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WIKI ANALYSIS
Virgin Media, Inc. (VMED) is a telecommunications firm that sells cable television, high speed internet, land line and mobile phone service in the United Kingdom. Virgin Media is the only cable provider currently operating in the UK, and it served 3.5 million customers in 2006 (about 27% of the UK's total pay-TV market). Virgin is the first British firm to use a bundling strategy, offering television, phone, and internet service in one discounted package. This strategy boosted revenues for cable firms in the United States, notably Comcast (CMCSA) and Time Warner Cable (TWC), but it has only recently gained traction in the UK. Virgin Media remains the only British firm that can offer a quadruple play of pay-TV, Broadband Technologies , Fixed-line telecommunication , and mobile phone service to its customers.
Despite these advantages, and average revenues of £1 billion in each quarter from June 2006 to June 2007, the company lost money in 2006 and has been losing customers. Financial losses are partially a result of high overhead costs from the company's recent acquisitions - the merger of ntl and Telewest in 2005, and the purchase of Virgin Mobile in 2006 that allowed the firm to expand into cellular phone service while securing the rights to the Virgin brand name for the next 30 years. A more significant factor, however, is the number of customers that Virgin Media has been losing to British Sky Broadcasting Group (BSY), a result of the fact that that BskyB has exclusive rights to some premium content, including many sports matches, that Virgin cannot broadcast.
BSkyB offers satellite TV service to 8.5 million customers, dwarfing Virgin Media's 3.5 million cable customers. The firm also has exclusive access to premium television content, including live sporting events and popular entertainment programming. Virgin Media must negotiate with BSkyB in order to broadcast these popular programs, and recently BSkyB has raised the prices it charges VMED while lowering what it will pay for the content that Virgin provides in return. Virgin Media has asked the British government to intervene on its behalf, and the result of this dispute will be a major factor in determining VMED's future profitability.
Company Overview
In June 2006, Virgin Media served 27% of the pay-TV customers in the UK. It also provided service to 17% of British homes with fixed telephony, 12% of Broadband internet consumers, and 6.4% of mobile phone users.
Virgin Media manages its business in three major divisions:
- Cable (83.5% of 2006 revenue) includes cable television service over the company's network, and broadband and fixed-line telephone services to consumers, businesses and public organizations. This includes 3.5 million cable, 3.2 million internet, and 4 million telephone customers. As of December 2006, 75% of Virgin's residential customers subscribed to more than one of its services, and 41% subscribed to a triple-play of land line phone, Internet, and cable TV.
- Mobile (8.1% of 2006 revenue)uses T-Mobile's UK network Deutsche Telekom AG (DT) under the brand name Virgin Mobile, and served approximately 4.5 million customers in 2006. The company hopes to use quadruple-play offerings to to drive mobile sales through its existing cable customer base, and likewise to draw more cable customers from its mobile network.
- Content (8.4% of 2006 revenue) includes the operations of Virgin Media's United Kingdom television channels, such as LivingTV and Bravo. While it is a low percentage of revenue, content plays a significant strategic role for Virgin Media. VMED must leverage its own content offerings in negotiations with BSkyB for access to BskyB's programs - and if BSkyB is uninterested in Virgin Media's programming, then it is unlikely to negotiate a favorable deal for access to its exclusive events.[1].
As of December 2006, 75% of Virgin's residential customers subscribed to more than one of its services, and 41% subscribed to a triple-play of land line phone, Internet, and cable TV.
Each of Virgin Media's four services is a revenue-generating unit (RGU), and the firm’s per customer RGUs improved from 2.06 in 2005 to 2.17 in 2006. Its main competitor BskyB recently began added Broadband to its offerings through the acquisition of Easynet in February 2006, and earns an even higher percentage of its revenues through pay-TV subscriptions.[3]
| Virgin Media vs. British Sky Broadcasting | VMED[4] | BSY[5] |
|---|---|---|
| Total subscribers (thousands) | 4,892 | 8,582 |
| Net add (thousands) | -37 | 406 |
| Churn | 1.70% | 12.40% |
| Total revenue | £3,602MM | £4,551MM |
| RGU/customer[6] | 2.17 | n/a |
| ARPU[7] | £42.82[8] | £33.07 [9] |
Trends and Forces
- Virgin Media is the only UK firm offering a package of four telecommunications services. Virgin's strongest asset is its quadruple-play - the discounted offering of paid television, Internet, land line and mobile phone. The company is anticipating that demand for these integrated services will continue to grow, and that consumers want to buy all of these services from one source. If, however, consumers opt to pay separately for wireless service, internet, or television, this could undermine Virgin Media's growth plan. Another potential deterrent to the quadruple play advantage is that many consumers are abandoning fixed line telephones and relying exclusively on cell phones. This would make Virgin's land line service irrelevant to many customers.
- Virgin must negotiate with British Sky Broadcasting for access to premium content. Content remains the weakest piece of Virgin Media's portfolio. Since satellite TV has a much wider U.K. consumer base than cable TV, BSkyB is better equipped to leverage the high fixed costs of bids for live content such as football matches. The high debt levels of Virgin's predecessor NTL further prevented it from bidding for the rights to these events. BSkyB thus controls the rights to the most popular sports and movie programming content, and has used these rights to create premium pay-TV channels. Virgin Media also owns some of its own content, but these are not nearly as popular as BSkyB channels such as Sky Sports. Virgin Media must negotiate with BSkyB for the ability to broadcast select events, and this has become increasingly difficult (See below, "Competition").
