While the creation of a 5bn rival to BT in the UK cable and telecommunications market has been widely welcomed, questions remain about whether it can solve the problems dogging the cable industry.
Cable & Wireless’ audacious purchase of Nynex Cable Communications, Bell Cablemedia and Videotron converted it overnight into the UK cable market leader. It caught many in the industry by surprise, particularly TeleWest, market leader until eight days ago, which believed it was close to doing a deal with Nynex.
But the agenda for the deal has more to do with satisfying one of C&W’s greatest needs – improved distribution – than with a desire to get into the entertainment business. It wants the opportunity to develop video on demand and other services, and recognises that convergence is now the name of the game. This is a deal driven, in the first instance, by a need to get the “last few hundred yards” into people’s homes with telephony.
“The deal moves C&W from having no access in local markets to 6 million franchise homes,” says one telecoms analyst, “but to exploit that it will have to rebrand, develop centralised customer services, renegotiate contracts and repackage products.”
The newly-formed Cable & Wireless Communications, housing Mercury Communications and the three cable operators, gives C&W the opportunity to reinvent itself. In ten years the Mercury brand has moved from being perceived as cutting edge technology to dated and dull.
Its part-owned mobile operator, One2One, dropped the Mercury name last month, officially to end consumer confusion but also to distance itself from the Mercury name.
City analysts believe C&W has a six-month timetable to merge the companies and rebrand the whole as a single entity. Names including Gateway and Quantum have been suggested but observers would be surprised if either survived the rigours of a branding exercise.
Despite being welcomed, the deal may have little bearing on the structural problems facing the industry.
Cable penetration is still low despite there being more than 30 players in the market. The proportion of households taking up cable has remained static at about 21 per cent for the past three years, says a Continental Research report on cable television viewing trends between 1990 and 1995. The report highlights the failure to convince households to try cable services and, more worryingly, a failure to retain consumers once they have sampled them.
The three cable companies now under the C&W banner have access to almost 6 million homes but only 579,000 consumers have taken telephony services. More than 2bn of investment is needed to complete the respective cable networks.
A 12m generic advertising campaign by the Cable Communications Association, through J Walter Thompson, failed to address these issues and was scrapped last month. It plans to launch a new campaign. But the merger has new speculation that TeleWest will join C&W and the general expectation is that the market will have just two or three players within the next two years. This possibility leaves a questionmark over the need for the CCA and also raises doubts about Tele-West’s future. It operated as United Artists Communications in 16 franchises, and Cable North West and Cable Midlands in two more, before it was renamed TeleWest in July.
Spokesman Ian Hood says the company is “not losing sleep” at being knocked off the top. “We’re not aiming to be the biggest, we’re aiming to be the leader,” he says.
Telewest is preparing to appoint an ad agency for a 4m brand-building campaign. But it would appear TeleWest’s room to manoeuvre has become more limited as a result of last week’s deal. It now has two options: join other partners and take on the might of C&W, or join C&W to become the clear dominant force in cable and telecommunications.
CCA communications director Roy Payne claims the C&W merger shows “clear confidence in the UK’s cable industry”. That confidence was reflected by in share price surges after the deal was struck: C&W shares jumped 30p to reach 471p by the end of last week.
But not everybody is as confident. “It all makes sense (the merger) but I don’t think it will change the fundamental problems of cable,” says Panmure Gordon investment analyst Tressan MacCarthy. “Maybe C&W will be better at marketing it. C&W could set up a single brand but would then have the whole new problem of establishing it throughout the UK.”
Increasingly, it is the marketing of the new company, already valued at 5bn ahead of a planned stock market flotation next spring, which analysts are highlighting as offering its best chance of success.
Cable & Wireless Communications is being positioned to “deliver a range of communication and entertainment products under a single brand”. It must also establish where One2One fits into the new operation. Analysts have been told that C&W remains committed to One2One, but there is a danger it could be overlooked.
The background to this is convergence and the coming together of telecoms and entertainment partners. The C&W deal can only accelerate that process as players, worried about being left on the sidelines, jockey for position.
That still leaves the problem of convincing consumers of the benefits of cable.