01 Sept 2000

The broadband future envisioned by the cable guys in Europe may still be bright, but there's no need to rush out and put on your shades. The latest glitch is Telewest's set-top box (STB) order. It is delayed (we are told because they will house superior flash memory technology) which will slow up Telewest's digital rollout. This has put the company's share price under pressure, effectively putting Telewest in play. Its travails are not an isolated case. They are a symptom of what is a constant cable refrain: "It's coming, just not right now."

Look at UPC, which threatened in mid-August to drop Microsoft as its software supplier for its digital service if it fails to deliver on time, which of course means that this is not only possible, but likely. Under its franchise agreement in Amsterdam, UPC must launch a digital service this autumn and wants to reach 30,000 interactive subscribers by year end. So to meet this goal, it will test software from Liberate of the US and also from Excite At Home, the the high-speed internet group. An idle threat? It's complicated. Microsoft owns a minority stake in UPC.

And UPC's ISP unit Chello recently merged with Excite At Home. Plus, Liberate may be a good, technology, but it is a bitter rival to Microsoft, which has spent millions of dollars trying to establish its software.

My favourite quote from UPC's chief Mark Schneider appeared in the Financial Times: "It is true that Microsoft is slow, but that doesn't mean we are going to be slow." Speed is crucial for cable and its biggest Achilles' heel. One of the legacies of Telewest's former management under Tony Illsley was the launch of a much-heralded fast internet service called Blueyonder.

The service launched in March and was billed as nine to ten times faster than a normal BT line with an always-on capability. But by early August the service had attracted a paltry 1,000 users. Complaints ranged from "it doesn't work" to "it's too expensive" relative to BT's fast internet service, which does work. By August the monthly charge for Blueyonder had been cut from £50 a month to £33, and word is that Blueyonder will re-launch in this autumn. Maybe it needs a new name too, one starting with the word 'wild'.

This is certainly where the future of cable seems to be. So why has such a bright blueprint become a wild blue yonder? Digging up the roads in the UK took longer and was more expensive than many thought. This led to consolidation among the operators, which took time and focus away from the main business of selling service. Then there is the technology issue.

How fancy an STB do you want and who can make it on schedule? But the big fly in the ointment is marketing and follow-up, such as converting free trials into paying customers. You know you should worry when an equity broker in London issues a sell order on Telewest stock after he learns that he can't get digital cable at home for several months.

This is not the time to let your customers down (particularly when they have clout in the City). Cable had an advantage over BT with its cheaper telephone service. Now it has the opportunity to deliver high-speed internet.

And what happens? Blueyonder. Meanwhile, Sky Digital, with what many call inferior technology, is adding new dish subscribers at the rate of one every 15 seconds.

Telewest has warned that the flash chip problem means it is now aiming at 500,000 digital subs by the first quarter of next year, instead of by the end of December 2000. After its own slow digital start, NTL has also been forced to downgrade its digital target from 700,000 digital subs by the end of the year to 500,000.

Some critics say cable lacks the exclusive content that will drive sales.

But most of what Sky offers is also available to cable, albeit at a wholesale rate that makes it less compelling for cable operators looking to improve their bottom lines. NTL has begun to re-dress this "imbalance" with its recent purchase of pay-per-view rights to Premier League football. And certainly the reason given by Telewest and Flextech for their recent merger was to "marry" Flextech's content with Telewest's distribution.

The problem is that cable is running out of time. Sky is shifting its focus from simply signing up subs to increasing its average revenue per unit (ARPU). This autumn it will download a WML browser (similar to the ones on WAP mobile phones) onto its existing STBs. This will allow subs to enjoy interactive services, including email and betting while they continue to watch a Sky programme. BSkyB's CEO Tony Ball calls this the "digital dividend". Sky's ARPU is now at £287, but the company sees that rising to £300 in the near future. And Sky is also looking closely at how it will launch its package of services on telephone lines super-charged by DSL (digital subscriber line) technology. Sky is already testing DSL-delivered services with Kingston Communications.

The cable story, with multiple services being offered over a single infrastructure, is still compelling, but even UPC has had to scramble to figure out how to continue to fund its broadband systems. After failing to float Chello on the stock market, the company merged with Excite At Home. The idea was to marry Excite's portal power to Chello's ISP business. More consolidation looks to be in the works, with Telewest now clearly in the frame between new shareholder UPC and fellow UK MSO NTL (Microsoft is a common shareholder between the two).

Marrying assets is not a bad strategy: it can cut costs and lead to better programming deals. But unless customers are treated right and prices are kept competitive, it could just be another chapter that starts with a big promise and ends with too little, too late.