- The Pay-TV Market is expanding.: Two major developments have spurred the growth of the pay-TV market in the UK - Video on demand and high definition television. In 2005, 700,000 HDTV sets were sold in the UK, and in 2006 these sales increased over 100%, driven by the World Cup in Germany that summer. BSkyB now offers eleven channels in HD, with 292,000 subscribers, and HD is the company's fastest selling product. [10] Virgin Media has moved to take advantage of the trend toward HDTV and on-demand with its new V+ service, which allows viewers to record up to 80 hours of shows and includes a free subscription to Virgin's HDTV. Currently, well over half of the UK's homes do not subscribe to either satellite or cable TV, choosing instead to use a conventional antennae or nothing at all. As the TV industry continues to develop its HD and on-demand offerings, Virgin (and BSkyB's) products become more attractive to consumers. There is tremendous revenue potential for both leading pay-TV firms if just a fraction of the UK's currently unsubscribed users decided to sign up in the near future.
- The transition from analog to digital TV will free up bandwidth and allow Virgin Media to expand its offerings. Currently, a disproportionate percentage of Virgin's network bandwidth is devoted to the broadcast of analog TV channels. The phase-out of this obsolete technology began when the Japanese introduced digital television in the 1980s, and analog TV will be extinct by the end of the decade (in the U.S., Congress has set a date in February 2009 as the deadline for television providers to switch to digital).[11]. Television providers have been simultaneously broadcasting analog and digital channels during the conversion. A complete switch to digital TV will free up over 1/3 of Virgin Media's network bandwidth, allowing it to offer more TV channels, increase the speed and capacity of its Broadband internet access, and reduce the cost of providing service.
Competition
Virgin Media is the only UK company offering integrated services in all four areas of telecommunications - and it faces a different set of competitors in each of these sectors.
Television:
Main Competitors
- British Sky Broadcasting Group (BSY) - Satellite service
- Freeview - with set-top box or digital TV
Virgin Media and BSkyB control the market for pay-TV in the U.K. BSkyB operates via satellite and has a high overall share of the UK pay-TV market. Virgin Media has a lower share but remains the lone cable provider.
BSkyB also controls the rights to live TV events and premium programming content, and recently it jacked up the rates it charges Virgin Media to broadcast these shows. Virgin Media sued BSkyB for these broadcasting rights, and the U.K.'s Office of Fair Trading determined that BSkyB must provide Virgin with fair access to its content. This finding voided an existing agreement between the two firms, and although no new agreement is in place Virgin's customers can still pay for access to a sample of BSkyB's premium channels.
Another competitor to both Virgin and BSkyB is Freeview, which carries no monthly fee and requires only the purchase of a top box or a digital television. This service is provided by a consortium of BSkyB, National Grid Wireless and the BBC. Freeview offers a limited range of television channels, including the traditional analog channels but not the most popular pay television channels, such as Sky Sports, Sky Movies and MTV.
Internet:
Main Competitors
- BT GROUP (BT) - direct service provider and the UK's market leader in Broadband technologies
- Orange (formerly Wanadoo) - indirect service provider
- AOL - indirect
- Tiscali - indirect
- Easynet/BSkyB - indirect, through local loop unbundling
Virgin Media provides Broadband internet access through direct connection, via its own cable network, and indirectly through BT GROUP (BT)'s local access network. BT is the market leader in terms of customers, network infrastructure, and revenues. Other firms also offer indirect service through BT's network, and another source of competition comes from Local Loop Unbundlers (LLUs), such as Easynet (recently acquired by BSkyB). These providers use their own network equipment but plug into BT's local infrastructure to reach individual users. Virgin and its competitors all provide Broadband internet connections at a much higher speed than conventional dial-up.
Telephone (Fixed Line):
Main Competitors
- BT GROUP (BT) - direct service, market leader
- One.Tel - indirect connection
- Talk Talk - indirect
- Homecall - indirect
- Tesco (TESO) - indirect
- Mobile phone providers
As in Broadband, BT holds an established market position and has a significant advantage in network access. Virgin has its own network but also provides indirect access to customers through BT's local network.
There is also a recent trend among consumers who are abandoning a land-line phone service and relying exclusively on their cellular phones. This is putting downward pressure on land line prices. Virgin expects that any decrease in demand for its fixed line telephone services will be at least partially offset by increased demand for its wholesale services to mobile operators.[12]
Telephone (Mobile)
UK Network Operators
- O2
- Vodafone
- Deutsche Telekom AG (DT)
- Orange
- 3
Mobile Virtual Network Operators
- Tesco (TESO)
- Mobile World
- Blyk
- BT
Virgin Mobile is a mobile virtual network operator on T-Mobile’s UK network (Deutsche Telekom). Virgin Mobile has about 4.5 million subscribers, a 6.4% share of the UK mobile market. The company expects these numbers to increase, as it can now offer bundle packages to Virgin Media's existing 5 million cable customer base.
References
- ↑ Reuter's Online, Virgin Media, Inc., January 2008
- ↑ The increase in coverage between 2005 and 2006 coincides with the merger of NTL and Telewest in July 2006, bringing Telewest's customers into NTL's network.
- ↑ VMED 2007 10-K, Introduction
- ↑ Year ending December 31, 2006
- ↑ Year ending June 30, 2007
- ↑ Revenue Generating Units per customer
- ↑ Average Revenue Per User
- ↑ VMED 2007 10-K, Introduction
- ↑ [http://library.corporate-ir.net/library/10/104/104016/items/258443/AR07.pdf BSY 2007 Annual Report, pg. 7. ARPU calculated by dividing DTH revenues by DTH subscribers. DTH is BSkyB's paid satellite TV service.
- ↑ BSY 2007 Annual Report, p. 26
- ↑ "FAQ," ZDNet.com, January 30, 2008
- ↑ VMED 2007 10-K, Item 1, pg. 20.
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