01 Mar 2008

Did I hear this correctly? Virgin Media's acting CEO Neil Berkett has just managed a brazen volte-face about what is most important for the success of the UK cable TV business. Out goes premium content and in comes broadband. It seems that some of the biggest players in the media business has suffered sudden memory loss, but it's really about the realities of the digital marketplace. Yes, all strategies change over time. It just seems that the time between transitions is getting shorter and shorter.

For Virgin Media the shift is really all about a reality check. After its failed bid for ITV in 2006 and its inability to wrest control of premium content from its rival BSkyB (forever), the UK's only cable operator is shifting gear. From this point on the focus (and the capital) will be pulled from a Sisyphean struggle to get its hands on premium TV content and instead put into what Berkett calls his 'hero' product: broadband.

Selling premium TV is a no-win for Virgin Media. Berkett blames the regulatory situation that allows BSkyB to charge wholesale rates for its premium TV channels that effectively leaves the cable operator with little to no margin. "There is no money in terms of economic profit in pay-TV," Berkett told a Broadcasting Press Guild lunch in London last month. "Unless there is a change in the regulatory landscape which I think there should be, we will not employ shareholder capital in the premium TV space."

The only way out for Virgin Media is to focus on next-generation broadband access rather than pay-TV or the acquisition of a major braodcaster. "We had too many strategies at the time Virgin Media was launched," admits Berkett, referring to the re-branding of the tired and discredited Telewest and NTL brands into the bright red, supposed Sky-busting brand of Virgin Media last February.

That's right, last February. This is a big shift in 12 months that have seen Berkett replace former CEO, Steve Burch and the call to beat Sky at its own pay-TV game fade into memory to be replaced by a more hard-nosed and practical approach in the day-to-day business of signing up (and keeping) customers.

Berkett's plan now is to play to cable's UK strengths and beat Sky at a game it has some chance of winning - broadband. Cable can offer faster speeds over its dedicated network more quickly and cheaply than Sky can using copper wires and leased capacity from BT.

As Berkett puts it, Virgin Media has both a technical and an economic advantage in broadband, something it lacks in premium pay TV, where Sky has the content and the platform to deliver it.

Virgin Media will begin offering a 50Mbps service by the fourth quarter of this year. Berkett predicts that the bulk of the next-generation network upgrade will be complete by 2009, and he predicts that "hundreds of thousands" of customers will sign up for the faster speed over the next few years.

Berkett recognises that the risk in this strategy is to become a commodity pipe business. After all, Sky succeeded in pay-TV not by offering a better technical platform but by acquiring and delivering content that customers were willing to pay for.

And Berkett's plan assumes that what I would describe as the Japanese model of broadband consumption will take root outside of Asia. While it is true that fibre-to-the-home operators in Japan are now wondering if 100Mbps is enough for gaming-hungry broadband users there, this kind of appetite for broadband has not yet been proven here. Even assuming that demand does grow, broadband providers will have to watch carefully if they are not to be sidelined by content that demands direct subscriptions, using their network but giving them little or no share of the pie. This is the crux of the network-neutrality debate that is causing a lot of anxiety in the US but is still only just beginning to be taken seriously in Europe.

Berkett knows that he has to "control his destiny" in terms of the content and applications that are accessed via his network. He may not want - or be able to afford - to own content, but he needs to work out how to add some value to what goes over his pipes. If he doesn't, then Virgin Media could start sliding down the slippery slope into utility-land, where all that matters is price, and that is a game that is indeed hard to win.

For Berkett, identifying the important content and applications for broadband is a tough call. Is it HDTV? Is it multiplayer games? Is it social networking? In Virgin Media's case, kicking the Berkett broadband plan into high gear is crucial, especially given Sky's recent year-end announcement that it passed the one-million subscriber mark for its own roll-out of broadband. Even starting with an inferior network that it does not entirely control, Sky has already proved that it can sign up broadband customers faster than most of its competitors. Virgin Media's re-focus not withstanding, Sky will continue to be a formidable competitor.