shopping channels, retail sales. Premium services generally do not sell advertising and primarily generate their revenue from per subscriber license fees. Programming providers generally have two sources of content: (1) rights to productions that are purchased from various independent producers and distributors, and (2) original productions filmed for the programming provider by internal personnel or third party contractors. We operate our programming businesses in Europe principally through our subsidiary Chellomedia; in Japan principally through our subsidiary J:COM; and in the Americas principally through our subsidiary Pramer S.C.A. We also own joint venture interests in MGM Networks Latin America, LLC, a programming business that serves the Americas, and in XYZ Networks Pty Ltd. (XYZ Networks), a programming business in Australia.
Our European operations are conducted through our wholly owned subsidiary, Liberty Global Europe, which provides video, voice and broadband Internet services in 11 countries in Europe. Liberty Global Europes operations are currently organized into the UPC Broadband Division, Telenet and the Chellomedia Division. Through the UPC Broadband Division and Telenet, Liberty Global Europe provides video, broadband Internet, telephony and mobile services over its networks and operates the largest cable network in each of Austria, Belgium, Czech Republic, Hungary, Ireland, Poland, Slovak Republic, Slovenia and Switzerland, in each case in terms of number of video subscribers. For information concerning the Chellomedia Division, see Chellomedia and Other below.
Provided below is country-specific information with respect to the broadband communications services of our UPC Broadband Division and Telenet.
The subscribers in the UPC Broadband Divisions operations in the Netherlands, which we refer to as UPC Netherlands, are located in six broad regional clusters, including the major cities of Amsterdam and Rotterdam. Its cable networks are 96% upgraded to two-way capability, and almost all of its cable homes passed are served by a network with a bandwidth of at least 860 MHz. For its analog cable customers, UPC Netherlands offers 25 to 40 video channels, depending on a customers location, and 40 radio channels.
In October 2005, UPC Netherlands initiated a program to migrate over time its analog cable customers to digital cable service by offering analog cable customers a digital interactive television box. Then, for a promotional period (currently three months) following acceptance of the box, UPC Netherlands provides the customer the digital entry level service at no incremental charge over the standard analog rate. In the second half of 2006, UPC Netherlands began a more targeted approach to distributing the digital interactive box to subscribers. Due in part to this more targeted approach, the pace of the migration program has been more gradual than when it was initially implemented. Ninety-two percent of UPC Netherlands homes passed are capable of receiving digital cable service.
The digital entry level service currently includes over 50 video channels and over 70 radio channels, an electronic program guide, interactive services and the functionality for VoD service. For an additional incremental monthly charge, the digital subscriber may upgrade to a digital basic tier subscription which includes all the channels and features of the digital entry level service, plus an extra channel package of approximately 40 general entertainment, sports, movies, music and ethnic channels. Digital cable customers may also subscribe to premium channels, such as Film 1 and Sport 1 NL, alone or in combination, for additional monthly charges. The VoD service includes both subscription-based VoD and transaction-based VoD. UPC Netherlands made these true VoD services available to its digital cable customers starting in April 2007. By September 2007, all digital cable customers were able to access VoD services. A customer also has the option for an incremental monthly charge to upgrade the digital box to one with digital video recorder (DVR) functionality, which was first made available to digital cable customers in November 2006. UPC Netherlands also started making HD boxes available to digital cable customers in the second quarter of 2007.
UPC Netherlands offers five tiers of broadband Internet service with download speeds ranging from 384 Kbps to 20 Mbps and, starting in February 2008, 24 Mbps. Multi-feature telephony services are also available from UPC Netherlands to 94% of its homes passed. UPC Netherlands offers both traditional switched circuit telephony and VoIP. Of UPC Netherlands total customers (excluding mobile customers), 11% subscribe to two services (double-play customers) and 21% subscribe to three services (triple-play customers) offered by UPC Netherlands (video, broadband Internet and telephony).
UPC Netherlands offers a self-install option for its digital cable services, its broadband Internet services and its telephony services, allowing subscribers to install the technology themselves and save money on the installation fee. Almost all of its new digital, broadband Internet and telephony subscribers have chosen to self-install their new service.
UPC Netherlands offers mobile service to all consumers in the Netherlands. The product is a pre-paid mobile offering. UPC Netherlands is operating as a mobile virtual network operator reselling leased network capacity.
In addition, through Priority Telecom Netherlands BV, UPC Netherlands offers a range of voice, broadband Internet, private data networks and customized network services to business customers primarily in its core metropolitan networks.
The UPC Broadband Divisions operations in Switzerland are operated by Cablecom. Cablecoms cable networks are 71% upgraded to two-way capability and 75% of its cable homes passed are served by a network with a bandwidth of at least 650 MHz.
For 64% of its analog cable subscribers, Cablecom maintains billing relationships with landlords or housing associations, which typically provide analog cable service for an entire building and do not terminate service each time there is a change of tenant in the landlords or housing associations premises. Ninety-four percent of Cablecoms homes passed are capable of receiving digital cable service. Cablecom offers its digital cable subscribers a digital entry package consisting of 90 video channels and 40 radio channels and a range of additional pay television programming in a variety of foreign language program packages. The third television product is NVoD services, which is available to all of Cablecoms digital cable customers. In 2006, Cablecom introduced DVR functionality, enabling users to create a personalized television experience. Cablecoms digital cable service is sold directly to the end user as an add-on to its analog cable services. Cablecom introduced HD boxes to its digital cable subscribers in the fourth quarter of 2007.
In April 2007, Cablecom initiated a program to migrate over time its analog cable customers to digital cable service. At that time, Cablecom changed the package of digital services by, among other things, offering an introductory package with a digital television box at a low rate.
Cablecom offers eight tiers of broadband Internet service with download speeds ranging from 500 Kbps to 10 Mbps. As of January 15, 2008, Cablecom increased the download speed to 25 Mbps. In addition, Cablecom continues to offer dial-up Internet services on a limited basis. Of Cablecoms homes passed, 81% are capable of receiving Cablecoms Internet services.
Telephony services are available from Cablecom to 81% of its homes passed. Cablecom was the first to offer a flat rate telephone plan in Switzerland, known as Unlimited24. Cablecom offers its digital telephony services through VoIP.
Cablecom provides full or partial analog television signal delivery services, network maintenance services and engineering and construction services to its partner networks. Cablecom also offers digital television, broadband Internet and fixed line telephony service directly to the analog cable subscribers of those partner networks that enter into service operating contracts with Cablecom. Cablecom has the direct customer billing relations with the subscribers who take these services on the partner networks. By permitting Cablecom to offer some or all of its digital television, broadband Internet and fixed line telephony products directly to those partner network subscribers, Cablecoms service operating contracts have expanded the addressable markets for Cablecoms digital products. In exchange for the right to provide digital products directly to the partner network subscribers, Cablecom pays to the partner network a share of the revenue generated from those subscribers.
At the end of 2005, Cablecom launched a pre-paid mobile telephony service, followed by the launch, at the beginning of 2006, of a post-paid offering. Therefore, Cablecom is the first telecommunications provider in Switzerland to offer television, Internet, fixed line telephony and mobile telephony also known as quadruple-play from a single provider. Of its total customers (excluding mobile customers), 16% are double-play customers and 16% are triple-play customers.
In addition, Cablecom offers advanced data services to the Swiss business market. Cablecom provides broadband Internet, multi-site data connectivity, virtual private network, security, messaging and hosting and other value added services to business customers on a retail basis.
The UPC Broadband Divisions operations in Austria (excluding the Austrian portion of Cablecoms network), which we refer to as UPC Austria, is comprised of both coaxial cable and unbundled DSL operations. The coaxial cable operations are located in regional clusters encompassing the capital city of Vienna, three other regional capitals and two smaller cities. Four of these cities, directly or indirectly, own 5% of the local operating company of UPC Austria; the others are 100% owned by Liberty Global Europe. The DSL services are provided over an unbundled loop or in certain cases, over a shared access network. The unbundled DSL operations are available in the majority of the country, wherever the incumbent telecommunications operator has implemented DSL technology. UPC Austrias cable network is 100% upgraded to two-way capability and all of its cable homes passed are served by a network with a bandwidth of at least 860 MHz.
The majority of UPC Austrias video cable subscribers receive a package of 38 channels, mostly in the German language, plus over 30 radio channels. In the fourth quarter of 2007, UPC Austria rolled out a new program to migrate analog cable customers to digital cable service over time. Customers desiring digital service may request a digital interactive television box from UPC Austria. The digital entry level service includes over 50 video channels and over 30 radio channels, an electronic program guide, interactive services and the functionality for NVoD service. UPC Austria provides this digital entry level service at no incremental charge over the standard analog rate. For an additional incremental monthly charge, the digital cable subscriber may upgrade to a digital basic tier subscription, which includes all the channels and features of the digital entry level service, plus an extra channel package of approximately 30 general entertainment, sports, movies, music and ethnic channels. Digital cable customers may also subscribe to premium channels (including ethnic channels, for example Serb and Turkish offerings), alone or in combination, for additional monthly charges. The NVoD service may be used for a separate
fee for each movie or event ordered. Currently, a customer also has the option to upgrade the digital box to one with DVR functionality for an incremental monthly charge and UPC Austria expects to make HD boxes available in 2008.
UPC Austria offers five tiers of broadband Internet service with download speeds ranging from one Mbps to 25.6 Mbps and a student package over its cable network. Over DSL technology, UPC Austria offers three tiers of unbundled DSL broadband Internet, plus additional tiers via wholesale offerings. It also offers a double-play package of broadband Internet and telephony over DSL.
Multi-feature telephony services are available from UPC Austria to 100% of the homes passed by its cable network. UPC Austria offers basic dial tone service as well as value-added services. UPC Austria also offers a bundle of fixed line and mobile telephony in a co-branding arrangement with the telephony operator One GmbH. In March 2006, UPC Austria began offering its telephony services through VoIP, which is now available to all customers. It also continues to offer telephony services through traditional switched telephony services. Of UPC Austrias total customers (excluding mobile customers), 32% are double-play customers and 12% are triple-play customers.
UPC Austria offers a range of voice, data, lease line and asymmetric digital subscriber line (ADSL) services to business customers throughout Austria with a primary focus on business customers in cities, including Vienna, Graz, Klagenfurt, Villach, St. Polten, Dombirn, Leibnitz, Leoben, Salzburg, Linz and Innsbruck.
The UPC Broadband Divisions operations in Ireland, which we refer to as UPC Ireland, are located in five regional clusters, including the cities of Dublin and Cork. Its cable network is 48% upgraded to two-way capability, and 56% of its cable homes passed are served by a network with a bandwidth of at least 550 MHz. UPC Ireland makes digital services available to 89% of its homes passed, including its MMDS customers. The UPC Ireland MMDS customers receive digital service and in some cases can receive either analog or digital services. UPC Ireland continues to pro-actively migrate its remaining analog cable, analog premium and analog MMDS customers to its digital service to provide its customers with a wider range of channels and to release additional bandwidth for other digital services. Under the current promotional pricing, the digital service is provided at the same rate as the analog service for the first six months.
UPC Ireland offers an analog cable package with up to 22 channels and a digital cable package with up to 150 channels. The program offerings for each type of service include domestic, foreign, sport and premium movie channels. In addition, digital customers can receive event channels such as seasonal sport and real life entertainment events. UPC Ireland also distributes up to seven Irish channels. To complement its digital offering, UPC Ireland also offers its digital subscribers 28 channels of premium service.
UPC Ireland offers four tiers of broadband Internet service with download speeds ranging from one Mbps to six Mbps. UPC Ireland offers VoIP multi-feature telephony services to 27% of its homes passed. It offers basic dial tone service as well as value-added services. Of UPC Irelands total customers, 11% are double-play customers.
In addition, UPC Ireland offers to business customers a complete range of telecommunications solutions from standard voice and Internet services to more advanced services such as Ethernet LAN extensions, corporate voice services and high speed Internet. These services are offered to large corporations, public organizations and small to medium size businesses throughout Ireland, covering Cork, Dublin, Galway, Limerick and Waterford.
The cable networks of the UPC Broadband Divisions operations in Hungary, which we refer to as UPC Hungary, are 96% upgraded to two-way capability, and 63% of its cable homes passed are served by a network with a bandwidth of at least 750 MHz. UPC Hungary offers up to four tiers of analog cable programming services (between 5 and 55 channels) and two premium channels, depending on the technical capability of the network. Programming consists of the national Hungarian terrestrial broadcast channels and selected European satellite and local programming that consist of proprietary and third party channels.
UPC Hungary offers five tiers of broadband Internet service with download speeds ranging from 128 Kbps to 20 Mbps. UPC Hungary provides these broadband Internet services to 281,400 subscribers in 18 cities, including Budapest. It also had 23,500 ADSL subscribers at December 31, 2007, on its twisted copper pair network located in the southeast part of Pest County. On this copper pair network, UPC Hungary also offers traditional circuit switched telephony services to 57,700 subscribers. It offers VoIP telephony services over its two-way capable cable network throughout Hungary and had 130,000 VoIP telephony subscribers at the end of 2007. Of our total customers in Hungary, 19% are double-play customers and 8% are triple-play customers.
UPC Hungary offers business customers a variety of Internet and telephony packages, managed leased lines and virtual private network services primarily to its small office at home (SOHO) customers and small to medium size business customers.
The UPC Broadband Division also operates cable networks in Czech Republic (UPC Czech), Poland (UPC Poland) and Romania (UPC Romania), and cable and MMDS networks in Slovak Republic (UPC Slovakia) and Slovenia (UPC Slovenia). In each of these operations, at least 72% of the cable networks are upgraded to two-way capability, and at least 69% of the homes passed are served by a network with a bandwidth of at least 860 MHz. Through UPC Direct and another subsidiary, the UPC Broadband Division also has DTH operations in certain of these countries.
Liberty Global Europes operations in Belgium are operated by Telenet. We indirectly own 51.1% of Telenets outstanding ordinary shares. Telenet offers video cable, broadband Internet and fixed and mobile telephony service in Belgium, primarily to residential customers in the cities of Flanders and Brussels. Its cable networks are 100% upgraded to two-way capability and 100% of its cable homes passed are served by a network with a bandwidth of 450MHz.
All of Telenets homes passed are capable of receiving digital cable service. Telenet offers its digital cable subscribers a digital basic package consisting of 46 video channels and 23 radio channels, interactive services and the functionality for VoD service. For an additional incremental monthly charge, the digital subscriber may upgrade to a premium package, which includes all the channels and features of the digital basic package, plus six general entertainment, sports and movie channels. In addition, digital cable customers may also subscribe to premium channels, including documentary, foreign language, kids, sports, adult and movies, alone or in combination, for an additional monthly charge. Telenets digital customers who subscribe to interactive services can receive over 100 channels depending on the packages selected. A customer has the option to upgrade the digital box to one with DVR functionality for an incremental monthly charge. Telenet made HD boxes available in December 2007 and offers two HD channels. Telenets digital cable service is sold directly to the end user as an add-on to its analog cable services.
Telenet offers four tiers of broadband Internet service with download speeds ranging from one Mbps to 20 Mbps. In addition, Telenet continues to offer dial-up Internet services on a limited basis. Of Telenets homes passed, 100% are capable of receiving Telenets Internet services.
Telephony services are available from Telenet to 100% of its homes passed. Telenet offers digital telephony services through VoIP and traditional circuit switched telephony services, as well as value-added services. In addition, Telenet offers a bundle of fixed line and mobile telephony. Of Telenets customers, 24% are double-play customers and 15% are triple-play customers.
Telenet also offers a range of voice, data and Internet services to business customers throughout Belgium under the brand Telenet Solutions.
Telenet has the exclusive right to provide point-to-point services and the non-exclusive right to provide certain other services on the partner network owned by the PICs. Through these rights, Telenet offers broadband Internet and fixed line telephony service directly to the analog cable subscribers of those partner networks that enter into service operating contracts with Telenet. Telenet has the direct customer billing relations with the subscribers who take these services on the partner networks. By permitting Telenet to offer broadband Internet and fixed line telephony products directly to those partner network subscribers, Telenets service operating contracts have expanded the addressable markets for Telenets digital products. In connection with these usage rights, Telenet is required to make payments to the PICs on an ongoing basis under its agreements with the PICs. Telenet has been negotiating with the PICs to increase the capacity available to Telenet on the partner networks. This increase is to avoid possible future degradation of service due to congestion that may arise in future years. Telenet is also involved in litigation with the PICs with respect to the scope of Telenets exclusive right to provide point-to-point services and the PICs desire to provide VoD and related digital interactive services over the partner network. In November 2007, the parties announced a non-binding agreement in principle for the acquisition by Telenet of the analog and digital television activities of the PICs. This agreement in principle is being challenged by the incumbent telecommunications operator and there can be no assurance that the transaction will be consummated. For additional information, see note 20 to our consolidated financial statements.
Liberty Global Europes interest in Telenet is held by certain indirect subsidiaries of Chellomedia. Under the Syndicate Agreement, these subsidiaries have rights of first offer in respect of market sales and offerings of Telenet shares by the other Telenet Syndicate shareholder to certain persons. All Telenet Syndicate shareholders, including these subsidiaries, are subject to mutual rights of first offer in respect of transfers to third parties of Telenet shares that are not effected through market sales. Also under the Syndicate Agreement and the Telenet Articles of Association, certain minority-protective Telenet Board decisions must receive the affirmative vote of specified directors in order to be effective.
Liberty Global Europes Chellomedia Division provides interactive digital products and services, produces and markets 27 thematic channels, operates a digital media center and manages our investments in various businesses in Europe. Below is a description of the business unit operations of our Chellomedia Division:
Chello Zone. Chellomedia produces and markets a number of widely distributed multi-territory thematic channels. These channels target the following genres: extreme sports and lifestyles (the Extreme Sports Channel), horror films (Zone Horror), real life stories (Zone Reality), womens information and entertainment (Zone Club and Zone Romantica), art house basic movies (Zone Europa), science fiction and fantasy (Zone Fantasy), prime time movies (Zone Thriller) and childrens pre-school (Jim Jam). In addition, Chellomedia has a channel representation business, which represents both wholly owned and third party channels across Europe.
