Battle of the bands
By Kate Bulkley
Monday April 1, 2002
The fight for the right to build broadband Britain has begun. From today, BT is slashing its prices while its competitors are doubling their speed. By Kate Bulkley
It seems appropriate that April Fool's Day 2002 may become a landmark day in the turbulent history of Broadband Britain. Today sees the much-anticipated start of BT's broadband offensive with a slashing of its whole sale ADSL high-speed line prices to £14.75 from £25 per month, and the launch of the first television broadband advertisements. The twin strategy aims to spur demand in the UK which is lagging behind other European countries with less than half a million broadband connections either by BT, cable and other operators. BT's ad campaign for broadband, featuring a bobsleigh team, is part of a £10m marketing and advertising plan promoting the lower broadband prices.
The phone giant's new CEO, Ben Verwaayen, has put his neck on the forecasting chopping block and targets 1 million ADSL connections by next summer, up from only 160,000 today. The bulk of those connections, or about 100,000, have been sold through its portal service BT Openworld. Openworld's retail broadband prices will drop today to £29.99 a month from £39.99 a month.
BT may be speeding up its plans for broadband, but its cable rivals are not sitting idle. Both NTL and Telewest's 512 kilobits per second broadband service will still be £5 cheaper per month than BT Openworld's new price. NTL also recently launched a 1 megabit speed broadband service that is believed to have attracted over 6,500 registered orders in its first two weeks. The service is not cheap at £50 a month on top of a £14.99 per month "access package" of TV services and a phone line, but it is much faster than the 500 kilobits per second that BT Openworld is offering.
Telewest CEO, Adam Singer, says he also has megabit plans. Later this year Telewest will switch all of its broadband customers to a one megabit per second service (up from the 512 kilobits per second they have now) for no extra monthly charge. "BT's network runs out of puff at two megabits," says Singer. "And the one thing that BT has made clear is that they are really nervous about competing on speed. So let's do the one thing we can do with our network really well and it doesn't cost us much either to do it."
After a slow start, it suddenly looks like there's a real battle shaping up for UK broadband customers and the stakes are high, particularly for Telewest and the UK's largest cable operator NTL. Both have big debts which have put their shares into free-fall and are threatening to change their current ownership. In the case of NTL, its massive $17bn of debt has forced a financial restructuring that will probably leave equity shareholders with less than 5% of the restructured company, according to Merrill Lynch bank, and could bring in new strategic partners such as Liberty Media and AOL Time Warner.
A restructured NTL with less debt on its books could also look like a more attractive merger partner for Telewest, which counts Liberty Media and Microsoft as major shareholders. Some analysts say a merger of the two would not only improve the operating results of the business but help make cable a more effective competitor to Sky and BT. All that may be in the future. At the moment, NTL is locked in discussions with its bankers and potential strategic investors but is said by some analysts to have only enough cash to last it until June. Executives at NTL admit that the company could run out of funds before the new structure is put into place, but add that the management is making "substantial and rapid progress" in restructuring the company's balance sheet and that the process should be complete by the third quarter.
The irony is that from an operational perspective NTL and Telewest - which is also carrying large debts but so far has been able to cover its interest payments - are performing well. NTL posted a huge net loss for the year, due largely to goodwill and asset write-downs totalling about $11 billion, but revenues rose 29% to $3.67 billion and earnings before interest, taxes, depreciation and amortisation also increased to $708m from $344m a year earlier. "We established clear leadership in broadband in the UK in the fourth quarter of last year notwithstanding BT's [proposed] price cuts," NTL CEO Barclay Knapp told analysts and reporters last week.
NTL has 180,000 broadband customers and is seeing a 50% growth quarter to quarter. "Our early lead will stand us in good stead against BT," says Knapp. "Don't confuse balance sheet issues with an ability to keep operating the business," adds Telewest's Singer. "At Telewest we've had six straight quarters of financial improvement and financial growth. NTL and we are still pressing on and BT has finally deigned to show up."
The cable operators clearly see broadband as part of the media landscape where they have a headstart on BT and also an advantage. "The one thing you can be absolutely sure about is both of us will be pushing broadband because it adds significant value to our business," says Singer. "Bondholders in NTL or Telewest are going to say, 'You may be in a cash conservation mode and running this thing as leanly and meanly as you can, but for God's sake keep those broadband customers and those triple play [telephone, TV and broadband] customers.' They are the one thing that gives hope to every stakeholder in these businesses."
Perhaps the examples of the ill-fated British Satellite Broadcasting (BSB) or the Channel Tunnel are now relevant for the broadband industry. These were both groundbreakers that sank in a quicksand of over-expectation, colossal debt and uninspired management. Yet BSB morphed into British Sky Broadcasting, which is the UK's leading digital TV operator, and the Channel Tunnel is now a welcome and established part of the transport landscape and is putting up a good competitive fight with the ferries.
Telewest and NTL are both facing financially difficult times, but their networks are a tremendous asset that aren't going away. That said, the businesses themselves are threatened by uncertainty about future funding, as staff leave and customers wonder if their service will continue.
"How you emerge from a restructuring depends on how you go into it and how long it takes to get out of it," says a City analyst who requested anonymity. "All bets are off as to how NTL grows going forward, but for both Telewest and NTL, the broadband product is clearly the growth driver."
According to this analyst, the barrier to broadband growth for cable is ultimately their balance sheets, but for the moment, adding broadband customers is a healthy margin business where there is room for growth. For instance, Telewest has about 107,000 broadband customers today out of 5 million homes that it could connect on its current network.
And so to the customers. Will they be swept along by BT's bobsleigh team or Telewest's extra free speed? A recent survey, sponsored by software company Motive Communications, says that more than 40% of current broadband users already find it hard to set up services and 20% describe themselves as frustrated. Consultancy Jupiter MMXI says that besides the high prices, broadband growth in the UK has been hampered by little clarity for consumers about the advantages of broadband besides, perhaps, faster web surfing. "Broadband is all the rage among industry executives, but nobody is communicating the value of broadband to consumers," says Noah Yasskin, director of European research at Jupiter MMXI. These are the kinds of concerns and statistics that indicate too many broadband customers have already felt like April fools. At least there is now a chase on to stop the jokes and start the serious business of making broadband Britain really work.