Four-play isn’t enough: Virgin should make this deal

Marc Sidwell
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JOHN Malone’s bid makes good sense for Virgin Media. Born of the pioneering consolidation of UK cable and mobile firms to build Britain’s first quadruple-play media firm (providing broadband internet, fixed-line telephone, mobile telephone and television services), the resulting company has acknowledged it remains vulnerable to a larger-scale consolidation by its rivals.

Joining a global player like Liberty Global, with operations in 13 territories and a growing European footprint offers the sort of economies of scale and competitive heft that secure futures are built on in a cut-throat market. That is, if the longstanding rivalry between Rupert Murdoch and Malone doesn’t simply up the ante.

For all the natural interest in that potential corporate face-off, Malone is making a mistake if he imagines he is buying a television company. Virgin Media’s cable broadband internet is more profitable than its television services, according to the most recent annual report, and while it is the second largest in pay TV in the UK after BSkyB, the difference is significant, with Sky’s 10m-plus TV customers outclassing Virgin’s 3.8m.

By its nature as a multiple-play company, Virgin has to bundle its customers together, to maximise revenue and minimise churn, with subscription to more than one service helping to lock users in for longer. But this model requires a healthy future for all four media segments in order to look robust.

For instance, Virgin’s most profitable customers are those who are triple-play: subscribing to broadband, television and fixed line telephone. But Virgin has candidly described its fixed telephony business as in decline and not likely to improve. That is thanks not just to a shift to mobile-only phone use but also to the disruptive transition from voice to data, with Skype and related voice-over-internet-protocol firms providing a service hard for fixed lines to outcompete on price.

Meanwhile pay television is another marketplace under pressure from innovative providers like Netflix and the ease of access to free or pirated video content online.

Virgin does have a massive competitive advantage in its cable network, enabling it to offer fast broadband independently of BT. However, the overlap between its broadband customers and its mobile customers has been poor, which must be why I keep getting so many leaflets imploring me to sign up for a Virgin BlackBerry.

The firm’s imperative has to be keeping its broadband advantage while developing unmissable television services and packaging both so as to make a Virgin mobile subscription the natural choice – its new TV Anywhere service is a start but streaming was wi-fi only at launch, still lagging Sky Go.

Tackling all this will take plenty of cash. Right now, Virgin mainly has plenty of debt, some £5.686bn net. It knows a man who can help with that however. Liberty Global may be riding to the rescue at just the right time.

Marc Sidwell is City A.M.’s managing editor @marcsidwell