Chello Benelux. Chellomedia owns and manages a premium sports channel (Sport 1 NL) and a premium movie channel (Film 1) in the Netherlands. Sport 1 NL has exclusive pay television rights for a variety of sports, but it is primarily football oriented. These exclusive pay television rights expire at various dates through 2009. For Film 1, Chellomedia has exclusive pay television output deals with key Hollywood studios that expire at various dates through 2014.
The channels originate from Chellomedias digital media center (DMC), located in Amsterdam. The DMC is a technologically advanced production facility that services the Chellomedia Division, the UPC Broadband Division and third-party clients with channel origination, post-production and satellite and fiber transmission. The DMC delivers high-quality, customized programming by integrating different video elements, languages (either in dubbed or sub-titled form) and special effects and then transmits the final product to various customers in numerous countries through affiliated and unaffiliated cable systems and DTH platforms.
Chello Central & Eastern Europe. Chellomedia has a controlling 80% interest in a joint venture with an unrelated third party that owns and manages sports channels (Sport 1 and Sport 2). The programming on these channels varies by country, but is predominately football oriented. Chellomedia also owns 100% of the childrens channel Minimax, the thematic channels Filmmuzeum (a Hungarian library film channel), TV Paprika (a cooking channel) and TV Deko (a home and lifestyle channel). Sport 1 and Minimax are distributed to the UPC Broadband Division and other broadband operators in Hungary, Czech Republic, Slovak Republic, Romania and Serbia. Sport 2 and Filmmuzeum are distributed in Hungary. TV Paprika and TV Deko are distributed in Hungary, Czech Republic and Slovak Republic.
Chello Multicanal. Through its subsidiaries IPS C.V. and Multicanal S.L. (collectively, IPS), Chellomedia owns and manages a suite of eight thematic channels carried on a number of major pay television platforms in Spain and Portugal. IPS has six wholly owned thematic channels (Canal Hollywood, Odisea, Sol Musica, Canal Panda, Canal Cocina and Decasa) and two joint venture channels with A&E Television Networks (Canal de Historia and The Biography Channel).
We have operations in Japan and Australia. Our Japanese operations are conducted primarily through Super Media and its subsidiary J:COM. We have an indirect controlling ownership interest in J:COM of 37.9%. Our Australian operations are conducted primarily through Austar in which we own a 53.4% controlling ownership interest.
J:COM is a leading broadband provider of bundled entertainment, data and communication services in Japan. As of December 31, 2007, J:COM is the largest multiple-system operator (MSO), in Japan, as measured by the total number of homes passed and customers. J:COM operates its broadband networks through 22 managed local cable companies, which J:COM refers to as its managed franchises, 20 of which were consolidated subsidiaries as of December 31, 2007. J:COM owns a 46.6% and 45.0% equity interest in its two unconsolidated managed franchises. As described below, J:COMs services include video, broadband Internet and telephony. Of its total customers (excluding mobile customers), approximately 28% are double-play customers and approximately 25% are triple-play customers.
Twenty-one of J:COMs managed franchises are clustered around three metropolitan areas of Japan, consisting of the Kanto region (which includes Tokyo), the Kansai region (which includes Osaka, Kobe and Kyoto) and the Kyushu region (which includes Fukuoka and Kita-Kyushu). In addition, J:COM owns and manages a local franchise in the Sapporo area of Japan that is not part of a cluster.
Each managed franchise consists of headend facilities receiving television programming from satellites, traditional terrestrial television broadcasters and other sources, and a distribution network composed of a combination of fiber-optic and coaxial cable, which transmits signals between the headend facility and the customer locations. Almost all of J:COMs cable networks are upgraded to two-way capability, with all of its cable homes passed served by a system with a bandwidth of at least 750 MHz. J:COM provides its managed franchises with experienced personnel, operating and administrative services, sales and marketing, training, programming and equipment procurement assistance and other management services. J:COMs managed franchises use J:COMs centralized customer management system to support sales, customer and technical services, customer call centers and billing and collection services.
J:COM offers analog and digital cable services in all of its managed franchises. J:COMs analog television service consists of approximately 45 channels of cable programming and analog terrestrial broadcasting and broadcast satellite channels, not including premium services. A typical channel line-up includes popular channels in the Japanese market such as Movie Plus, a top foreign movie channel, LaLa TV, a womens entertainment channel, J sports 1, J sports 2 and J sports ESPN, three popular sports channels, the Discovery Channel, the Golf Network, the Disney Channel and Animal Planet, in addition to retransmission of analog terrestrial and satellite television broadcasts. At December 31, 2007, J:COMs digital television service includes approximately 66 channels of cable programming, digital terrestrial broadcasting, and broadcast satellite channels, not including audio and data channels and premium services. The channel line-up for the digital service includes 21 HD channels. J:COM provides its digital cable subscribers VoD and pay-per-view functionality, allowing those subscribers, generally for an additional fee, to receive programming that is not available to J:COMs analog cable subscribers. In April 2006, J:COM introduced to its digital television customers a digital video recording service, which utilizes digital set top boxes equipped with an internal hard disk drive capable of recording up to 20 hours of digital HD programming and the ability to record two programs in competing time slots. J:COM also offers both its analog and digital subscribers optional subscriptions for an additional fee to premium channels, including movies, sports, horseracing and other special entertainment programming, either individually or in packages. J:COM offers package discounts to customers who subscribe to bundles of J:COM services. In addition to the services offered to its cable television subscribers, J:COM also provides terrestrial broadcast retransmission services to more than 4.2 million additional households in its consolidated franchise areas as of December 31, 2007, including compensation households for which J:COM receives up-front fees pursuant to long-term contracts to provide such retransmission services.
J:COM offers broadband Internet services in all of its managed franchises through its wholly owned subsidiary, @NetHome Co., Ltd, and its subsidiary, Kansai Multimedia Services (KMS). These broadband Internet services offer downstream speeds of mainly either 30 Mbps or eight Mbps. J:COM holds a 76.5% interest in KMS, which provides broadband Internet services in the Kansai region of Japan. J:COM offers the J:COM NET Hikari service for multiple dwelling units connected to J:COMs network by optical fiber cables. J:COM NET Hikari offers downstream speeds of up to 100 Mbps. In April 2007, J:COM launched a very high-speed broadband Internet service for single dwelling units, individual homes and smaller apartment buildings in a portion of the Kansai area, which delivers downstream speeds of up to 160 Mbps.
J:COM offers telephony services over its own network in all of its consolidated franchise areas. J:COMs headend facilities contain equipment that routes calls from the local network to telephony switches (a majority of which J:COM owns), which in turn transmit voice signals and other information over the network. J:COM also utilizes VoIP technology in certain franchise areas. J:COM provides a single line to the majority of its telephony customers, most of whom are residential customers. J:COM charges its telephony subscribers a fee for basic telephony service (together with charges for calls made) and offers additional premium services, including call-waiting, call-forwarding, caller identification and three-way calling, for a fee. In partnership with WILLCOM, Inc, a personal handphone system service provider in Japan, J:COM offers a mobile phone service called J:COM MOBILE. J:COM MOBILE customers receive discounted phone service when bundled with J:COMs other telephone service, including free and discounted calling plans.
In addition to its 22 managed franchises, J:COM owns non-controlling equity interests of 5.5% and 20.0% in two cable franchises that are operated and managed by third-party franchise operators.
J:COM sources its programming through multiple suppliers, including JTV Thematics. J:COM acquired JTV Thematics on September 1, 2007, after it was spun-off from Jupiter TV. See Recent Developments Dispositions above. JTV Thematics invests in, develops, manages and distributes fee-based television programming. This acquisition enables J:COM to bring key programming genres to the Japanese market and to promote the development of quality programming services.
Through JTV Thematics, J:COM develops, manages and distributes pay television services in Japan on a platform-neutral basis through various distribution infrastructures, principally cable and DTH service providers, and more recently, alternative broadband service providers using fiber-to-the-home (FTTH), and ADSL platforms. As of December 31, 2007, J:COM owned four channels through wholly or majority owned subsidiaries and had investments ranging from 10% to 50% in ten additional channels. J:COMs majority owned channels are a movie channel (Movie Plus), a golf channel (Jupiter Golf Network), a womens entertainment channel (LaLa TV) and a new channel that is planned to be launched in April 2008 (Channel Ginga). Channels in which J:COM holds investments include four sports channels owned by J SPORTS Broadcasting Corporation, which is a 33% owned joint venture with Sony Broadcast Media Co. Ltd., Fuji Television Network, Inc., Club iT Corporation, SKY Perfect Communications Inc. and Itochu Corporation; Animal Planet Japan, a one-third owned joint venture with Discovery Asia, Inc. and Worldwide America Investments, Inc.; Discovery Channel Japan and Discovery HD through a 50% owned joint venture with Discovery Asia, Inc.; and AXN Japan, a 35% owned joint venture with Sony Pictures Entertainment. J:COM provides affiliate sales services and in some cases advertising sales and other services to channels in which it has an investment for a fee.
The market for multi-channel television services in Japan is highly complex with multiple cable systems, DTH satellite platforms and alternative broadband service providers. Cable systems in Japan served 21.5 million homes at September 30, 2007. A large percentage of these homes, however, are served by systems (referred to as compensation systems) whose service principally consists of retransmitting free television services to homes whose reception of such broadcast signals has been blocked. Higher capacity systems and larger cable systems that offer a full complement of cable and broadcast channels, of which J:COM is the largest in terms of subscribers, served 6.5 million households as of December 31, 2007. The majority of channels in which J:COM holds an interest are marketed to cable system operators as basic television services, with distribution at December 31, 2007, ranging from 5.7 million homes for Movie Plus to 1.1 million homes for more recently launched channels, such as Discovery HD.
Each of the channels in which J:COM has an interest, except for Discovery HD, is also offered on SKY PerfecTV, a digital satellite platform that delivers approximately 190 linear video channels (24 hours a day) a la carte and in an array of basic and premium packages, from two satellites operated by JSAT Corporation. Each of the channels, except for Discovery HD, is also offered on e2 by SKY PerfecTV, another satellite platform in Japan, which delivers approximately 70 linear channels (24 hours a day). The majority of channels in which J:COM holds an interest are marketed to DTH subscribers as basic television services, with distribution at December 31, 2007, ranging from 1.2 million homes for Movie Plus to 435,000 homes for Jupiter Golf Network, which is a premium channel on one of the SKY PerfecTV platforms.
Distribution of multi-channel television services in Japan, through alternative broadband platforms, such as FTTH and ADSL, is not yet widespread. The majority of channels in which Jupiter TV holds an interest are marketed to alternative broadband subscribers as basic television services, with distribution at December 31, 2007, ranging from 266,000 homes for Discovery to approximately 150,000 homes for most other channels.
J:COM owns a 100% interest in Jupiter Entertainment Co., Ltd., which offers VoD services to J:COM franchises. J:COM offers VoD services to its digital customers in a majority of its franchises. Because J:COM is usually a programmers largest cable customer in Japan, J:COM is generally able to negotiate favorable terms with its programmers.
Our interest in J:COM is held primarily through Super Media, an entity that is owned 58.7% by us and 41.3% by Sumitomo. We also own, through a wholly owned subsidiary, an additional 3.7% in J:COM. Pursuant to the operating agreement of Super Media, most of our interest and most of Sumitomos interest in J:COM is held through Super Media. Sumitomo and our subsidiary are generally required to contribute to Super Media any additional shares of J:COM that either of us acquires and to permit the other party to participate in any additional acquisition of J:COM shares during the term of Super Media. Pursuant to an amendment to such operating agreement, the shares received in the JTV Thematics merger by us and Sumitomo will not be contributed to Super Media but we each agreed to vote such shares in the same manner that Super Media votes its shares of J:COM and to restrictions on transfer.
Our interest in Super Media is held through two separate corporations, one of which is wholly owned. Three individuals, including one of our executive officers and an officer of one of our subsidiaries, own common stock representing an aggregate of 14.3% of the common equity in the second corporation, which owns a 4.0% indirect interest in J:COM.
Super Media is managed by a management committee consisting of two members, one appointed by us and one appointed by Sumitomo. The management committee member appointed by us has a casting or tie-breaking vote with respect to any management committee decision that we and Sumitomo are unable to agree on, which casting vote will remain in effect for the term of Super Media. Certain decisions with respect to Super Media require the consent of both members rather than the management committee. These include a decision to engage in any business other than holding J:COM shares, sell J:COM shares, issue additional units in Super Media, make in-kind distributions or dissolve Super Media, in each case other than as contemplated by the Super Media operating agreement. While Super Media effectively has the ability to elect J:COMs entire board, pursuant to the Super Media operating agreement, Super Media is required to vote its J:COM shares in favor of the election to J:COMs board of three non-executive directors designated by Sumitomo and three non-executive directors designated by us.
Because of our casting vote, we indirectly control J:COM through our control of Super Media, which owns a controlling interest in J:COM, and therefore consolidate J:COMs results of operations for financial reporting purposes. Super Media will be dissolved on February 18, 2010, unless Sumitomo and we mutually agree to extend the term. Super Media may also be dissolved earlier under certain circumstances.
We also own an interest in Mediatti Communications, Inc. (Mediatti). Mediatti is a provider of cable television and broadband Internet services in Japan with approximately 166,000 video customers and 100,000 broadband Internet customers. Our interest in Mediatti is held through Liberty Japan MC, LLC (Liberty Japan MC), a company of which we own 95.2% and Sumitomo owns 4.8%. Liberty Japan MC owns a 45.5% voting interest in Mediatti.
Liberty Japan MC and certain affiliates of Olympus Capital (Olympus) and two minority shareholders of Mediatti have entered into a shareholders agreement pursuant to which Liberty Japan MC has the right to nominate three of Mediattis seven directors and which requires that significant actions by Mediatti be approved by at least one director nominated by Liberty Japan MC.
The Mediatti shareholders who are party to the shareholders agreement have granted to each other party whose ownership interest is greater than 10% a right of first refusal with respect to transfers of their respective interests in Mediatti. Each shareholder also has tag-along rights with respect to such transfers. Olympus has a put right that is first exercisable during July 2008 to require Liberty Japan MC to purchase all of its Mediatti shares at fair market
value. If Olympus exercises such right, the two minority shareholders who are party to the shareholders agreement may also require Liberty Japan MC to purchase their Mediatti shares at fair market value. If Olympus does not exercise such right, Liberty Japan MC has a call right that is first exercisable during July 2009 to require Olympus and the minority shareholders to sell their Mediatti shares to Liberty Japan MC at the then fair market value. If neither the Olympus put right nor the Liberty Japan MC call right is exercised during the first exercise period, either may thereafter exercise its put or call right, as applicable, until October 2010.
We own a 53.4% controlling interest in Austar. Austar is Australias leading pay television service provider to regional and rural Australia and the capital cities of Hobart and Darwin.
Austars pay television services are primarily provided through DTH satellite. FOXTEL Management Pty Ltd. (FOXTEL), the other main provider of pay television services in Australia, has leased space on an Optus C1 satellite. Austar and FOXTEL have entered into an agreement pursuant to which Austar is able to use a portion of FOXTELs leased satellite space to provide its DTH services. This agreement will expire in 2017. FOXTEL manages the satellite platform on Austars behalf as part of such agreement.
Austars DTH service is available to 2.4 million households, which is approximately one-third of Australian homes. Of Austars homes passed, 27% subscribe to Austars DTH service. Austars territory covers all of Tasmania and the Northern Territory and the regional areas outside of the capital cities in South Australia, Victoria, New South Wales and Queensland. Austar does not provide DTH service to Western Australia. FOXTELs service area is concentrated in metropolitan areas and covers the balance of the other two thirds of Australian homes. FOXTEL and Austar do not compete with each other with the exception of the Gold Coast area in Queensland. Austar also operates a small digital cable network in Darwin.
Austars DTH service offers over 90 premier channels, as well as NVoD and interactive services. Austars channel offerings include movies, sport, lifestyle programs, childrens programs, documentaries, drama and news. The NVoD service is comprised of 30 channels, dedicated to recently released movies. The interactive services include Sports Active, Weather Active and SKY News Active, three game services and more than 30 digital radio channels. For the base level service, a subscriber receives 41 channels, including six timeshifted channels. Additionally, Austar launched DVR functionality to a select number of subscribers in November 2007 and to all satellite subscribers in early 2008. In addition to residential subscribers, Austar also provides its television services to commercial premises including hotel, retail and licensed venues.
Austar owns a 50% interest in XYZ Networks. XYZ Networks has an ownership interest in or distributes the following channels: Discovery Channel, Nickelodeon, Nick Jr., arena, The LifeStyle Channel, LifeStyle Food, Channel [v], [v]2, MAX, Country Music Channel and The Weather Channel. These channels are distributed throughout Australia. Austars partner in XYZ Networks is FOXTEL. Through XYZ Networks and other agreements, Austar has a number of long-term key exclusive programming agreements for its regional territory.
Austar offers a dial-up Internet service, which is outsourced and available throughout Australia and broadband Internet service in two markets as described below. In addition, Austar offers mobile telephony services through reseller agreements.
Since 2000, Austar has owned significant holdings of 2.3 GHz and 3.5 GHz spectrum throughout its regional territory. This spectrum is ideally suited for new Worldwide Interoperability for Microwave Access (WiMax) based telecommunications services. In 2006, Austar launched a WiMax network in two trial markets for broadband Internet services with download speeds ranging from 256 Kbps to one Mbps. On January 7, 2008, Austar announced the proposed sale of these spectrum holdings to a consortium, which is to be the recipient of government funding to build wireless and fixed broadband networks in regional Australia. Under the proposed deal, which is subject to certain conditions, Austar would receive AUD 65.0 million, and enter into various wholesale agreements with the consortium members to allow it to resell DSL, WiMax, fixed telephony, mobile and other services.
In addition to our interests in Austar, we own a 20% equity interest in Premium Movie Partnership (PMP), which supplies three premium movie-programming channels to both Austar and FOXTEL. PMPs partners include Showtime, Twentieth Century Fox, Sony Pictures, Paramount Pictures and Universal Studios.
Our operations in the Americas are conducted primarily through our 80% owned subsidiary VTR in Chile and our wholly owned subsidiary Liberty Puerto Rico. We also have a joint venture interest in MGM Networks Latin America and a subsidiary in Argentina, both of which offer programming content to the Latin America market. Our partner in VTR, Cristalerías de Chile S.A. (Cristalerías), has a put right which allows Cristalerías to require us to purchase all, but not less than all, of its 20% interest in VTR at fair value, subject to a minimum price. This put right is exercisable until April 13, 2015.
