NTL growth plans cloud Sky’s horizon

NTL’s forthcoming merger with Cable & Wireless makes a deal with TeleWest all the more likely – and Sky’s dominant position increasingly vulnerable. But, as cable comes of age the real loser is likely to be ONDigital.

Despite posting a second quarter net loss of $348m (£217m), cable TV company NTL, led by chief executive Barclay Knapp, poses a growing threat to BSkyB and ONDigital.

NTL’s challenge to BSkyB pivots largely on a merger with its last remaining cable rival, TeleWest, which could happen when the NTL/Cable & Wireless Communications (CWC) merger deal goes through in six months time.

But there are other factors which suggest NTL will take on the might of Rupert Murdoch’s empire sooner rather than later. Cable’s potential as a medium for Internet and e-mail services has not gone unnoticed by US software giant Microsoft. It already has a three per cent stake in NTL and 29.9 per cent in TeleWest, and will play a crucial role in the development of the UK cable TV industry. Microsoft wants to ensure its software is used in set-top boxes, so, as you would expect, it is pushing for an alliance between NTL and TeleWest.

For the moment, BSkyB has 1.2 million digital and a further 2.7 million analogue subscribers, compared with just under 2.8 million for NTL. CWC, meanwhile, has almost one million customers and has signed up 10,000 digital subscribers in the first month of operation. ONDigital has 247,000 subscribers.

A source close to BSkyB admits NTL has a strong proposition: “Technological convergence through TV screens is a big factor in cable’s favour. Interactivity, video-on-demand and gaming are all delivered better by cable. Cable also has the advantage on telephony.”

The cable telephony service is likely to remain a core attraction. According to Faulds Advertising deputy planning director David McGlone – who has worked on NTL’s regional Teeside account – it has become the biggest telephone provider in the area, outflanking BT. “In Teeside, NTL has [gained] a 60 per cent market share of telephony by offering half-price line rental and discounted calls,” says McGlone. People switched to the company because it was an alternative to ‘Big Brother’ BT. It got involved in local sponsorship, schools and community issues. It must keep that local edge as it centralises to become a big national – and international – company.”

BT and BSkyB are not the only companies threatened by the growth of NTL. ONDigital may also be hit hard.

WestLB Panmure analyst Anthony de Larrinaga says: “ON-Digital is in a very tough position. It has no unique selling point on content or price, lacks long-term vision and has a confused agenda, with dual shareholders. It is being buffeted between its competitors.”

An industry insider agrees: “I can’t see how ONDigital will maintain its positioning. It will be squeezed in the middle between Sky and cable.”

Another factor in NTL’s favour is its attitude to marketing. McGlone and others say NTL is more flexible than CWC, with one industry insider saying: “I would be very surprised if NTL left CWC’s marketing strategy in place. I am also sure we’ll see a generic cable campaign.”

The precedent for such a campaign is not good. In 1996, the Cable Communications Association (CCA) brought out a generic TV ad starring Dawn French. Backed by ten companies, it failed dismally. However, any future initiative stands a better chance of success with just one or two cable companies in the frame.

CWC consumer marketing manager Gavin Wheeler says: “It would make logical senseä even before the merger goes through. It wouldn’t be like the CCA branding campaign – we’d want a unified proposition. It’s easier to work with two companies than ten.”

NTL marketing director Mike Hounsell will spearhead the merged company’s marketing, although it is unclear what role his counterpart at CWC, Janet Somerville, will have. Meanwhile, the joint ad account is likely to move to NTL’s agency

J Walter Thompson, which produced the CCA campaign.

Wheeler says NTL and CWC will redefine the way digital services are marketed: “We disagree with the way BSkyB was marketing digital on the volume of channels – it is selling digital short. We want to market digital as more than TV. It will make the Internet and e-mail a mass-market proposition.”

McGlone comments: “JWT’s advertising for NTL promises ‘technology tamed’, which is very appealing and strong positioning, but it needs proof. A small segment of customers has grasped what cable means, but many need a helping hand – in plain English and with a good price tag attached.”

Intense competition is taking its toll. BSkyB and ONDigital have already been forced to offer free set-top box decoders – worth £199 – to increase take-up. TeleWest’s losses, meanwhile, increased from £140m to £264m in the first half of this year. BSkyB’s pre-tax loss was £388m for the year to June.

WestLB Panmure’s de Larrinaga believes NTL could increase penetration by discounting premium channels: “If cable took a more modest margin on the premium channels, it wouldn’t lose much because most new subscribers don’t take them anyway. It would increase penetration and gain critical mass in future negotiations for football and film rights.”

When the exclusive Premier League football rights deal with Sky runs out in 2001, NTL is expected to make a bid for the £1bn rights, and will be in a strong position. It already has powerful football connections through its sponsorship of Rangers FC and Celtic FC, and last year it made a bid for Newcastle United.

Nevertheless, NTL still has difficult challenges ahead. Sky is a well-established brand and consumers know what its proposition entails. An industry insider says: “Sky will bring the analogue turn-off date as far forward as possible, as fast as it can, to put pressure on the cable companies.”

Further, NTL is reliant on BSkyB and ONDigital for programming. “Cable’s broadband capabilities are like having a 50-lane motorway. But without BSkyB and ONDigital, it has no traffic,” says Richard Woolam, managing director of cable and telecoms consultancy The European Communications Network.

NTL has six to eight months to decide how to integrate its £8.2bn purchase CWC, implement a strategy and simultaneously launch its services. Observers believe its internal restructuring programme could take up to 18 months; one goes so far as to say three or four years.

But Knapp is not idling. Last week, less than a month after the audacious CWC deal was struck, NTL lavished £81m on voice, data and video networks business Workplace Technologies.

“On-demand services are going to be an incredibly powerful marketing tool and that will allow cable to take kudos away, not only from Sky and ONDigital, but the BBC and Blockbuster video stores,” says Woolam.

One industry insider says NTL will be handicapped by 12 months of inward-investment, “but all predictions suggest that in ten years it [NTL] will have the biggest market share in pay TV because of cable’s interactivity”.

If he gets his marketing strategy right, the CWC merger goes well and he manages to broker a deal with TeleWest’s Illsley, Knapp is likely to be doing a lot more than just, as he puts it: “Popping up on Rupert’s radar”.


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