Our primary Latin American operation, VTR, is Chiles largest multi-channel television provider in terms of homes passed and number of subscribers, and a leading provider of broadband Internet and residential telephony services. VTR provides services in Santiago, Chiles largest city, the large regional cities of Iquique, Antofagasta, Concepción, Viña del Mar, Valparaiso and Rancagua, and smaller cities across Chile. Of VTRs customers, 16% are double-play customers and 39% are triple-play customers.
All of VTRs video subscribers are served by wireline cable, with the vast majority reached through aerial plant. VTRs cable network is 68% upgraded to two-way capability and 82% of cable homes passed are served by a network with a bandwidth of at least 750 MHz. VTR has an approximate 70% market share of cable television services throughout Chile. VTRs channel lineup consists of 22 to 116 channels segregated into three tiers of cable service: a low tier service with 22 to 47 channels, a basic service with up to 74 channels, and a digital premium service with an additional offer of up to 42 channels. VTR offers basic tier programming similar to the basic tier program lineup in the United States, but includes more premium channels such as HBO, Cinemax and Cinecanal on the basic tier. VTR obtains programming from the United States, Europe, Argentina and Mexico. There is also domestic cable television programming in Chile, based on local events such as soccer matches and regional content. VTRs digital service also offers programming options of 40 music channels, four pay-per-view channels, more than 1,000 titles in VoD, DVR and one HD channel. Almost 80% of VTRs homes passed are capable of receiving digital cable service, which are located in Santiago and important regional cities. At December 31, 2007, 21% of VTRs video subscribers are digital.
VTR offers several alternatives of always on, unlimited-use broadband Internet services to residences and SOHO offices under the brand name Banda Ancha in 26 communities within Santiago and 21 cities outside Santiago. Subscribers can purchase one of nine services with download speeds ranging from 300 Kbps to 10 Mbps. For a moderate to heavy Internet user, VTRs broadband Internet service is generally less expensive than a dial-up service with its metered usage.
VTR offers telephony service over its cable network to customers in 26 communities within Santiago and 21 cities outside Santiago via either switched circuits or VoIP, depending on location. VTR offers basic dial tone service as well as several value-added services. VTR primarily provides service to residential customers who require one or two telephony lines. It also provides service to SOHO customers. VTR offers telephony services through VoIP to its two-way homes passed. Forty-six percent of VTRs telephony subscribers are served using VoIP technology.
In December 2005, the Subsecretaria de Telecomunicaciones de Chile awarded VTR regional concessions for wireless fixed telephony service in the frequency band of 3400-3600 MHz. Using this spectrum, VTR plans to offer broadband telephony and data services through WiMax technology. WiMax is a wireless alternative to cable and DSL for the last mile of broadband access. VTR anticipates WiMax will allow it to expand its service area by 1.3 million homes and increase the number of two-way homes passed by 540,000 on a more cost-effective basis than if it had to install cable.
VTR is subject to certain regulatory conditions as a result of the combination with Metrópolis Intercom S.A. in April 2005. The most significant conditions require that the combined entity (i) re-sell broadband capacity to third party Internet service providers on a wholesale basis; (ii) activate two-way service to two million homes passed within five years from the consummation date of the combination; and (iii) for three years after the consummation date of the combination, limit basic tier price increases to the rate of inflation, plus a programming cost escalator.
Another condition expressly prohibits us, as the controlling shareholder of VTR, from owning an interest, directly or indirectly through related parties, in any company that provides microwave or satellite television services in Chile. The DirecTV Group, Inc. (DirecTV) owns a satellite television distribution service that operates in Chile and elsewhere in the Americas. On December 12, 2006, Liberty Media announced publicly that it had agreed to acquire an approximate 39% interest in DirecTV. On August 1, 2007, VTR received formal written notice from the Chilean Federal Economic Prosecutor (FNE) that Liberty Medias acquisition of the DirecTV interest would violate the regulatory condition prohibiting us from owning an interest in Chilean satellite or microwave television businesses. If the FNE ultimately determines that a violation has occurred, it will commence an action before the Chilean Antitrust Court. We currently are unable to predict the outcome of this matter.
Video distribution, Internet, telephony and content businesses are regulated in each of the countries in which we operate. The scope of regulation varies from country to country, although in some significant respects regulation in European markets is harmonized under the regulatory structure of the European Union (EU). Adverse regulatory developments could subject our businesses to a number of risks. Regulation could limit growth, revenue and the number and types of services offered. In addition, regulation may restrict our operations and subject them to further competitive pressure, including pricing restrictions, interconnect and other access obligations, and restrictions or controls on content, including content provided by third parties. Failure to comply with current or future regulation could expose our businesses to various penalties.
Foreign regulations affecting distribution and programming businesses fall into several general categories. Our businesses are generally required to obtain licenses, permits or other governmental authorizations from, or to notify or register with, relevant local or national regulatory authorities to own and operate their respective distribution systems and to offer services across them. In most countries, these licenses and registrations are non-exclusive and, in some circumstances, they may be of limited duration. In most countries where we provide video services, we must comply with restrictions on, or requirements to carry, programming content. Local or national regulatory authorities in some countries where we provide video services also impose pricing restrictions and subject certain price increases to prior approval or subsequent control by the relevant local or national authority.
Austria, Belgium, Bulgaria, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Poland, Portugal, Romania, Slovak Republic, Slovenia, Spain, Sweden and the United Kingdom are Member States of the EU. As such, these countries are required to enact national legislation that implements EU directives and are directly bound by some other elements of EU law. As a result, most of the markets in Europe in which our businesses operate have been significantly affected by the regulatory framework that has been developed by the EU. The exception to this is Switzerland, which is not an EU Member State and is currently not seeking any such membership. Regulation in Switzerland is discussed separately below.
A number of legal measures, which we refer to as the Directives, are the basis of the regulatory regime concerning communications services across the EU. They include the following:
In addition to the Directives, the European Parliament and European Council made a decision intended to ensure the efficient use of radio spectrum within the EU. Existing EU member countries were required to implement the Framework, Authorization, Access and the Universal Service and Users Rights Directives by July 25, 2003. The Privacy Directive was to have been implemented by October 31, 2003. The Competition Directive is self-implementing and does not require any national measures to be adopted. The 12 countries that joined the EU since the date of the Directives should have been in compliance with the Directives as of the date of their accession. Measures seeking to implement the Directives are in force in most Member States, although in practice the EU Commission produces regular reports noting problems with implementation across the Member States and takes periodic compliance action. In the Member States in which we operate the Directives have been largely transposed, although we regularly raise concerns either with the national authorities or with the EU Commission where we see a problem with an existing or proposed regulation.
The Directives seek, among other things, to harmonize national regulations and licensing systems and further increase market competition. These policies seek to harmonize licensing procedures, reduce administrative fees, ease access and interconnection, and reduce the regulatory burden on telecommunications companies. Another important objective of the Directives is to implement one regime for the development of communications networks and communications services, including the delivery of video services, irrespective of the technology used.
Many of the obligations included within the Directives apply only to operators or service providers with Significant Market Power (SMP) in a relevant market. For example, the provisions of the Access Directive allow Member States to mandate certain access obligations only for those operators and service providers that are deemed to have SMP. For purposes of the Directives, an operator or service provider will be deemed to have SMP where, either individually or jointly with others, it enjoys a position of significant economic strength affording it the power to behave to an appreciable extent independently of competitors, customers and consumers.
As part of the implementation of certain elements of the Directives, the National Regulatory Authority (NRA), is obliged to analyze certain markets predefined by the EU Commission to determine if any operator or service provider has SMP. Until November 2007, there were 18 such markets but on November 13, 2007, the EU Commission adopted a new recommendation reducing the list of markets to seven with immediate effect. Such markets are referred to as the seven predefined markets. The effect of the new recommendation is that those Member States who have not analyzed one of the deleted markets, or who have analyzed such a market and found no SMPs are no longer required to carry out any analysis in that market. Member States who have analyzed one of the deleted markets and found SMP will have to re-analyze that market and, if they still find SMP, notify the EU Commission as a finding of SMP outside the seven predefined markets. Pending such re-analysis, the prior finding of SMP will remain in effect until the end of its duration (most of the decisions are valid for three years). There is no specific timetable for such re-analysis, although the EU Commission tends to pressure Member States if it sees them as being slow in performing market analyses.
We have been found to have SMP in some markets in some countries and further such findings are possible. In particular, in those markets where we offer telephony services, we have been found to have SMP in the termination of calls on our own network (a market which remains on the revised list). In addition, in the Netherlands we have been found to have SMP in the wholesale distribution of television channels (a market which is no longer on the list of predefined markets).
NRAs might also seek to define us as having SMP in another of the seven predefined markets or they may define and analyze additional markets, such as the retail market for the reception of radio and television packages. In the event that we are found to have SMP in any particular market, a NRA could impose conditions on us to prevent
abusive behavior by us. Under the Directives, the EU Commission has the power to veto the assessment by a NRA of SMP in any market not set out in their predefined list as well as any finding by a NRA of SMP in any market whether or not it is set out in the list.
Certain key elements included in the Directives are set forth below, followed by a discussion of certain other regulatory matters and a description of regulation for four countries where we have large operations. This description is not intended to be a comprehensive description of all regulation in this area.
Licensing. Individual licenses for electronic communications services are not required for the operation of an electronic communications network or the offering of electronic communications services. A simple registration is required in these cases. Member States are limited in the obligations that they may place on someone who has so registered; the only obligations that may be imposed are specifically set out in the Authorization Directive. Possible obligations include financial charges for universal service or for the costs of regulation, environmental requirements, data privacy and other consumer protection rules, must carry obligations, provision of customer information to law enforcement agencies, access obligation and so on. Certain of these are discussed further elsewhere in this section.
Access Issues. The Access Directive sets forth the general framework for interconnection of, and third party access to, networks, including cable networks. Public telecommunications network operators are required to negotiate interconnection agreements on a non-discriminatory basis with each other. In addition, some specific obligations are provided for in this Directive such as an obligation to distribute wide-screen television broadcasts in that format and certain requirements to provide access to conditional access systems. Other access obligations can be imposed on operators identified as having SMP in a particular market. These obligations are based on the outcomes that would occur under general competition law.
Must Carry Requirements. In most countries where we provide video and radio services, we are required to transmit to subscribers certain must carry channels, which generally include public national and local channels. In some European countries, we may be obligated to transmit quite a large number of channels by virtue of these requirements. Under the Directives, Member States are only permitted to impose must carry obligations where they are necessary to meet clearly defined general interest objectives and where they are proportionate and transparent. Any such obligations must be subject to periodic review. To date, Member States have not felt meaningfully bound by this restriction and the EU Commission has not made meaningful efforts to enforce it. Thus in several Member States we face must carry obligations, which, to us, seem inconsistent with the Directives.
Consumer Protection Issues and Pricing Restrictions. Under the Directives, we may face various consumer protection restrictions if we are in a dominant position in a particular market. However, before the implementation of the Directives, local or national regulatory authorities in many European countries where we provide video services already imposed pricing restrictions. This was often a contractual provision rather than a regulatory requirement. Often, the relevant local or national authority had to approve basic tier price increases. Generally, these kinds of arrangements are now rare. In certain countries, however, price increases will only be approved if the increase is justified by an increase in costs associated with providing the service or if the increase is less than or equal to the increase in the consumer price index (CPI). Even in countries where rates are not regulated, subscriber fees may be challenged if they are deemed to constitute anti-competitive practices.
Other. Our European operating companies must comply with both specific and general legislation concerning data protection, data retention, content provider liability and electronic commerce. These issues are broadly harmonized or being considered for harmonization at the EU level. For example, on March 15, 2006, the EU adopted a Directive on data retention, which will likely increase the amount of data we must store for law enforcement purposes and the length of time we must store it. Few Member States, however, have implemented this Directive to date.
Since 2005 the Commission has been engaged in a process of reviewing the Directives. On November 13, 2007, the Commission published revised legislative proposals. Among other things the proposals include a suggestion for a European level communications regulator, the possibility for national regulators to impose functional separation on operators, and changes to radio spectrum licensing. The proposals will be considered, and any revised Directive eventually adopted, by the European Parliament and the European Council. There can be no assurance when this will happen nor what the final form of the revised Directives will be nor how they will affect us.
Broadcasting. Broadcasting is an area outside the scope of the Directives. Generally, broadcasts originating in and intended for reception within a country must respect the laws of that country. However, pursuant to another Directive, commonly call Television without Frontiers Directive (TVWF), EU Member States are required to allow broadcast signals of broadcasters in another EU Member State to be freely transmitted within their territory so long as the broadcaster complies with the law of the originating EU Member State. In respect of many of our channels, The European Convention on Transfrontier Television extends this right beyond the EUs borders into the majority of the European territories into which we sell our channels. TVWF also establishes quotas for the transmission of European-produced programming and programs made by European producers who are independent of broadcasters.
TVWF has been under review for some time and on November 29, 2007 a new Directive, replacing TVWF, called Audiovisual Media Services Directive (AVMS), completed its legislative path. We expect this directive to be published in the EUs Official Journal shortly after which Member States will have two years to amend their national laws in light of the new rule. In essence, we do not expect AVMS to have any material effect on our programming business. EU Member States will still be required to allow the channels of broadcasters in another EU Member State to be freely transmitted within their territory so long as the broadcaster complies with the law of the originating EU Member State. However, among other things, AVMS extends the scope of TVWF somewhat to apply to TV-like services other than traditional TV channels (such as video on demand) as well as making other changes to the general EU broadcasting framework such as a relaxation of the rule on TV advertising.
EU directives and national consumer protection and competition laws in many of our European markets impose limitations on the pricing and marketing of bundled packages of services, such as video, telephony and Internet services. Although our businesses may offer their services in bundled packages in European markets, they are sometimes not permitted to make subscription to one service, such as cable television, conditional upon subscription to another service, such as telephony. In addition, providers cannot abuse or enhance a dominant market position through unfair anti-competitive behavior. For example, cross-subsidization having this effect would be prohibited.
Currently the telecommunications equipment we provide our customers, such as digital set top boxes, is not subject to regulations regarding energy consumption. The EU Commission is, however, considering the need for mandatory requirements regarding energy consumption of such equipment. Similar discussions are already underway in Switzerland. We have been participating in discussions and studies regarding energy consumption with various parts of the EU Commission, with experts working on their behalf, and with the Swiss authorities. In addition, we are working with suppliers of our digital set top boxes to lower power consumption as well as looking at possibilities through software to lower the power consumption of the existing fleet of digital set top boxes.
As our businesses become larger throughout the EU and in individual countries in terms of service area coverage and number of subscribers, they may face increased regulatory scrutiny. Regulators may prevent certain acquisitions or permit them only subject to certain conditions.
The Netherlands has an electronic communications law that broadly transposes the Directives. Onafhankelijke Post en Telecommunicatie Autoriteit (OPTA), the Netherlands NRA, has finished its first round and started, for several markets, a second round of analysis of the original 18 predefined markets in order to determine which, if any, operator or service provider has SMP.
In its first round, OPTA found our subsidiary UPC Nederland BV (UPC NL) to have SMP in two of the 18 predefined markets (market 9 relating to call termination on individual public telephone networks, and market 18 relating to wholesale video broadcasting transmission services) and a third market not on the EU list (market 19 relating to retail transmission of radio and video services). All three decisions of OPTA were successfully challenged by UPC NL. College van Beroep voor het bedrijfsleven (CBb), the administrative supreme court, annulled on May 11, 2007, the SMP designation of UPC NL on market 9 consequently meaning that there are no legal grounds for imposing obligations. Further, CBb annulled on July 24, 2007, the obligations imposed on UPC NL relating to market 18 and market 19. With respect to the market 19, CBb decided, however, that the legal consequences of the annulled obligations remained in force. This has no practical consequences for us, however, as the decision of OPTA was restricted in time, expiring March 17, 2007.
In its rulings CBb ordered OPTA to take new or amended decisions relating to market 9 and 18. A new draft decision relating to market 9 was published in December 2007. The national consultation procedure ends in February 2008.
With respect to market 18, the CBb annulled the decision because OPTA was not able to demonstrate that the remedies were proportionate. On December 21, 2007, OPTA issued a new decision in relation to market 18, which decision came into force on January 1, 2008. The decision imposes exactly the same obligations on UPC NL as the previous decision, as further described below, while at the same time purporting to address the proportionality concerns of the CBb. UPC NL has filed an appeal against this new decision because it believes that OPTA did not comply with the decision of the CBb. The new decision of OPTA, like its original decision, includes the obligation to provide access to content providers and packagers that seek to distribute content over UPC NLs network using their own conditional access platform. This access must be offered on a non-discriminatory and transparent basis at cost oriented prices regulated by OPTA. Further, the decision requires UPC NL to grant program providers access to its basic tier offering in certain circumstances in line with current laws and regulations. UPC NL will have to reply within 15 days after a request for access. OPTA has stated that requests for access must be reasonable and has given some broad guidelines for filling in this concept. Examples of requests that will not be deemed to be reasonable are: requests by third parties who have an alternative infrastructure; requests that would hamper the development of innovative services; or requests that would result in disproportionate use of available network capacity due to the duplication of already existing offerings of UPC NL. It is expected that the concept of reasonableness will be further developed by the creation of guidelines by OPTA and/or by the development of case law.
As Switzerland is not a member of the EU, it is not obliged to follow EU legislation. However, the liberalization of the Swiss telecommunications market to a certain extent has moved in parallel, although delayed, with liberalization in the EU. The regulatory framework liberalizing telecommunications services in Switzerland was established on January 1, 1998, with the enactment of the Telecommunications Act and a concurrent restatement of the Radio and Television Act (RTVA). This regulatory regime opened both the telecommunications and cable television markets to increased competition.
The RTVA has undergone a comprehensive review in order to keep up with technological and market developments. A revised RTVA entered into force on April 1, 2007. It regulates the operation, distribution and redistribution, and receipt of radio and television programs. As in the EU, must carry rules require us to redistribute certain international, national and regional television and radio programs, such as programs of the Swiss Broadcasting Corporation and certain public broadcasters programs of neighboring countries.
Under the revised RTVA, the terms of carriage for programming, other than must carry programming, can be commercially negotiated subject to non-discrimination. The rules requiring us to carry certain programs will be expanded, but at the same time the maximum number of such channels has been fixed and broadcasters must use the cable operators digital distribution platform unless that platform cannot offer state of the art services. Thus, as long as we offer a modern state of the art platform, broadcasters will be obliged to use our digital platform for the broadcasting of their programs on our network.
To ensure interoperability or to maintain freedom of information, the authorities may, however, impose technical standards. Encryption of our digital offering is permissible under the revised law though there is an initiative pending in parliament with the aim to prohibit the encryption of the digital basic offering.
The transmission of voice and data information through telecommunications devices is regulated by the Telecommunications Act. A revised Telecommunications Act aiming to strengthen competition in the telecommunication market, in particular by introducing the unbundling of the local loop by a formal act, and to increase transparency for customers took effect on April 1, 2007. Dominant telecommunications service providers must provide interconnection to other providers on a non-discriminatory basis and in accordance with a transparent and cost-based pricing policy, stating the conditions and prices separately for each interconnection service. We have not been found to have a dominant market position under the Telecommunications Act, but cannot exclude the possibility that we might be in the future.
Only Swisscom AG (Swisscom), as the incumbent operator, was required to provide full line access as well as bitstream access on a transparent, non-discriminatory and cost-based basis. The obligation to offer bitstream access is limited to a period of four years. In addition, all operators are required to take action against spamming. The licensing system has been replaced by a notification system. Universal service obligations have been imposed, and all operators are required to contribute to the costs for the provision of universal services if the licensees are not able to provide such services in a cost efficient manner.
Under the Act on the Surveillance of Prices, the Swiss Price Regulator has the power to prohibit price increases or to order price reductions in the event a company with market power implements prices that are deemed to be abusively high, unless the Swiss Price Regulator and the company can come to a mutual agreement. For purposes of the Act on the Surveillance of Prices, a price is considered to be abusively high if it is not the result of effective competition. We are subject to price regulation regarding our analog television offering and entered into a contract with the price regulator that determined the retail prices for analog television services until the end of 2006. As of 2007, we are no longer subject to an agreement with the Swiss Price Regulator. However, the Swiss Price Regulator has defined key terms regarding our products and prices until 2009, which we will have to take into account in order to avoid regulatory intervention on our pricing.
Hungary has a communications law that broadly transposes the Directives. The NRA has virtually finished the process of analyzing the 18 predefined markets to determine if any operator or service provider has SMP with the only exception of relevance to our business being the ongoing analysis of the wholesale broadcast transmission market. In July 2007, Hungary implemented new regulations for broadcast transmission access similar to market 18, which related to wholesale video broadcasting transmission services. UPC Hungary is considering a challenge of the new regulations as certain obligations, including the distribution obligation, seem to be outside the Directives. The new regulations include the obligation to conclude contracts with program providers for the distribution of up to 40 channels, if the channels serve the goals of cultural diversity and media pluralism.
The operations of our telephony subsidiary, Monor Telefon Tarsasag RT (Monor) have been found to have SMP in the call termination and origination market in our own telecommunications network, as well as in the markets for wholesale unbundled access and for wholesale broadband access, together with all other similar network operators. This has led to a variety of requirements, including the need to provide interconnection and access to, and use of, specific network facilities, non-discrimination, transparency, accounting separation and price control. We are also required to produce a wholesale ADSL offer on the Monor telecommunication network based on a discount from our retail prices.
Monor has further been found to have SMP in a variety of retail markets relating to the provision of network access to business and to residential customers where our price increases have been capped at the rise in the CPI and in the markets for long distance and international calls for residential and business customers where we have been required to offer carrier pre-selection services.
The IP telephony operation of UPC Magyarország Kft., our cable subsidiary, has been designated as SMP in the call termination market. As a result, our subsidiary must provide interconnection on a non-discriminatory and transparent basis. According to these requirements, it must publish its terms of interconnection and termination prices on its website.
Belgium has transposed the Directives into national law. The new communications law entered into force as of July 2005. Some of the market analyses, however, have not been finalized yet. Telenet has been declared a SMP operator on market 9 relating to call termination on an individual fixed public telephone network. With respect to the market for call termination on individual fixed networks, an on-going three year reduction of termination rates was imposed on Telenet beginning January 1, 2007. After the rate reduction in January 2009, this reduction will end with near reciprocal termination tariffs (Telenet will charge the interconnection rate of the incumbent telecommunications operator, Belgacom NV/SA (Belgacom), plus 15%).
In Belgium both the federal regulator Belgisch Intituut voor Post en Telecommunicatie (BIPT), and the regional media regulators (Vlaamse Media Regulator (Flanders), Conseil Supérieur de lAudiovisuel (Wallonia), and Medienrat (in the German speaking community)) have to approve the wholesale broadband market analysis. In practice this means that the BIPT makes a draft analysis and submits it to the regional regulators for comments, which the BIPT has done. During the regional consultation, the Flemish media regulator asked that a new market analysis on the wholesale broadband market be launched within 18 months. This is at odds with the BIPTs position on the European framework, which provides that a market analyses is in principle valid for a three year period, except for substantial changes in the broadband market. The BIPT has notified its findings on this market to the EU Commission. In January 2008, this market analysis was approved by the EU Commission and formally adopted by the BIPT. The BIPT has not bound itself to re-analyze the market within 18 months, although it may do so. In the analysis the BIPT found that cable was not included in the wholesale broadband market and was not subject to regulation.
The wholesale broadcasting market analysis has to be conducted by the Flemish media regulator for our activities in Flanders and by the BIPT for our activities in Brussels. Neither has started yet. We understand that the Flemish media regulator will not analyze the market now that the EU Commission has deleted the wholesale broadcasting market from the list of relevant markets.
Regulation of the Cable Television Industry. The two key laws governing cable television broadcasting services in Japan are the Cable Television Broadcast Law and the Wire Telecommunications Law. The Cable Television Broadcast Law was enacted in 1972 to regulate the installation and operation of cable television broadcast facilities and the provision of cable television broadcast services. The Wire Telecommunications Law is the basic law in Japan governing wire telecommunications, and it regulates all wire telecommunications equipment, including cable television broadcast facilities.
Under the Cable Television Broadcast Law, any business seeking to install cable television facilities with more than 500 drop terminals must obtain a license from the Ministry of Internal Affairs and Communications, commonly referred to as the MIC. Under the Wire Telecommunications Law, if these facilities have less than 500 drop terminals, only prior notification to the MIC is required. If a license is required, the license application must provide an installation plan, including details of the facilities to be constructed and the frequencies to be used, financial estimates, and other relevant information. Generally, the license holder must obtain prior permission from the MIC in order to change certain items included in the original license application. The Cable Television Broadcast Law also provides that any business that wishes to furnish cable television broadcast services must file prior notification with the MIC before commencing service. This notification must identify the service area and facilities to be used (unless the facilities are owned by the provider) and outline the proposed cable television broadcasting services and other relevant information, regardless of whether these facilities are leased or owned. Generally, the cable television provider must notify the MIC of any changes to these items.
Prior to the commencement of operations, a cable television provider must notify the MIC of all charges and tariffs for its cable television broadcast services. Those charges and tariffs to be incurred in connection with the mandatory re-broadcasting of television content require the approval of the MIC. A cable television provider must also give prior notification to the MIC of all amendments to existing tariffs or charges (but MIC approval of these amendments is not required, except for the aforementioned approval matters for mandatory re-broadcasting).
A cable television provider must comply with specific guidelines, including: (1) editing standards; (2) making its facilities available for third party use for cable television broadcasting services, subject to the availability of broadcast capacity; (3) providing service within its service area to those who request it absent reasonable grounds for refusal; (4) obtaining retransmission consent where retransmission of television broadcasts occur, unless such retransmission is required under the Cable Television Broadcast Law for areas having difficulties receiving television signals; and (5) obtaining permission to use public roads for the installation and use of cable.
The MIC may revoke a facility license if the license holder breaches the terms of its license; fails to comply with technical standards set forth in, or otherwise fails to meet the requirements of, the Cable Television Broadcast Law; or fails to implement a MIC improvement order relating to its cable television broadcast facilities or its operation of cable television broadcast services.
Regulation of the Telecommunications Industry. As providers of broadband Internet and telephony, our businesses in Japan also are subject to regulation by the MIC under the Telecommunications Business Law. The Telecommunications Business Law and related regulations subject carriers to a variety of licensing, registration and filing requirements depending upon the nature of their networks and services. Carriers may generally negotiate terms and conditions with their users (including fees and charges), except those relating to basic telecommunications services.
Carriers who provide Basic Telecommunications Services, defined as telecommunications that are indispensable to the lives of the citizenry as specified in MIC ordinances, are required to provide such services in an appropriate, fair and consistent manner. Carriers providing Basic Telecommunications Services must do so pursuant to terms and conditions and for rates that have been filed in advance with the MIC. The MIC may order modifications to contract terms and conditions it deems inappropriate for certain specified reasons.
Carriers, other than those exceeding certain standards specified in the Telecommunications Business Law (such as Nippon Telephone & Telegraph (NTT)), may set interconnection tariffs and terms and conditions through independent negotiations without MIC approval.
Telecommunication carriers that own their telecommunication circuit facilities are required to maintain such facilities in conformity with specified technical standards. The MIC may order a carrier that fails to meet such standards to improve or repair its telecommunication facilities.
Subscription television, Internet and mobile telephony services are regulated in Australia by a number of Commonwealth statutes. In addition, State and Territory laws, including environmental and consumer protection legislation, may influence aspects of Austars business. Government policies likely to affect the media and communications sector are currently in flux due to the Federal election in November 2007, which resulted in a Labor Government coming to power for the first time in Austars history.
Broadly speaking, the regulatory framework in Australia distinguishes between the regulation of content services and the regulation of facilities used to transmit those services. The Australian Broadcasting Services Act 1992 (Cth) (BSA) regulates the ownership and operation of all categories of television and radio services in Australia and also aspects of Internet and mobile content. The technical delivery of Austars services is separately licensed under the Radiocommunications Act 1992 (Cth) (the Radiocommunications Act) or the Telecommunications Act 1997 (Cth), depending on the delivery technology utilized. Other legislation of key relevance to Austar is the Trade Practices Act 1974 (Cth), which includes competition and consumer protection regulation.
The BSA regulates subscription television broadcasting services through a licensing regime managed by the Australian Communications and Media Authority (ACMA). Austar and its related companies hold broadcasting licenses under the BSA. Subscription television broadcasting licenses are for an indefinite period. Each subscription television broadcasting license is issued subject to general license conditions, which may be revoked or varied by the Australian Government, and may include specific additional conditions. License conditions include a prohibition on cigarette or other tobacco advertising; a requirement that subscription fees must be the predominant source of revenue for the service; a requirement that the licensee must remain a suitable licensee under the BSA; a requirement that customers must have the option to rent domestic reception equipment and a requirement to comply with provisions relating to anti-siphoning and the broadcast of R-rated material.
An additional obligation on subscription television licensees who provide a service predominantly devoted to drama programs is to spend at least 10% of its annual program expenditure on new Australian drama programs. Austar has made the required investments in such programming.
The BSA prohibits subscription television broadcasting licensees from obtaining exclusive rights to certain events that the Australian Government considers should be made freely available to the public. These events, which are specified on the anti-siphoning list, include a number of highly popular sporting events in Australia, and are currently protected until 2010. Effective January 1, 2007, changes to the anti-siphoning regime were introduced through the implementation of a use it or lose it scheme the free to air (FTA) broadcasters use of sporting events are monitored, and the listed sporting events, which do not receive adequate coverage or which are not acquired by the FTA broadcasters, may be considered for permanent (or partial) removal from the anti-siphoning list. Despite its introduction, the use it or lose it scheme has not been effective to date.
Changes to media laws were passed in October 2006. Foreign ownership restrictions under the BSA were lifted in April 2007, although the media has been retained as a sensitive sector and foreign investment in the media sector remains subject to Treasurer approval. Cross media ownership rules have been amended to allow cross media transactions so that an operator can own two out of three types of media assets in a market, subject to there being at least five voices in metro markets and four voices in regional markets. The media reforms also included clarification on the following issues which impact Austar: (1) analogue switch-off to be targeted for 2010-2012; (2) no fourth commercial network until the end of the switch-off period; (3) FTA broadcasters to be permitted to provide one standard definition (SD) multi-channel from Jan 2009, although full multi-channeling to be prohibited for the FTA broadcasters until the end of the switch-off period; (4) the FTA restriction on simulcast of SD and HD was lifted such that FTA HD offerings can be enhanced with additional programming, however no FTA channel can broadcast listed sporting events on their SD or HD multi-channel unless the listed event has been or is being shown on the SD main channel; and (5) the public broadcasters restriction on the content of their multi-channels was lifted to enable their program offerings to be enhanced. The auction of two spare terrestrial television channels was to be delayed until switch-off. Of the two channels up for auction, Channel A is available for datacasting, community and narrowcasting services (FTA broadcasters are specifically excluded from controlling these services), and Channel B will be used for emerging new digital services such as mobile TV. Neither channel can be used for traditional in home commercial television or subscription broadcasting services. These policies are under review following the appointment of the Labor Government. Labor has indicated that they intend to fix an analogue switch-off date in 2013 and have suggested that they may conduct the license A and B auctions and will consider the introduction of a fourth commercial network prior to switch-off.
The BSA currently regulates Internet content. Internet service providers (ISPs) or Internet content hosts are not primarily liable for the content of material carried on their service; however, once notified of the existence of illegal or highly offensive material on their service, they have a responsibility to remove or block access to such material. There is also a prohibition on ISPs providing access to certain interactive gambling services to Australian-based customers or to provide certain Australian-based interactive gambling services to customers in designated countries. It is an offense to advertise interactive gambling services in Australia.
The Content Services Act was passed on June 21, 2007, and will become effective on January 20, 2008. It effectively prohibits the supply of certain Internet and mobile content to the public Refused Classification and X18+; and Restricted 18+ and Mature Audiences 15+ content that is not subject to a restricted access system. The Act amends the BSA and replaces the current regulation of Internet content. The objective of the legislation is to
ensure providers of content respect community standards and establish measures that protect children from inappropriate content. The Act sets up a complaints based scheme under which the ACMA can issue a notice to remove or disable access to prohibited or potentially prohibited content, or require providers to place such content behind a restricted access system designed to verify the age of those seeking access. Industry Code(s) are currently being developed to deal with content providers obligations to pre-assess content, the provision of consumer information and complaints handling mechanisms. There are exceptions for licensed broadcasting services (including ancillary subscription television content services such as on demand services) and retransmitted services, and for operators who do no more than provide a carriage service. The new regulation will impact the provision of Internet and mobile content by Austar as well as its role as an ISP.
In addition to licenses issued under the BSA, certain companies in the Austar group hold spectrum licenses issued under and regulated by the Radiocommunications Act. As described under Operations Asia/Pacific Australia, Austar has announced the proposed sale of these spectrum holdings, subject to the satisfaction of certain conditions. Until completion of the sale, the Austar group will continue to hold 19 spectrum licenses in the 2.3 GHz Band and 26 licenses in the 3.5 GHz Band covering geographic areas similar to Austars subscription television areas. These licenses expire in 2015. The spectrum licenses authorize the use of spectrum space rather than the use of a specific device or technology. Austar is using this spectrum to provide WiMax based broadband Internet services in two trial markets and will continue to operate in these markets following completion of the sale until the purchaser can provide an alternative network. Similar to the BSA, licenses issued under the Radiocommunications Act are subject to general license conditions and may be subject to specific license conditions, which can be added to, revoked or varied by written notice during the term of the license. Spectrum licensees must comply with core conditions of the license and be compatible with the technical framework for the bands. There are no restrictions on ownership/control of spectrum licenses except that the licensee must be a resident of Australia.
A subsidiary of Austar also holds a carrier license issued under the Telecommunications Act 1997 and a number of Austar companies operate as carriage service providers. These companies are required to comply with Australian telecommunications legislation, including legislation that establishes various access regimes. Companies in the Austar group provide dial-up and broadband Internet service and mobile telephony services. ISPs are considered carriage service providers for the purposes of the Telecommunications Act and must observe statutory obligations, including in relation to access, law enforcement and national security, and interception, and must become a member of the Telecommunications Industry Ombudsman scheme. ISPs must also observe various industry codes of practice relating to Internet content and Internet gambling. Mobile service providers must observe various regulation and industry codes of practice relating to mobile service provision, such as billing and mobile content.
As described under Operations The Americas, VTR is subject to certain regulatory conditions as a result of its combination with Metrópolis Intercom S.A. in April 2005. These conditions are in addition to the regulations described below.
Video. Cable television services are regulated in Chile by the Ministry of Transportation and Telecommunications (the Ministry). VTR has permits to provide wireline cable television services in the major cities, including Santiago, and in most of the medium-sized markets in Chile. Wireline cable television permits are granted for indefinite terms and are non-exclusive, meaning there may be more than one operator in the same service area. As these permits do not use the radio-electric spectrum, they are granted without ongoing duties or royalties. Wireless cable television services are also regulated by the Ministry.
Cable television service providers in Chile are not required to carry any specific programming, but some restrictions may apply with respect to allowable programming. The National Television Council has authority over programming content, and it may impose sanctions on providers who are found to have run programming containing excessive violence, pornography or other objectionable content. Cable television providers have historically retransmitted programming from broadcast television, without paying any compensation to the
broadcasters. However, certain broadcasters have filed lawsuits against VTR claiming that VTR breached their intellectual property rights by retransmitting their signals. This issue is still pending before the Chilean courts and a final judicial decision is not expected until 2009.
Internet. Internet services are considered complementary telecommunication services and, therefore, do not require concessions, permits or licenses.
Telephony. The Ministry also regulates telephone services. The provision of telephony services (both fixed and mobile) requires a public telecommunication service concession. VTR has telecommunications concessions to provide wireline fixed telephony in most major and medium-sized markets in Chile. Telephony concessions are non-exclusive and have renewable 30-year terms. The original term of VTRs wireline fixed telephony concessions expires in November 2025. Telephone long distance services are considered intermediate telecommunications services and, as such, are also regulated by the Ministry. VTR has concessions to provide this service, which is non-exclusive and has a 30-year renewable term.
VTR has been awarded wireless fixed telephony concessions under which it has an exclusive right to use a specific block of spectrum in 3,400 MHz in most of the Chilean regions. With these concessions, VTR plans to offer telephone and Internet services using WiMax technology, which is allowed under the concessions. Wireless fixed telephony concessions are granted for renewable terms of 30 years. Such concessions are non-exclusive.
Local service concessionaires are obligated to provide telephony service to all customers that are within their service area or are willing to pay for an extension to receive service. All local service providers, including VTR, must give long distance telephony service providers equal access to their network connections at regulated prices and must interconnect with all other public services concessionaires of the same type. Under the regulations, public services concessionaires of the same type are those whose systems are technically compatible among themselves.
The Chilean Antitrust Tribunal has found that the local telephone market in Chile is not competitive. As a result, the incumbent local telephony service provider in each market in Chile (typically Compañia de Telecomunicaciones de Chile SA (Telefónica)) must have its local telephone service rates set by regulatory authorities. VTR is not the incumbent service provider in any of the telephony markets where it operates and, therefore, it is not subject to rate regulation. In the future, these telephony markets may be determined by the Chilean Antitrust Tribunal to be competitive, in which case the incumbent operators would no longer be subject to price regulation. Long distance service rates are not currently regulated, since the long distance market is considered highly competitive.
Interconnect charges (including access charges and charges for network unbundling services) are determined by the regulatory authorities. This rate regulation is applicable to incumbent operators and all local and mobile telephone companies, including VTR. The maximum rates that may be charged by each operator for the corresponding service are made on a case-by-case basis, and are effective for five years. VTRs interconnection and unbundling rates were established in June 2002, and are in the process to be renewed during the first quarter of 2008, for an additional five-year period.
Finally, in addition to the conditions on pricing imposed as a result of VTRs combination with Metrópolis Intercom S.A. (see Operations The Americas), with respect to VTRs ability to increase the price of its different telecommunication services to its subscribers, the general Consumer Protection Laws contain provisions that may be interpreted by the authorities to require that any increase in rates to existing subscribers must be previously accepted and agreed to by those subscribers. VTR disagrees with this interpretation and is evaluating its options for adjusting or increasing its subscriber rates in compliance with applicable laws.
The markets for video, broadband Internet and telephony services, and for video programming, generally are highly competitive and rapidly evolving. Consequently, our businesses have faced and are expected to continue to face increased competition in these markets in the countries in which they operate, and specifically as a result of deregulation in the EU. The percentage information provided below for UPC Broadband is based on information from the website of DataXis for the second and third quarters of 2007. The percentage information for Telenet is based on information from the Internet Services Providers Association of Belgium for the third quarter of 2007 for
Internet and on internal market studies for video as of December 31, 2007, and for telephony as of September 30, 2007. For Japan, all percentage information is based on information obtained from the website of the Japanese Ministry of Internal Affairs and Communications, dated as of various dates from December 31, 2006 to December 31, 2007, and internal market studies as of December 31, 2007. For Chile, the percentage information is based on internal market studies, information obtained from public filings by competitors as of December 1, 2007, and market information provided by Latin Panel Chile SA. The competition in certain countries in which we operate is described more specifically after the respective competition overview on video, broadband Internet and telephony.
Our businesses compete directly with a wide range of providers of news, information and entertainment programming to consumers. Depending upon the country and market, these may include: (1) over-the-air broadcast television services; (2) DTH satellite service providers; (3) digital terrestrial television (DTT) broadcasters; (4) other cable operators in the same communities that we serve; (5) other fixed line telecommunications carriers and broadband providers, including the incumbent telecommunications operators, offering video products (a) through broadband Internet connections over networks using DSL or ADSL technology (which we refer to as DSL-TV), (b) through DTH satellite systems, or (c) over fiber optic lines of FTTH networks; (6) satellite master antenna television systems, commonly known as SMATVs, which generally serve condominiums, apartment and office complexes and residential developments; (7) MMDS operators; and (8) movie theaters, video stores and home video products. Our businesses also compete to varying degrees with other sources of information and entertainment, such as newspapers, magazines, books, live entertainment/concerts and sporting events.
Today we are facing increased competition from both new entrants and established competitors using advanced technologies and aggressively priced services. DTT is increasingly a competitive reality in Europe via a number of different business models which range from full blown encrypted pay television to FTA television. Similarly DSL-TV, which is either provided directly by the owner of the network or by a third party, is fast becoming a significant part of the competitive environment. Further launches of DTT and DSL-TV are expected in 2008.
In most of our Central and Eastern European markets, we are also experiencing significant competition from the DTH platform of a Romanian cable, telephony and Internet service provider, which is targeting our analog cable, MMDS and DTH customers with aggressively priced DTH packages, in addition to overbuilding portions of our cable network in Romania. The incumbent telecommunications operator in Romania also operates a competing DTH platform.
In most of our European markets, competitive video services are now being offered by the incumbent telecommunications operator, whose video strategies include DSL-TV, DTH and DTT. The ability of incumbent operators to offer the so-called triple-play of video, broadband Internet and telephony services is exerting growing competitive pressure on our operations, including the pricing and bundling of our video products. In order to gain video market share, the incumbent operators in a number of our larger markets have begun pricing their DSL-TV video packages at a discount to the retail price of the comparable digital cable service and including DVRs as a standard feature.
FTTH networks are, so far, rare in Europe, although they are present or planned in a number of countries. In addition, there is increasing willingness from government and quasi-government entities in Europe to invest in such networks, which would create a new source of competition.
We seek to compete by accelerating the migration of our customers from analog to digital services, upgrading our digital television service to include the functionality for VoD, HD, DVRs and other advanced products and services, and offering attractive content packages and bundles of services at reasonable prices.
The Netherlands. The Netherlands has one of the highest cable penetration rates in Europe with 83% of all households subscribing to a cable service. UPC Netherlands provides video cable services to 37% of the total video households in the Netherlands. Satellite television penetration is nine percent of the total video households. In addition to satellite television, we face increasing competition from DTT and DSL-TV services offered by Royal KPN NV, the incumbent telecommunications operator (KPN). KPN is the majority owner of the Dutch DTT service, Digitenne. It also launched a DSL-TV service in the second quarter of 2006, which includes VoD, an electronic program guide and a DVR. KPN is targeting our price sensitive analog customers and, more recently, our digital customers with discounted Digitenne and DSL-TV video packages, respectively. With its nationwide telecommunications network and ability to offer bundled triple-play services, KPN is expected to be a significant competitor. In 2007, UPC Netherlands launched VoD services across its entire digital subscriber base. DVR and HD boxes are also available to all UPC Netherlands digital customers.
Switzerland. We are the largest cable television provider in Switzerland based on number of video cable subscribers and are the sole provider in substantially all of our network area. Due to a small program offering, competition from terrestrial television in Switzerland is limited, although DTT is now available in most parts of Switzerland. DTH satellite services are also limited due to various legal restrictions such as construction and zoning regulations or rental agreements that prohibit or impede installation of satellite dishes. Given technical improvements, such as the availability of smaller satellite antennae, as well as the continuous improvements of DTH offerings, we expect increased competition from satellite television operators. Swisscom, the incumbent telecommunications operator, launched its DSL-TV service in late 2006 and has grown to 60,000 subscribers through the end of the third quarter of 2007. In 2007, Cablecom rolled out a digital television platform, which provides the ability to offer premium video services such as VoD and interactive television in the future.
Austria. In Austria, we are the largest cable company based on number of video cable subscribers. Our primary competition for video customers is from FTA television received via satellite. Approximately 61% of Austrian households receive free television compared to approximately 39% of Austrian households receiving cable services. UPC Austria provides video cable services to approximately 65% of the households in Austria receiving cable services. UPC Austria faces increased competition in the future from developing technologies. The incumbent telecommunications operator, Telekom Austria AG, launched a DSL-TV service in early 2006, which incorporates advanced product features such as VoD. The public broadcaster, ORF, launched its DTT services in Vienna in October 2006. To stay competitive, in the fourth quarter of 2007, UPC Austria launched a new digital television platform with DVR functionality. This platform will be expanded to include HD channels and HD DVR functionality in 2008.
Hungary. In Hungary, we are the largest cable service provider based on number of video cable subscribers. Of the Hungarian households receiving cable television, 34% receive their cable service from UPC Hungary. In addition, UPC Hungary provides satellite service, branded UPC Direct, to 36% of Hungarian DTH households. Digi TV, a DTH service launched in April 2006, is an aggressive competitor targeting our analog cable and DTH subscribers with low-priced video packages. UPC Hungary also faces competition from Antenna Hungaria Rt., a digital MMDS provider (recently purchased by Swisscom), and from the incumbent telecommunications company Magyar Telekom Rt. (in which Deutshe Telekom has a majority stake), which launched a DSL-TV service in early 2006, including a VoD service to Internet subscribers of its ISP subsidiary, and is now offering triple-play packages. To meet such competition, UPC Hungary will be launching a digital television platform in the second quarter of 2008. The platform will include interactive television content and standard and HD DVR boxes. Programming options will also be expanded to include more premium channels and a selection of HD channels.
Belgium. In Belgium, we are the largest cable service provider based on number of video cable subscribers. Telenet provides video cable services to approximately 40% of the total video households in Belgium.
Telenets principal competitor is Belgacom, the incumbent telecommunications operator, which launched interactive digital television in June 2005 and is expected to launch HD service as part of its video offer in mid-2008. Belgacom also offers double-play and triple-play packages. We also face competition from TV Vlaanderen, which provides digital television via satellite. Our ability to expand our digital interactive services or any other video cable service on the partner networks will largely depend on legal actions related to a non-binding agreement in principle between Telenet and the PICs. See Operations Europe Liberty Global Europe Telenet (Belgium). Notwithstanding, we believe our extensive cable network and the broad acceptance of our basic cable television services, together with our extensive program options, allow us to compete effectively.
With respect to broadband Internet services and online content, our businesses face competition in a rapidly evolving marketplace from incumbent and non-incumbent telecommunications companies, other cable-based ISPs, non-cable-based ISPs and Internet portals, many of which have substantial resources. The Internet services offered by these competitors include both traditional dial-up Internet services and broadband Internet services using DSL, ADSL or FTTH, in a range of product offerings with varying speeds and pricing, as well as interactive computer-
based services, data and other non-video services to homes and businesses. As the technology develops, competition from wireless services using WiMax and other technologies may become significant in the future. We are already seeing competition in Europe from mobile carriers that offer mobile data cards allowing a laptop user to access the carriers broadband wireless data network with varying speeds and pricing. We seek to compete on speed and price, including increasing the maximum speed of our connections and offering varying tiers of service and varying prices, as well as a bundled product offering and a range of value added services.
In the Netherlands, we face competition from KPN, the largest broadband Internet provider, and operators using the unbundled local loop. As of December 31, 2007, UPC Netherlands provided broadband Internet services to 12% of the total broadband Internet market (or about 25% of our current footprint).
In Switzerland, Swisscom is the largest provider of broadband Internet services, with an estimated market share of half of all broadband Internet customers. Cablecom serves 20% of all broadband Internet customers.
UPC Austrias largest competitor with respect to Internet services is the incumbent telecommunications company, Telekom Austria AG. In addition, UPC Austria faces competition from unbundled local loop access and mobile broadband operators, which has increased the competition in the broadband Internet market. The Austrian broadband Internet market is developing into a segmented market based on price, with a strong focus on the low and medium priced markets due to a general price decrease in the Austrian market. To compete, UPC Austria has launched new bundled offers specifically aimed at these market segments. UPC Austria uses its triple-play bundling capabilities across all market segments to encourage customers to switch from other providers to UPC Austrias services and to reduce churn in the existing customer base.
In Hungary, the Internet market is growing rapidly. Our primary competitor is the incumbent telecommunications company, Magyar Telekom. More recently, we are also experiencing competition from mobile broadband operators. As of December 31, 2007, UPC Hungary provided broadband Internet services to 24% of the total broadband Internet market.
In Belgium, the internet market continues to grow at a significant pace. Telenets primary competitor is Belgacom and other DSL service providers. Belgacom is currently upgrading its network to enable enhanced Internet speeds. To compete, Telenet offers an always on broadband Internet service, with one of the fastest speeds available to residential customers. As of September 30, 2007, Telenet provided broadband Internet service to 37% of the total broadband Internet market in Belgium.
With respect to telephony services, our businesses face competition from the incumbent telecommunications operator in each country. These operators have substantially more experience in providing telephony services, greater resources to devote to the provision of telephony services and longstanding customer relationships. In many countries, our businesses also face competition from other cable telephony providers, wireless telephony providers, FTTH-based providers or other indirect access providers. Competition in both the residential and business telephony markets will increase with certain market trends and regulatory changes, such as general price competition, the introduction of carrier pre-selection, number portability, continued deregulation of telephony markets, the replacement of fixed line with mobile telephony, and the growth of VoIP services. As a result, we seek to compete on pricing as well as product innovation, such as personal call manager and unified messaging, and increasing the services we offer.
In the Netherlands, KPN is the dominant telephony provider, but all of the large MSOs, including UPC Netherlands, as well as ISPs, offer VoIP services and continue to gain market share from KPN. In Switzerland, we are the largest VoIP service provider, but Swisscom is the dominant fixed telephony service provider followed by two carriers that offer pre-select services.
In Belgium, Belgacom is the dominant telephony provider with an estimated 72% of the fixed-line telephony market in Flanders, excluding wholesale, at September 30, 2007. To gain market share, we offer VoIP telephony service and emphasize customer service and provide innovative plans to meet the needs of our customers. We also compete with mobile operators, including Belgacom, in the provision of our mobile service in Belgium.
In Austria and in Hungary, the incumbent telephone companies dominate the telephony market. Most of the fixed line competition to the incumbent telephone operators in these countries is from entities that provide carrier pre-select services. Carrier pre-select allows the end user to choose the voice services of operators other than the incumbent while using the incumbents network. We also compete with ISPs that offer VoIP services and mobile operators. In Austria, we serve our subscribers with circuit switched telephony services and VoIP over our cable plant. In Hungary, we provide circuit switched telephony services over our copper wire telephony network and VoIP telephony services over our cable plant. We continue to gain market share with our VoIP telephony service offerings in the Czech Republic, Hungary, Ireland, Poland, Romania, Slovak Republic and Slovenia.
The business of providing programming for cable and satellite television distribution is highly competitive. Our programming businesses directly compete with other programmers for distribution on a limited number of channels. Once distribution is obtained, these programming services compete, to varying degrees, for viewers and advertisers with other cable and over-the-air broadcast television programming services as well as with other entertainment media, including home video (generally video rentals), online activities, movies and other forms of news, information and entertainment.
As of December 31, 2007 we, including our consolidated subsidiaries, had an aggregate of approximately 22,000 employees, certain of whom belong to organized unions and works councils. Certain of our subsidiaries also use contract and temporary employees, which are not included in this number, for various projects. We believe that our employee relations are good.
Financial information related to the geographic areas in which we do business appears in note 21 to our consolidated financial statements included in Part II of this report.
All our filings with the Securities and Exchange Commission (SEC) as well as amendments to such filings are available on our Internet website free of charge generally within 24 hours after we file such material with the SEC. Our website address is www.lgi.com. The information on our website is not incorporated by reference herein.
In addition to the other information contained in this Annual Report on Form 10-K, you should consider the following risk factors in evaluating our results of operations, financial condition, business and operations or an investment in our stock.
The risk factors described in this section have been separated into four groups:
Although we describe below and elsewhere in this Annual Report on Form 10-K the risks we consider to be the most material, there may be other unknown or unpredictable economic, business, competitive, regulatory or other factors that also could have material adverse effects on our results of operations, financial condition, business or operations in the future. In addition, past financial performance may not be a reliable indicator of future performance and historical trends should not be used to anticipate results or trends in future periods.
If any of the events described below, individually or in combination, were to occur, our businesses, prospects, financial condition, results of operations and/or cash flows could be materially adversely affected.
We operate in increasingly competitive markets, and there is a risk that we will not be able to effectively compete with other service providers. The markets for cable television, broadband Internet and telephony in many of the regions in which we operate are highly competitive. In the provision of video services we face competition from DTT broadcasters, video provided over satellite platforms, networks using DSL or ADSL technology, FTTH networks and, in some countries where parts of our systems are overbuilt, cable networks, among others. Our operating businesses in Europe and Japan are facing increasing competition from video services provided by or over the networks of incumbent telecommunications operators. Our operating businesses in Central and Eastern Europe are experiencing significant competition from other DTH providers. In the provision of telephone and broadband Internet services, we primarily compete with the incumbent telecommunications operators in each country in which we operate. These operators typically dominate the market for these services and have the advantage of nationwide networks and greater resources than we have to devote to the provision of these services. Many of the incumbent operators are now offering double-play and triple-play bundles of services. In many countries, we also compete with other operators using the unbundled local loop of the incumbent telecommunications operator to provide these services, other facilities-based operators and wireless providers. Developments in the DSL technology used by the incumbent telecommunications operators and alternative providers have improved the attractiveness of our competitors products and services and strengthened their competitive position. Developments in wireless technology, such as WiMax, may lead to additional competitive challenges.
In some European markets, national and local government agencies may seek to become involved, either directly or indirectly, in the establishment of FTTH networks, DTT systems or other communications systems. We intend to pursue available options to restrict such involvement or to ensure that such involvement is on commercially reasonable terms. There can be no assurance, however, that we will be successful in these pursuits. As a result, we may face competition from entities not requiring a normal commercial return on their investments. In addition, we may face more vigorous competition than would have been the case if there was no government involvement.
The market for programming services is also highly competitive. Programming businesses compete with other programmers for distribution on a limited number of channels. Once distribution is obtained, program offerings must then compete for viewers and advertisers with other programming services as well as with other entertainment media, such as home video, online activities and movies.
We expect the level and intensity of competition to increase in the future from both existing competitors and new market entrants as a result of changes in the regulatory framework of the industries in which we operate, advances in technology, the influx of new market entrants and strategic alliances and cooperative relationships among industry participants. Increased competition may result in increased customer churn, reduce the rate of customer acquisition and lead to significant price competition, in each case resulting in decreases in revenue, operating margins, profitability and cash flows. The inability to compete effectively may result in the loss of subscribers, and our revenue and stock price may suffer.
Changes in technology may limit the competitiveness of and demand for our services, which may adversely impact our business and stock value. Technology in the video, telecommunications and data services industries is changing rapidly. This significantly influences the demand for the products and services that are offered by our businesses. The ability to anticipate changes in technology and consumer tastes and to develop and introduce new and enhanced products on a timely basis will affect our ability to continue to grow, increase our revenue and number of subscribers and remain competitive. New products, once marketed, may not meet consumer expectations or demand, can be subject to delays in development and may fail to operate as intended. A lack of market acceptance of new products and services which we may offer, or the development of significant competitive products or services by others, could have a material adverse impact on our revenue, growth and stock price. Alternatively, if consumer demand for new services in a specific country or region exceeds our expectations, meeting that demand could overburden our infrastructure, which could result in service interruptions and a loss of customers.
Our capital expenditures may not generate a positive return. The video, broadband Internet and telephony businesses in which we operate are capital intensive. Significant capital expenditures are required to add customers to our networks, including expenditures for equipment and labor costs. No assurance can be given that our future upgrades will generate a positive return or that we will have adequate capital available to finance such future
upgrades. If we are unable to, or elect not to, pay for costs associated with adding new customers, expanding or upgrading our networks or making our other planned or unplanned capital expenditures, our growth could be limited and our competitive position could be harmed.
Failure in our technology or telecommunications systems could significantly disrupt our operations, which could reduce our customer base and result in lost revenues. Our success depends, in part, on the continued and uninterrupted performance of our information technology and network systems as well as our customer service centers. The hardware supporting a large number of critical systems for our cable network in a particular country or geographic region is housed in a relatively small number of locations. Our systems are vulnerable to damage from a variety of sources, including telecommunications failures, power loss, malicious human acts and natural disasters. Moreover, despite security measures, our servers are potentially vulnerable to physical or electronic break-ins, computer viruses and similar disruptive problems. Despite the precautions we have taken, unanticipated problems affecting our systems could cause failures in our information technology systems or disruption in the transmission of signals over our networks. Sustained or repeated system failures that interrupt our ability to provide service to our customers or otherwise meet our business obligations in a timely manner would adversely affect our reputation and result in a loss of customers and net revenue.
We may not be able to obtain attractive programming at reasonable cost for our digital cable services, thereby lowering demand for our services. We rely on programming suppliers for the bulk of our programming content. We may not be able to obtain sufficient high-quality programming for our digital cable services on satisfactory terms or at all in order to offer compelling digital cable services. This may reduce demand for our services, thereby lowering our future revenue. It may also limit our ability to migrate customers from lower tier programming to higher tier programming, thereby inhibiting our ability to execute our business plans. Furthermore, we may not be able to obtain attractive country-specific programming for video services. This could further lower revenue and profitability. In addition, must carry requirements may consume channel capacity otherwise available for other services.
Our businesses are conducted almost exclusively outside of the United States, which gives rise to numerous operational risks. Our businesses operate almost exclusively in countries outside the United States and are thereby subject to the following inherent risks:
Operational risks that we experienced in certain countries in the past and may again experience in the future as we seek to expand our operations into new countries include disruptions of services or loss of property or equipment that are critical to overseas businesses due to expropriation, nationalization, war, insurrection, terrorism or general social or political unrest.
We are exposed to potentially volatile fluctuations of the U.S. dollar (our reporting currency) against the currencies of our operating subsidiaries and affiliates. Any increase (decrease) in the value of the U.S. dollar against any foreign currency that is the functional currency of any of our operating subsidiaries or affiliates will cause us to experience unrealized foreign currency translation losses (gains) with respect to amounts already invested in such foreign currencies. We also are exposed to foreign currency risk in situations where our debt is denominated in a currency other than the currency of the entity whose cash flows support our ability to repay or refinance such debt. In addition, our company and our operating subsidiaries and affiliates are exposed to foreign currency risk to the extent that we or they enter into transactions denominated in currencies other than our respective
functional currencies, such as investments in debt and equity securities of foreign subsidiaries, equipment purchases, programming costs, notes payable and notes receivable (including intercompany amounts) that are denominated in a currency other than our respective functional currencies. Changes in exchange rates with respect to these items will result in unrealized (based upon period-end exchange rates) or realized foreign currency transaction gains and losses upon settlement of the transactions. In addition, we are exposed to foreign exchange rate fluctuations related to operating subsidiaries monetary assets and liabilities and the financial results of foreign subsidiaries and affiliates when their respective financial statements are translated into U.S. dollars for inclusion in our consolidated financial statements. Cumulative translation adjustments are recorded in accumulated other comprehensive income (loss) as a separate component of equity. As a result of foreign currency risk, we may experience economic loss and a negative impact on earnings and equity with respect to our holdings solely as a result of foreign currency exchange rate fluctuations. The primary exposure to foreign currency risk for us is to the euro and the Japanese yen due to the percentage of our U.S. dollar revenue that is derived from countries where these currencies are the functional currency. In addition, our operating results and financial condition are expected to be significantly impacted by changes in the exchange rates for the Swiss franc, the Chilean peso, the Hungarian forint, the Australia dollar and other local currencies in Europe.
Our businesses are subject to risks of adverse regulation by foreign governments. Our businesses are subject to the unique regulatory regimes of the countries in which they operate. Cable and telecommunications businesses are subject to licensing eligibility rules and regulations, which vary by country. The provision of telephony services requires licensing from, or registration with, the appropriate regulatory authorities and entrance into interconnection arrangements with the incumbent phone companies. It is possible that countries in which we operate may adopt laws and regulations regarding electronic commerce which could dampen the growth of the Internet services being offered and developed by these businesses. In a number of countries, our ability to increase the prices we charge for our cable television service or make changes to the programming packages we offer is limited by regulation or conditions imposed by competition authorities or is subject to review by regulatory authorities. In addition, regulatory authorities may grant new licenses to third parties, resulting in greater competition in territories where our businesses may already be licensed, and may require that third parties be granted access to our bandwidth, frequency capacity, facilities or services. Programming businesses are subject to regulation on a country by country basis, including programming content requirements, requirements to make programming available on non-discriminatory terms, and service quality standards. In some cases, ownership restrictions may apply to broadband communications and/or programming businesses. Consequently, our businesses must adapt their ownership and organizational structure as well as their pricing and service offerings to satisfy the rules and regulations to which they are subject. A failure to comply with these rules and regulations could result in penalties, restrictions on such business or loss of required licenses.
Businesses that offer multiple services, such as video distribution as well as Internet and telephony, or both video distribution and programming content, are facing increased regulatory review from competition authorities in several countries in which we operate, with respect to their businesses and proposed business combinations. For example, the regulatory authorities in several countries in which we do business have considered from time to time what access rights, if any, should be afforded to third parties for use of existing cable television networks and in certain countries have imposed access obligations. Depending on the terms on which third parties are granted access to our distribution infrastructure for the delivery of video, audio, Internet or other services, those providers could compete with services similar to those which our businesses offer, which could lead to significant price competition and loss of market share.
When we acquire additional communications companies, these acquisitions may require the approval of governmental authorities, which can block, impose conditions on, or delay an acquisition.
We cannot be certain that we will be successful in acquiring new businesses or integrating acquired businesses with our existing operations. Historically, our businesses have grown, in part, through selective acquisitions that enabled them to take advantage of existing networks, local service offerings and region-specific management expertise. We expect to seek to continue growing our businesses through acquisitions in selected markets. Our ability to acquire new businesses may be limited by many factors, including debt covenants, availability of financing, the prevalence of complex ownership structures among potential targets and government regulation. In addition, we have faced increased competition for potential acquisition targets, primarily from private
equity funds. Even if we were successful in acquiring new businesses, the integration of new businesses may present significant costs and challenges, including: realizing economies of scale in interconnection, programming and network operations; eliminating duplicative overheads; and integrating personnel, networks, financial systems and operational systems. We cannot assure you that we will be successful in acquiring new businesses or realizing the anticipated benefits of any completed acquisition.
In addition, we anticipate that most, if not all, companies acquired by us will be located outside the United States. Foreign companies may not have disclosure controls and procedures or internal controls over financial reporting that are as thorough or effective as those required by U.S. securities laws. While we intend to conduct appropriate due diligence and to implement appropriate controls and procedures as we integrate acquired companies, we may not be able to certify as to the effectiveness of these companies disclosure controls and procedures or internal controls over financial reporting until we have fully integrated them.
We may have to pay U.S. taxes on earnings of certain of our foreign subsidiaries regardless of whether such earnings are actually distributed to us, and we may be limited in claiming foreign tax credits; since substantially all of our revenue is generated through foreign investments, these tax risks could have a material adverse impact on our effective income tax rate, financial condition and liquidity. Certain foreign corporations in which we have interests, particularly those in which we have controlling interests, are considered to be controlled foreign corporations under U.S. tax law. In general, our pro rata share of certain income earned by our subsidiaries that are controlled foreign corporations during a taxable year when such subsidiaries have positive current or accumulated earnings and profits will be included in our income when the income is earned, regardless of whether the income is distributed to us. This income, typically referred to as Subpart F income, generally includes, but is not limited to, such items as interest, dividends, royalties, gains from the disposition of certain property, certain currency exchange gains in excess of currency exchange losses, and certain related party sales and services income. In addition, a U.S. stockholder of a controlled foreign corporation may be required to include in income its pro rata share of the controlled foreign corporations increase in the average adjusted tax basis of any investment in U.S. property held by the controlled foreign corporation to the extent the controlled foreign corporation has positive current or accumulated earnings and profits (other than Subpart F income). This is the case even though the U.S. stockholder may not have received any actual cash distributions from the controlled foreign corporation. Since we are investors in foreign corporations, we could have significant amounts of Subpart F income. Although we intend to take reasonable tax planning measures to limit our tax exposure, we cannot assure you that we will be able to do so or that any of such measures will not be challenged.
In general, a U.S. corporation may claim a foreign tax credit against its U.S. federal income taxes for foreign income taxes paid or accrued. A U.S. corporation may also claim a credit for foreign income taxes paid or accrued on the earnings of certain foreign corporations paid to the U.S. corporation as a dividend. Our ability to claim a foreign tax credit for dividends received from our foreign subsidiaries is subject to various limitations. Some of our businesses are located in countries with which the United States does not have income tax treaties. Because we lack treaty protection in these countries, we may be subject to high rates of withholding taxes on distributions and other payments from our businesses and may be subject to double taxation on our income. Limitations on our ability to claim a foreign tax credit, our lack of treaty protection in some countries, and our inability to offset losses in one foreign jurisdiction against income earned in another foreign jurisdiction could result in a high effective U.S. federal income tax rate on our earnings. Since substantially all of our revenue is generated abroad, including in jurisdictions that do not have tax treaties with the United States, these risks are proportionately greater for us than for companies that generate most of their revenue in the United States or in jurisdictions that have such treaties.
We may not report net earnings. We reported losses from continuing operations of $422.6 million, $334.0 million and $59.6 million during 2007, 2006 and 2005, respectively. In light of our historical financial performance, we cannot assure you that we will report net earnings in the near future or at all.
We may not freely access the cash of our operating companies. Our operations are conducted through our subsidiaries. Our current sources of corporate liquidity include (i) our cash and cash equivalents, (ii) interest and dividend income received on our cash and cash equivalents and investments, and (iii) proceeds received upon the
exercise of stock options. LGI also has access to $215.0 million of borrowings pursuant to the LGI Credit Facility. From time to time, we also receive distributions, loans or loan repayments from our subsidiaries or affiliates and proceeds upon the disposition of investments and other assets. The ability of our operating subsidiaries to pay dividends or to make other payments or advances to us depends on their individual operating results and any statutory, regulatory or contractual restrictions to which they may be or may become subject and in some cases our receipt of such payments or advances may be subject to onerous tax consequences. Most of our operating subsidiaries are subject to credit agreements or indentures that restrict sales of assets and prohibit or limit the payment of dividends or the making of distributions, loans or advances to stockholders and partners, including us. In addition, because these subsidiaries are separate and distinct legal entities they have no obligation to provide us funds for payment obligations, whether by dividends, distributions, loans or other payments. With respect to those companies in which we have less than a majority voting interest, we do not have sufficient voting control to cause those companies to pay dividends or make other payments or advances to any of their partners or stockholders, including us.
Certain of our subsidiaries are subject to various debt instruments that contain restrictions on how we finance our operations and operate our businesses, which could impede our ability to engage in beneficial transactions. Certain of our subsidiaries are subject to significant financial and operating restrictions contained in outstanding credit agreements, indentures and similar instruments of indebtedness. These restrictions will affect, and in some cases significantly limit or prohibit, among other things, the ability of those subsidiaries to:
As a result of restrictions contained in these credit facilities, the companies party thereto, and their subsidiaries, could be unable to obtain additional capital in the future to:
In addition, some of the credit agreements to which these subsidiaries are parties require them to maintain financial ratios, including ratios of total debt to operating cash flow and operating cash flow to interest expense. Their ability to meet these financial ratios and tests may be affected by events beyond their control, and we cannot assure you that they will be met. In the event of a default under such subsidiaries credit agreements or indentures, the lenders may accelerate the maturity of the indebtedness under those agreements or indentures, which could result in a default under other outstanding credit facilities. We cannot assure you that any of these subsidiaries will have sufficient assets to pay indebtedness outstanding under their credit agreements and indentures. Any refinancing of this indebtedness is likely to contain similar restrictive covenants.
We are exposed to interest rate risks. Shifts in such rates may adversely affect the debt service obligation of our subsidiaries. We are exposed to the risk of fluctuations in interest rates, primarily through the credit facilities
of certain of our subsidiaries, which are indexed to EURIBOR, LIBOR, TIBOR or other base rates. Although we enter into various derivative transactions to manage exposure to movements in interest rates, there can be no assurance that we will be able to continue to do so at a reasonable cost.
Our substantial leverage could limit our ability to obtain additional financing and have other adverse effects. We seek to maintain our debt at levels that provide for attractive equity returns without assuming undue risk. In this regard, we strive to cause our operating subsidiaries to maintain their debt at levels that result in a consolidated debt balance that is between four and five times our consolidated operating cash flow (as defined in note 21 to our consolidated financial statements). At December 31, 2007, our total consolidated outstanding debt and capital lease obligations was $18.4 billion, of which $383.2 million is due over the next 12 months. While we currently believe we will have the financial resources to meet our financial obligations when they come due, we cannot anticipate what our future condition will be. Our ability to service or refinance our debt is dependent primarily on our ability to maintain or increase our cash provided by operations and to achieve adequate returns on our capital expenditures and acquisitions. Accordingly, if our cash provided by operations declines or we encounter other material liquidity requirements, we may be required to seek additional debt or equity financing in order to meet our debt obligations and other liquidity requirements as they come due. In addition, our current debt levels may limit our ability to incur additional debt financing to fund working capital needs, acquisitions, capital expenditures, or other general corporate requirements. We can give no assurance that any additional debt or equity financing will be available on terms that are as favorable as the terms of our existing debt or at all, particularly in light of current market conditions. During 2007, we used our available liquidity to purchase $1,861.0 million of LGI Series A and Series C common stock. Any cash used by our company in connection with any future purchases of our common stock would not be available for other purposes, including the repayment of debt.
We are subject to increasing operating costs and inflation risks which may adversely affect our earnings. While our operations attempt to increase our subscription rates to offset increases in operating costs, there is no assurance that they will be able to do so. Therefore, operating costs may rise faster than associated revenue, resulting in a material negative impact on our cash flow and earnings. We are also impacted by inflationary increases in salaries, wages, benefits and other administrative costs, the effects of which to date have not been material.
The liquidity and value of our interests in our subsidiaries may be adversely affected by stockholder agreements and similar agreements to which we are a party. We own equity interests in a variety of international broadband communications and video programming businesses. Certain of these equity interests are held pursuant to stockholder agreements, partnership agreements and other instruments and agreements that contain provisions that affect the liquidity, and therefore the realizable value, of those interests. Most of these agreements subject the transfer of such equity interests to consent rights or rights of first refusal of the other stockholders or partners. In certain cases, a change in control of the company or the subsidiary holding the equity interest will give rise to rights or remedies exercisable by other stockholders or partners. Some of our subsidiaries are parties to loan agreements that restrict changes in ownership of the borrower without the consent of the lenders. All of these provisions will restrict the ability to sell those equity interests and may adversely affect the prices at which those interests may be sold.
The loss of certain key personnel could harm our business. We have experienced employees at both the corporate and operational levels who possess substantial knowledge of our business and operations. We cannot assure you that we will be successful in retaining their services or that we would be successful in hiring and training suitable replacements without undue costs or delays. As a result, the loss of any of these key employees could cause significant disruptions in our business operations, which could materially adversely affect our results of operations.
John C. Malone has significant voting power with respect to corporate matters considered by our stockholders. John C. Malone beneficially owns outstanding shares of our common stock representing 27.1% of our aggregate voting power as of February 21, 2007. Including stock options held by Mr. Malone, the voting power of the shares beneficially owned by him was 33.1% at that date. By virtue of Mr. Malones voting power in our company, as well as his position as our Chairman of the Board, Mr. Malone may have significant influence over
the outcome of any corporate transaction or other matters submitted to our stockholders for approval. Mr. Malones rights to vote or dispose of his equity interests in our company are not subject to any restrictions in favor of us other than as may be required by applicable law and except for customary transfer restrictions pursuant to equity award agreements.
It may be difficult for a third party to acquire us, even if doing so may be beneficial to our stockholders. Certain provisions of our restated certificate of incorporation and bylaws may discourage, delay or prevent a change in control of our company that a stockholder may consider favorable. These provisions include the following:
Our incentive plan may also discourage, delay or prevent a change in control of our company even if such change of control would be in the best interests of our stockholders.
LGI Internationals potential indemnity liability to Liberty Media if the spin off is treated as a taxable transaction could materially adversely affect our prospects and financial condition. LGI International entered into a tax sharing agreement with Liberty Media in connection with LGI Internationals spin off from Liberty Media on June 7, 2004. In the tax sharing agreement, LGI International agreed to indemnify Liberty Media and its subsidiaries, officers and directors for any loss, including any adjustment to taxes of Liberty Media, resulting from (1) any action or failure to act by LGI International or any of LGI Internationals subsidiaries following the completion of the spin off that would be inconsistent with or prohibit the spin off from qualifying as a tax-free transaction to Liberty Media and to Liberty Medias stockholders under Section 355 of the Internal Revenue Code of 1986, as amended (the Code) or (2) any breach of any representation or covenant given by LGI International or one of LGI Internationals subsidiaries in connection with any tax opinion delivered to Liberty Media relating to the qualification of the spin off as a tax-free distribution described in Section 355 of the Code. LGI Internationals indemnification obligations to Liberty Media and its subsidiaries, officers and directors are not limited in amount or subject to any cap. If LGI International is required to indemnify Liberty Media and its subsidiaries, officers and directors under the circumstances set forth in the tax sharing agreement, LGI International may be subject to substantial liabilities.
During 2007, we leased our executive offices in Englewood, Colorado. All of our other real or personal property is owned or leased by our subsidiaries and affiliates.
Our subsidiaries and affiliates own or lease the fixed assets necessary for the operation of their respective businesses, including office space, transponder space, headend facilities, rights of way, cable television and telecommunications distribution equipment, telecommunications switches and customer premises equipment and other property necessary for their operations. The physical components of their broadband networks require maintenance and periodic upgrades to support the new services and products they introduce. Our management believes that our current facilities are suitable and adequate for our business operations for the foreseeable future.
From time to time, our subsidiaries and affiliates have become involved in litigation relating to claims arising out of their operations in the normal course of business. The following is a description of certain legal proceedings to which certain of our subsidiaries are parties. In our opinion, the ultimate resolution of these legal proceedings would not likely have a material adverse effect on our business, results of operations, financial condition or liquidity.
Cignal. On April 26, 2002, Liberty Global Europe received a notice that certain former shareholders of Cignal Global Communications (Cignal) filed a lawsuit (the 2002 Cignal Action) against Liberty Global Europe in the District Court in Amsterdam, the Netherlands, claiming damages for Liberty Global Europes alleged failure to honor certain option rights that were granted to those shareholders pursuant to a Shareholders Agreement entered into in connection with the acquisition of Cignal by Liberty Global Europes subsidiary, Priority Telecom NV (Priority Telecom). The Shareholders Agreement provided that in the absence of an IPO, as defined in the Shareholders Agreement, of shares of Priority Telecom by October 1, 2001, the Cignal Shareholders would be entitled until October 31, 2001, to exchange their Priority Telecom shares into shares of Liberty Global Europe, with a cash equivalent value of $200 million in the aggregate, or cash at Liberty Global Europes discretion. Liberty Global Europe believes that it complied in full with its obligations to the Cignal shareholders through the successful completion of the IPO of Priority Telecom on September 27, 2001, and accordingly, the option rights were not exercisable.
On May 4, 2005, the District Court rendered its decision in the 2002 Cignal Action dismissing all claims of the former Cignal shareholders. On August 2, 2005, an appeal against the District Court decision was filed. Subsequently, when the grounds of appeal were filed in November 2005, nine individual plaintiffs, rather than all former Cignal shareholders, continued to pursue their claims. Based on the share ownership information provided by the nine plaintiffs, the damage claims remaining subject to the 2002 Cignal Action are approximately $28 million in the aggregate before statutory interest. A hearing on the appeal was held on May 22, 2007. On September 13, 2007, the Court of Appeals rendered its decision that no IPO within the meaning of the Shareholders Agreement had been realized and accordingly the plaintiffs should have been allowed to exercise their option rights. In the same decision, the Court of Appeals directed the plaintiffs to present more detailed calculations and substantiation of the damages they claimed to have suffered as a result of Liberty Global Europes nonperformance with respect to their option rights, and stated that Liberty Global Europe will be allowed to respond to the calculations submitted by the plaintiffs by separate statement. The Court of Appeals gave the parties leave to appeal to the Dutch Supreme Court and deferred all further decisions and actions, including the calculation and substantiation of the damages, pending such appeal. Liberty Global Europe filed the appeal with the Dutch Supreme Court on December 13, 2007. On February 15, 2008, the plaintiffs filed a conditional appeal with the Dutch Supreme Court, challenging certain aspects of the Court of Appeals decision in the event that Liberty Global Europes appeal is not dismissed by the Dutch Supreme Court.
On June 13, 2006, Liberty Global Europe, Priority Telecom, Euronext NV and Euronext Amsterdam NV were each served with a summons for a new action (the 2006 Cignal Action) purportedly on behalf of all former Cignal shareholders and provisionally for the nine plaintiffs in the 2002 Cignal Action. The 2006 Cignal Action claims, among other things, that the listing of Priority Telecom on Euronext Amsterdam NV in September 2001 did not meet the requirements of the applicable listing rules and, accordingly, the IPO was not valid and did not satisfy
Liberty Global Europes obligations to the Cignal shareholders. Aggregate claims of $200 million, plus statutory interest, are asserted in this action, which amount includes the amount provisionally claimed by the nine plaintiffs in the 2002 Cignal Action. A hearing in the 2006 Cignal Action took place on October 9, 2007, following which, on December 19, 2007, the District Court rendered its decision dismissing the plaintiffs claims against Liberty Global Europe and the other defendants. We expect the plaintiffs will appeal the District Courts decision to the Court of Appeals.
Class Action Lawsuits Relating to the LGI Combination. In the first quarter of 2005, 21 lawsuits were filed in the Delaware Court of Chancery, and one lawsuit was filed in the Denver District Court, State of Colorado, all purportedly on behalf of UGCs public stockholders, regarding the announcement on January 18, 2005 of the execution by UGC and LGI International of the agreement and plan of merger for the combination of the two companies under LGI. The defendants named in these actions include UGC, former directors of UGC, and LGI International. The allegations in each of the complaints, which are substantially similar, assert that the defendants have breached their fiduciary duties of loyalty, care, good faith and candor and that various defendants have engaged in self-dealing and unjust enrichment, approved an unfair price, and impeded or discouraged other offers for UGC or its assets in bad faith and for improper motives. The complaints seek various remedies, including damages for the public holders of UGCs stock and an award of attorneys fees to plaintiffs counsel. On February 11, 2005, the Delaware Court of Chancery consolidated all 21 Delaware lawsuits into a single action, In re UnitedGlobalCom, Inc. Shareholders Litigation (C.A. No. 1012-VCS). Also, on April 20, 2005, the Denver District Court, State of Colorado, issued an order granting a joint stipulation for stay of the action filed in that court, pending the final resolution of the consolidated action in Delaware. On January 7, 2008, the Delaware Chancery Court was formally advised that the parties had reached a binding agreement, subject to the Courts approval, to settle the consolidated action for total consideration of $25 million (inclusive of any award of fees and expenses to plaintiffs counsel). A stipulation of settlement setting forth the terms of the settlement and release of claims was filed with the Delaware Chancery Court on February 20, 2008. The stipulation of settlement is subject to customary conditions, including Court approval following notice to class members and a hearing by the Court to determine the fairness, adequacy and reasonableness of the settlement, and entry of an agreed upon final judgment. If the Court determines not to approve the settlement, the stipulation of settlement will terminate. The defendants continue to believe that a fair process was followed and a fair price was paid in connection with the LGI Combination.
The capitalized terms used in PART II of this Annual Report on Form 10-K have been defined in the notes to our consolidated financial statements. In the following text, the terms, we, our, our company and us may refer, as the context requires, to LGI and its predecessors and subsidiaries.
We have three series of common stock, LGI Series A, LGI Series B and LGI Series C, which trade on the NASDAQ Global Select Market under the symbols LBTYA, LBTYB and LBTYK, respectively. The following table sets forth the range of high and low sales prices of shares of LGI Series A, Series B and Series C common stock for the periods indicated:
As of February 21, 2008, there were 2,574, 126 and 2,627 record holders of LGI Series A, Series B and Series C common stock, respectively (which amounts do not include the number of shareholders whose shares are held of record by banks, brokerage houses or other institutions, but include each such institution as one record holder).
We have not paid any cash dividends on LGI Series A, Series B and Series C common stock, and we have no present intention of so doing. Payment of cash dividends, if any, in the future will be determined by our Board of Directors in light of our earnings, financial condition and other relevant considerations including applicable Delaware law. There are currently no contractual restrictions on our ability to pay dividends in cash or stock, although credit facilities to which certain of our subsidiaries are parties would restrict our ability to access their cash for, among other things, our payment of cash dividends.
Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities
Issuer Purchase of Equity Securities
The following table sets forth information concerning our companys purchase of its own equity securities during the three months ended December 31, 2007:
In addition to the shares listed in the table above, 25,982 shares of LGI Series A common stock and 25,981 shares of LGI Series C common stock were surrendered during the fourth quarter of 2007 by certain of our officers and employees to pay withholding taxes and other deductions in connection with the release of restrictions on restricted stock.
The following tables present selected historical financial information of (i) certain international cable television and programming subsidiaries and assets of LGI Internationals predecessor for periods prior to the June 7, 2004 Spin-Off transaction, whereby LGI Internationals common stock was distributed on a pro rata basis to Liberty Medias stockholders as a dividend, and (ii) LGI (as the successor to LGI International) and its consolidated subsidiaries for periods following such date. The following selected financial data was derived from the audited consolidated financial statements of LGI and its predecessors as of and for the years ended December 31, 2007, 2006, 2005, 2004 and 2003. This information is only a summary, and should be read together with our consolidated financial statements included elsewhere herein.
The following discussion and analysis is intended to assist in providing an understanding of our financial condition, changes in financial condition and results of operations and should be read in conjunction with our consolidated financial statements. This discussion is organized as follows:
Unless otherwise indicated, convenience translations into U.S. dollars are calculated as of December 31, 2007.
We are an international provider of video, voice and broadband Internet services with consolidated broadband communications and/or DTH satellite operations at December 31, 2007 in 15 countries, primarily in Europe, Japan and Chile. Through our indirect wholly-owned subsidiary UPC Holding, we provide video, voice and broadband Internet services in 10 European countries and in Chile. As further described in note 10 to our consolidated financial statements, (i) our 100% ownership interest in Cablecom, a broadband communications operator in Switzerland, and (ii) our 80% ownership interest in VTR, a broadband communications operator in Chile, were transferred from certain of our other indirect subsidiaries to UPC Broadband Holding during the second quarter of 2007. UPC Broadband Holdings European broadband communications operations, including Cablecom, are collectively referred to as the UPC Broadband Division. Through our indirect controlling ownership interest in Telenet (51.1% at December 31, 2007), which we began accounting for as a consolidated subsidiary effective January 1, 2007 (as further described in note 4 to our consolidated financial statements), we provide broadband communications services in Belgium. Through our indirect controlling ownership interest in J:COM (37.9% at December 31, 2007), we provide broadband communications services in Japan. Through our indirect majority ownership interest in Austar (53.4% at December 31, 2007), we provide DTH satellite services in Australia. We also have (i) consolidated broadband communications operations in Puerto Rico and (ii) consolidated interests in certain programming businesses in Europe, Japan (through J:COM) and Argentina. Our consolidated programming interests in Europe are primarily held through Chellomedia, which also provides interactive digital services and owns or manages investments in various businesses in Europe. Certain of Chellomedias subsidiaries and affiliates provide programming and other services to certain of our broadband communications operations, primarily in Europe.
As further described in note 4 to our consolidated financial statements, we have completed a number of transactions that impact the comparability of our 2007, 2006 and 2005 results of operations. Certain of the more significant of these transactions are listed below:
In addition to the transactions listed above, we have also completed a number of less significant acquisitions in Europe and Japan during 2007, 2006 and 2005.
As further discussed in note 5 to our consolidated financial statements, our consolidated financial statements have been reclassified to present UPC Norway, UPC Sweden, UPC France and PT Norway as discontinued operations. Accordingly, in the following discussion and analysis, the operating statistics, results of operations and cash flows that we present and discuss are those of our continuing operations.
From a strategic perspective, we are seeking to build broadband communications and video programming businesses that have strong prospects for future growth in revenue and operating cash flow (as defined in note 21 to our consolidated financial statements). We also seek to leverage the reach of our broadband distribution systems to create new content opportunities in order to increase our distribution presence and maximize operating efficiencies. As discussed further under Liquidity and Capital Resources Capitalization below, we also seek to maintain our debt at levels that provide for attractive equity returns without assuming undue risk.
From an operational perspective, we focus on achieving organic revenue growth in our broadband communications operations by developing and marketing bundled entertainment, information and communications services, and extending and upgrading the quality of our networks where appropriate. As we use the term, organic growth excludes the effects of foreign currency exchange rate fluctuations, acquisitions and dispositions. While we seek to obtain new customers, we also seek to maximize the average revenue we receive from each household by increasing the penetration of our digital cable, broadband Internet and telephony services with existing customers through product bundling and upselling, or by migrating analog cable customers to digital cable services that include various incremental service offerings, such as video on demand, digital video recorders and high definition programming. We plan to continue to employ this strategy to achieve organic revenue and customer growth.
Through our subsidiaries and affiliates, we are the largest international broadband communications operator in terms of subscribers. At December 31, 2007, our consolidated subsidiaries owned and operated networks that passed 30,210,100 homes and served 24,034,700 revenue generating units (RGUs), consisting of 14,741,100 video subscribers, 5,377,600 broadband Internet subscribers and 3,916,000 telephony subscribers.
Including the effects of acquisitions, we added a total of 4,602,500 RGUs during 2007. Excluding the effects of acquisitions (RGUs added on the acquisition date), but including post-acquisition RGU additions, we added 1,445,800 RGUs on an organic basis during 2007 (including 163,100 added by Telenet), as compared to 1,631,000 RGUs that were added on an organic basis during 2006. Our organic RGU growth during 2007 is attributable to the growth of our broadband Internet services, which added 782,100 RGUs, and our digital telephony services, which added 741,100 RGUs. We experienced a net organic decline of 77,400 video RGUs during 2007, as decreases in our analog cable RGUs of 1,110,700 and our multi-channel multi-point (microwave) distribution system (MMDS) video RGUs of 24,400 were not fully offset by increases in our digital cable RGUs of 926,600 and our DTH video RGUs of 131,100. We expect that competitive and other factors will continue to adversely impact our ability to maintain or increase our video RGUs, particularly in Europe.
As discussed under Discussion and Analysis of our Consolidated Operating Results below, our consolidated revenue increased 9.3% on an organic basis during 2007, as compared to a 12.4% organic increase during 2006. The decline in our organic revenue growth rate is due primarily to increasing competition and the continuing maturation of certain of our broadband communications markets. In particular, increasing competition in the Netherlands, Austria, Romania, the Czech Republic and other parts of Europe has contributed to a lower number of organic RGU additions in our European broadband communications markets in 2007, as compared to 2006. In Romania, where we are seeing significant competition from several alternate providers, we experienced an organic decline of 26,900 RGUs during 2007, as significant declines in Romanias video RGUs were only partially offset by increases in broadband Internet and telephony RGUs. Competition also negatively impacted our ability to maintain or increase our monthly subscription fees for our service offerings during 2007, as we increasingly used bundling and promotional discounts to maintain or increase our RGUs. In this regard, we experienced declines from 2006 to 2007 in the average monthly subscription revenue earned per average RGU (ARPU) from broadband Internet and telephony services in most of our broadband communications markets. The negative impact of these declines was somewhat offset by improvements in (i) the mix of services provided in most of our markets, and (ii) video ARPU in certain of our markets, particularly those where we are offering digital cable services, as the ARPU from digital cable services is significantly higher than the ARPU we receive for analog cable services. Although we monitor and respond to competition in each of our markets, no assurance can be given that our efforts to improve our competitive position will be successful, and accordingly, that we will be able to reverse negative trends such as those described above. For additional information concerning the revenue trends of our reportable segments, see Discussion and Analysis of our Reportable Segments Revenue 2007 compared to 2006 below.
Despite the competitive pressures that we experienced during 2007, we were able to manage our operating and SG&A expenses such that we experienced expansion in the operating cash flow margins (operating cash flow divided by revenue) of each of our reportable segments (except for our Telenet (Belgium) segment, which reflects the consolidation of Telenet effective January 1, 2007). For additional information, see the discussion of the operating and SG&A expenses and the operating cash flow margins of our reportable segments under Discussion and Analysis of our Reportable Segments below.
Over the next few years, we believe that we will continue to be challenged to maintain recent historical organic revenue and RGU growth rates as we expect that competition will continue to grow and that the markets for certain of our service offerings will continue to mature. During this time frame, we expect that (i) increases in our digital cable, telephony, broadband Internet and DTH RGUs will more than offset decreases in our analog cable RGUs and (ii) the ARPU of our reportable segments will remain relatively unchanged, as the negative impact of competitive factors, particularly with respect to our broadband Internet and telephony services, is expected to offset the positive impacts of (a) the continued migration of video subscribers from analog to digital cable services and (b) other improvements in the mix of services provided to our subscriber base. We also believe that during this time frame we will see (i) modest improvements in our operating cash flow margins and (ii) declines in our aggregate capital expenditures and capital lease additions, as a percentage of revenue. Notwithstanding the above, we expect that we will be challenged to maintain or improve our current subscriber retention rates as competition grows. To the extent that we experience higher subscriber disconnect rates, we expect that it will be more difficult to control certain components of our operating, marketing and capital costs. Our expectations with respect to the items discussed in this paragraph are subject to competitive developments and other factors outside of our control, and no assurance can be given that actual results in future periods will not differ materially from our expectations.
The video, broadband Internet and telephony businesses in which we operate are capital intensive. Significant capital expenditures are required to add customers to our networks, including expenditures for equipment and labor costs. As noted above, we expect that the percentage of revenue represented by our aggregate capital expenditures and capital lease additions will decline over the next few years, due primarily to our belief that the capital required to upgrade our broadband communications networks will decline over this time frame. No assurance can be given that actual results will not differ materially from our expectations as factors outside of our control, such as significant increases in competition or the introduction of new technologies, could cause us to decide to undertake previously unplanned upgrades of our broadband communications networks in the impacted markets. In addition, no assurance can be given that our future upgrades will generate a positive return or that we will have adequate capital available to
finance such future upgrades. If we are unable to, or elect not to, pay for costs associated with adding new customers, expanding or upgrading our networks or making our other planned or unplanned capital expenditures, our growth could be limited and our competitive position could be harmed.
Our analog video service offerings include basic programming and expanded basic programming in some markets. We tailor both our basic channel line-up and our additional channel offerings to each system according to culture, demographics, programming preferences and local regulation. Our digital video service offerings include basic and premium programming and, in some markets, incremental product and service offerings such as enhanced pay-per-view programming (including video-on-demand and near video-on-demand), digital video recorders and high definition television services.
We offer broadband Internet services in all of our broadband communications markets. Our residential subscribers generally access the Internet via cable modems connected to their personal computers at various speeds depending on the tier of service selected. We determine pricing for each different tier of broadband Internet service through analysis of speed, data limits, market conditions and other factors.
We offer telephony services in all of our broadband communications markets. In Austria, Belgium, Chile, Hungary, Ireland, Japan and the Netherlands, we provide circuit switched telephony services and voice-over-Internet-protocol, or VoIP telephony services. Telephony services in the remaining markets are provided using VoIP technology. In select markets, including Australia, we also offer mobile telephony services using third-party networks.
As noted under Overview above, the comparability of our operating results during 2007, 2006 and 2005 is affected by acquisitions. In the following discussion, we quantify the impact of acquisitions on our operating results. The acquisition impact represents our estimate of the difference between the operating results of the periods under comparison that is attributable to the timing of an acquisition. In general, we base our estimate of the acquisition impact on an acquired entitys operating results during the first three months following the acquisition date such that changes from those operating results in subsequent periods are considered to be organic changes.
Changes in foreign currency exchange rates have a significant impact on our operating results as all of our operating segments, except for Puerto Rico, have functional currencies other than the U.S. dollar. Our primary exposure is currently to the euro and the Japanese yen. In this regard, 38.8% and 25.0% of our U.S. dollar revenue during 2007 was derived from subsidiaries whose functional currency is the euro and the Japanese yen, respectively. In addition, our operating results are impacted by changes in the exchange rates for the Swiss franc, the Chilean peso, the Hungarian forint, the Australian dollar and other local currencies in Europe.
The amounts presented and discussed below represent 100% of each businesss revenue and operating cash flow. As we have the ability to control Telenet, J:COM, VTR and Austar, GAAP requires that we consolidate 100% of the revenue and expenses of these entities in our consolidated statements of operations despite the fact that third parties own significant interests in these entities. The third-party owners interests in the operating results of Telenet, J:COM, VTR, Austar and other less significant majority owned subsidiaries are reflected in minority interests in earnings of subsidiaries, net, in our consolidated statements of operations. Our ability to consolidate J:COM is dependent on our ability to continue to control Super Media, which will be dissolved in February 2010 unless we and Sumitomo mutually agree to extend the term. If Super Media is dissolved and we do not otherwise control J:COM at the time of any such dissolution, we will no longer be in a position to consolidate J:COM. When reviewing and analyzing our operating results, it is important to note that other third-party entities own significant interests in Telenet, J:COM, VTR and Austar and that Sumitomo effectively has the ability to prevent our company from consolidating J:COM after February 2010.
Discussion and Analysis of our Reportable Segments
All of the reportable segments set forth below derive their revenue primarily from broadband communications services, including video, voice and broadband Internet services. Certain segments also provide CLEC and other B2B services. At December 31, 2007, our operating segments in the UPC Broadband Division provided services in
10 European countries. Our Other Central and Eastern Europe segment includes our operating segments in Czech Republic, Poland, Romania, Slovak Republic and Slovenia. Telenet, J:COM and VTR provide broadband communications services in Belgium, Japan and Chile, respectively. Our corporate and other category includes (i) Austar and other less significant operating segments that provide broadband communications services in Puerto Rico and video programming and other services in Europe and Argentina and (ii) our corporate category. Intersegment eliminations primarily represent the elimination of intercompany transactions between our broadband communications and programming operations, primarily in Europe.
As further discussed in notes 4 and 5 to our consolidated financial statements, we sold UPC Belgium to Telenet on December 31, 2006, and we began accounting for Telenet as a consolidated subsidiary effective January 1, 2007. As a result, we began reporting a new segment as of January 1, 2007 that includes Telenet from the January 1, 2007 consolidation date and UPC Belgium for all periods presented. The new reportable segment is not a part of the UPC Broadband Division. Segment information for all periods presented has been restated to reflect the transfer of UPC Belgium to the Telenet segment. We present only the reportable segments of our continuing operations in the following tables.
For additional information concerning our reportable segments, including a discussion of our performance measures and a reconciliation of total segment operating cash flow to our consolidated earnings (loss) before income taxes, minority interests and discontinued operations, see note 21 to our consolidated financial statements.
The tables presented below in this section provide a separate analysis of each of the line items that comprise operating cash flow (revenue, operating expenses and SG&A expenses, excluding allocable stock-based compensation expense in accordance with our definition of operating cash flow) as well as an analysis of operating cash flow by reportable segment for (i) 2007 as compared to 2006, and (ii) 2006 as compared to 2005. In each case, the tables present (i) the amounts reported by each of our reportable segments for the comparative periods, (ii) the U.S. dollar change and percentage change from period to period and (iii) the percentage change from period to period, after removing foreign currency effects (FX). The comparisons that exclude FX assume that exchange rates remained constant during the periods that are included in each table. As discussed under Quantitative and Qualitative Disclosures about Market Risk below, we have significant exposure to movements in foreign currency rates. We also provide a table showing the operating cash flow margins of our reportable segments for 2007, 2006 and 2005 at the end of this section.
Substantially all of the significant increases during 2007, as compared to 2006, in our revenue, operating expenses and SG&A expenses for our Telenet (Belgium) segment are attributable to the effects of our January 1, 2007 consolidation of Telenet, and accordingly, we do not separately discuss the results of our Telenet (Belgium) segment below. Telenet provides services over broadband networks owned by Telenet and the Telenet Partner Network owned by the PICs (as further described in note 10 to our consolidated financial statements), with the networks owned by Telenet accounting for approximately 70% of the aggregate homes passed by the combined networks and the Telenet Partner Network accounting for the remaining 30%. For information concerning Telenets ongoing negotiations and litigation with the PICs with respect to the Telenet Partner Network, see note 20 to our consolidated financial statements. Telenets organic revenue growth rate in 2008 is expected to fall within a range of 5% to 6%. This growth rate reflects, among other factors, the effects of anticipated declines in Telenets revenue from set top box sales and interconnect fees in 2008, as compared to 2007. No assurance can be given that actual results in future periods will not differ materially from our expectations.
Revenue derived by our broadband communications operating segments includes amounts received from subscribers for ongoing services, installation fees, advertising revenue, mobile telephony revenue, channel carriage fees, telephony interconnect fees and amounts received for CLEC and other B2B services. In the following discussion, we use the term subscription revenue to refer to amounts received from subscribers for ongoing services, excluding installation fees and mobile telephony revenue.
The rates charged for certain video services offered by our broadband communications operations in Europe and Chile are subject to rate regulation. Additionally, in Europe, our ability to bundle or discount our services may be constrained if we are held to be dominant with respect to any product we offer. The amounts we charge and incur
with respect to telephony interconnection fees are also subject to regulatory oversight in many of our markets. Adverse outcomes from rate regulation or other regulatory initiatives could have a significant negative impact on our ability to maintain or increase our revenue.
Revenue of our Reportable Segments
Revenue 2007 compared to 2006
N.M. Not Meaningful
The Netherlands. The Netherlands revenue increased $136.7 million or 14.8% during 2007, as compared to 2006. Excluding the effects of foreign exchange rate fluctuations, the Netherlands revenue increased $48.0 million or 5.2%. This increase is attributable to an increase in subscription revenue, primarily due to higher average RGUs, as increases in average telephony and broadband Internet RGUs were only partially offset by a decline in average video RGUs. The decline in average video RGUs includes a decline in average analog cable RGUs that was not fully offset by a gain in average digital cable RGUs. The decline in average video RGUs is largely due to the effects of competition from KPN, the incumbent telecommunications operator in the Netherlands. We believe that most of the declines in the Netherlands analog cable RGUs during 2007 were attributable to competition from KPN. We expect that we will continue to face significant competition from KPN in future periods.
ARPU was relatively unchanged during 2007, as the positive impacts of (i) an improvement in the Netherlands RGU mix, attributable to a higher proportion of digital cable, telephony and broadband Internet RGUs, and (ii) an increase in ARPU from video services were offset by decreases in ARPU from broadband Internet and telephony services. The increase in ARPU from video services primarily is attributable to (i) the positive impact of growth in the Netherlands digital cable services, and (ii) a January 2007 price increase for certain analog cable services. The decrease in ARPU from broadband Internet services primarily is attributable to a higher proportion of broadband Internet customers selecting lower-priced tiers of service and higher bundling discounts. The decrease in ARPU from telephony services during 2007 is due primarily to higher promotional and bundling discounts.
Subscription revenue for the 2006 period includes $9.6 million related to the release of deferred revenue (including $4.8 million that was released during the fourth quarter of 2006) in connection with rate settlements with certain municipalities. There were no such releases during 2007.
As compared to 2006, the net number of digital cable RGUs added by the Netherlands during 2007 declined substantially. This decline is due in part to the continued emphasis on more selective marketing strategies. Although the Netherlands emphasis on more selective marketing strategies has resulted in a more gradual pacing of the Netherlands digital migration efforts, we have seen the positive impact of these strategies in 2007 in the form of reductions in certain marketing, operating and capital costs and improved subscriber retention rates.
Switzerland. Switzerlands revenue increased $102.1 million or 13.2% during 2007, as compared to 2006. Excluding the effects of foreign exchange rate fluctuations, Switzerlands revenue increased $64.3 million or 8.3%. Most of this increase is attributable to an increase in subscription revenue, as the number of average broadband Internet, telephony and video RGUs was higher during 2007, as compared to 2006. ARPU remained relatively constant during 2007, as the positive impact of an improvement in Switzerlands RGU mix, attributable to a higher proportion of telephony, broadband Internet and digital cable RGUs, was offset by a decrease in ARPU from telephony and broadband Internet services. ARPU from video services remained relatively unchanged during 2007 as the positive impact of Switzerlands digital migration efforts was offset by the negative impact of Switzerlands adoption of certain provisions of the regulatory framework established by the Swiss Price Regulator in November 2006. In order to comply with this regulatory framework, Switzerland began offering a lower-priced tier of digital cable services and decreased the rental price charged for digital cable set top boxes during the second quarter of 2007. ARPU from telephony services decreased during 2007 primarily due to the impact of lower call volumes and competitive factors. The decrease in ARPU from broadband Internet services primarily is attributable to customers selecting lower-priced tiers of service and competitive factors. An increase in revenue from B2B services and other non-subscription revenue also contributed to the increase in Switzerlands revenue.
Austria. Austrias revenue increased $83.1 million or 19.8% during 2007, as compared to 2006. This increase includes a $21.4 million increase that is attributable to the impacts of the March 2006 INODE acquisition and the October 2007 Tirol acquisition. Excluding the effects of the INODE and Tirol acquisitions and foreign exchange rate fluctuations, Austrias revenue increased $20.2 million or 4.8%. The majority of this increase is attributable to an increase in subscription revenue, as the number of average broadband Internet RGUs and, to a lesser extent, telephony and video RGUs, was higher during 2007, as compared to 2006. ARPU remained relatively unchanged during 2007, as the positive impacts of (i) an improvement in Austrias RGU mix, primarily attributable to a higher proportion of broadband Internet RGUs, and (ii) a January 2007 rate increase for analog cable services were offset by the negative impacts of lower ARPU from broadband Internet and telephony services. The decrease in ARPU from broadband Internet services is attributable to higher discounting in response to increased competition and a higher proportion of customers selecting lower-priced tiers of service. The decrease in ARPU from telephony services primarily is due to (i) lower call volumes, (ii) an increase in the proportion of subscribers selecting VoIP telephony service, which generally is priced lower than Austrias circuit switched telephony service, and (iii) higher discounting. Telephony revenue in Austria decreased slightly on an organic basis during 2007, as the negative effect of the decrease in telephony ARPU was only partially offset by the positive impact of higher average telephony RGUs. An increase in revenue from B2B services also contributed to the increase in Austrias revenue during 2007.
Ireland. Irelands revenue increased $44.6 million or 17.0% during 2007 as compared to 2006. Excluding the effects of foreign exchange rate fluctuations, Irelands revenue increased $19.1 million or 7.3%. This increase is attributable to an increase in subscription revenue as a result of higher average RGUs and slightly higher ARPU during 2007, as compared to 2006. The increase in average RGUs primarily is attributable to an increase in the average number of broadband Internet RGUs. The increase in ARPU during 2007 primarily is due to the positive effects of (i) an improvement in Irelands RGU mix, primarily attributable to a higher proportion of digital cable RGUs, (ii) a November 2006 price increase for certain broadband Internet and MMDS video services and (iii) lower promotional discounts for broadband Internet services.
Hungary. Hungarys revenue increased $70.0 million or 22.8% during 2007, as compared to 2006. This increase includes $1.9 million attributable to the impact of a January 2007 acquisition. Excluding the effects of the acquisition and foreign exchange rate fluctuations, Hungarys revenue increased $20.9 million or 6.8%. The
majority of this increase is attributable to higher subscription revenue, as higher average numbers of broadband Internet and telephony RGUs were only partially offset by lower average numbers of analog cable and DTH RGUs. ARPU declined slightly during 2007, as the positive effects of (i) improvements in Hungarys RGU mix, primarily attributable to a higher proportion of broadband Internet RGUs, and (ii) a January 2007 rate increase for analog cable services were more than offset by the negative impacts of (a) increases in discounting due to competitive factors, (b) a higher proportion of customers selecting lower-priced broadband Internet tiers, (c) growth in Hungarys VoIP telephony service, which generally is priced slightly lower than Hungarys circuit switched telephony services, and (d) lower telephony call volume. Due primarily to the decline in ARPU from telephony services, Hungary also experienced a slight organic decline in revenue from telephony services during 2007, as compare to 2006. Hungary is continuing to experience organic declines in analog cable RGUs, primarily due to the effects of competition from an alternative DTH provider. The majority of Hungarys analog cable subscriber losses during 2007 have occurred in certain municipalities where the technology of our networks limits our ability to create a less expensive tier of service that would more effectively compete with the alternative DTH provider. Due to a decrease in the average number of DTH and analog cable RGUs and lower ARPU from DTH video services as a result of competitive and other factors, Hungary experienced a slight decline in revenue from video services during 2007, as compared to 2006. An increase in revenue from B2B services, which more than offset decreases in certain other categories of non-subscription revenue, also contributed to the increase in Hungarys revenue during 2007.
Other Central and Eastern Europe. Other Central and Eastern Europes revenue increased $232.1 million or 40.4% during 2007, as compared to 2006. This increase includes $69.2 million attributable to the aggregate impact of the September 2006 consolidation of Karneval and other less significant acquisitions. Excluding the effects of these acquisitions and foreign exchange rate fluctuations, Other Central and Eastern Europes revenue increased $68.6 million or 11.9%. This increase primarily is attributable to an increase in subscription revenue as a result of higher average RGUs during 2007, as compared to 2006. The increase in average RGUs during 2007 is attributable to higher average numbers of (i) broadband Internet RGUs (mostly in Poland, Romania and the Czech Republic), (ii) telephony RGUs (mostly related to the expansion of VoIP telephony services in Poland, the Czech Republic and Romania) and, (iii) to a much lesser extent, video RGUs as increases in average video RGUs in Slovenia, the Czech Republic and Poland were partially offset by decreases in Romania. ARPU in our Other Central and Eastern Europe segment increased slightly during 2007 as the positive effects of (i) an improvement in RGU mix, primarily attributable to a higher proportion of broadband Internet RGUs, (ii) January 2007 rate increases for video services in certain countries and (iii) somewhat higher ARPU from telephony services due to increased call volumes (primarily in Poland and Romania) were offset by the negative effects of higher discounting related to increased competition and a higher proportion of broadband Internet subscribers selecting lower-priced tiers.
We continue to experience increased competition in Romania, the Czech Republic and other parts of Central and Eastern Europe, due largely to the effects of competition from alternative providers. In Romania, where we are facing intense competition from multiple alternative providers (two of which are also offering telephony and broadband Internet services), we experienced significant organic declines in video RGUs during 2007. In response to the elevated level of competition in Romania, we are implementing aggressive pricing and marketing strategies in order to mitigate or reverse organic analog cable RGU declines. These strategies, which are expected to adversely impact Romanias organic revenue growth rates and result in increased capital expenditures in the near term, are being implemented with the objective of maintaining our market share in Romania and enhancing our prospects for continued revenue growth in future periods. In light of the foregoing discussion, we expect Romanias organic revenue growth rate in 2008 to be significantly lower than Romanias organic revenue growth rate during 2007, and that the overall organic revenue growth rate for our Other Central and Eastern Europe segment will be somewhat impacted by the lower growth rate in Romania. No assurance can be given that actual results in future periods will not differ materially from our expectations.
J:COM (Japan). J:COMs revenue increased $346.8 million or 18.2% during 2007, as compared to 2006. This increase includes a $194.0 million increase that is attributable to the aggregate impact of (i) the September 2007 acquisition of JTV Thematics, (ii) the September 2006 acquisition of Cable West and (iii) other less significant acquisitions. Excluding the effects of these acquisitions and foreign exchange rate fluctuations, J:COMs revenue increased $175.6 million or 9.2%. Most of this increase is attributable to an increase in subscription revenue, due primarily to a higher average number of video, telephony and broadband Internet RGUs during 2007. ARPU
remained relatively unchanged during 2007, as the positive effects of (i) a higher proportion of digital cable RGUs and (ii) a higher proportion of broadband Internet subscribers selecting higher-priced tiers of service were largely offset by the negative effects of bundling discounts and lower telephony ARPU due to decreases in customer call volumes.
VTR (Chile). VTRs revenue increased $76.0 million or 13.6% during 2007, as compared to 2006. Excluding the effects of foreign exchange rate fluctuations, VTRs revenue increased $65.1 million or 11.7%. Most of this increase is attributable to an increase in subscription revenue, due primarily to a higher average number of broadband Internet, telephony and video RGUs during 2007. ARPU decreased somewhat during 2007, as the positive impacts of (i) inflation adjustments to certain rates for analog cable and broadband Internet services, (ii) increases in the proportion of subscribers selecting higher-speed broadband Internet services over the lower-speed alternatives and digital cable over analog cable services, and (iii) the migration of a significant number of telephony subscribers to a fixed-rate plan were more than offset by the negative effects of (a) higher bundling discounts, (b) an increase in the proportion of subscribers selecting lower-priced tiers of analog video services and (c) lower call volumes for telephony subscribers that remain on a usage-based plan.
Revenue 2006 compared to 2005