For Digital News July 26, 2001.

By Kate Bulkley

NTL, the UK's biggest cable operator, has announced big cost-cutting plans, including slashing the workforce by about a third over the next two years to 15,000. It's all part of NTL's effort to stop the slide in its share price, which has slumped over concerns about whether the company is fully funded to reach breakeven in 2003. Today NTL has $15.6 billion (£11 billion) of net debt and is expected to spend another £1.6 billion or so of its current £1.8 billion cash and bank facilities before breakeven. NTL says it can cut its costs by £45 million in 2001 and by another £150 million next year. It also forecasts strong EBITDA (cash flow) growth with margins estimated to grow from 19% today to 38% in 2003, which is more in line with US cable margins of 40%. However, the margin for error in this business plan is thin. Under NTL's plans, if the company hits its forecast EBITDA of £1.57 billion in 2003 and controls its expenses and capital expenditures, there will only be a £5 million cash cushion leftover. NTL is also considering selling or listing with a tracking stock its broadcast towers and European cable businesses.

Q. It looks from your forecasts today that you have to execute perfectly over the next few years to make sure NTL hits its projections. On your own projections you only have a £5 million leeway on your current liquidity analysis to reach your forecast 2003 operating breakeven.

A I’m not sure I would use the word perfectly but there is no doubt that we have laid out a case for the business that says the focus needs to be on operational delivery. Is there room for manoeuvre? Yes, there is room for manoeuvre. There's a bit of room for manoeuvre on prices, on volumes, on product mix, on margins, on programming costs, on interconnect. So there is a bit of room for manoeuvre but the business has to grow and the business has to grow on a lower cost basis. Is that doable? Yes I think that is doable. I do think that is unique to this business even in relations to Telewest, don’t quote me on that, but we arrived at the point at which the markets turned down was almost the end of one journey for this company. We had done nothing for two years other than buy, buy, and buy. Get scale. And with the greatest respect operations went to hell in a hand bucket. The upside to that is you can do the opposite. You can integrate, deliver, integrate, and deliver. There is quite a bit of scope for improvement but you can't do it overnight.

Q. There are a lot of cost reductions that you can make and you have spelled these out, like the up to 5,000 more job cuts (in addition to 2,300 made this year) before your forecast breakeven in 2003, but what about the revenue side? I remember it was not so long ago that cable companies were all saying let's sell in on telephony because people understand that product.

A. And give the rest away for free.

Q. Yes.

A. Yes well it's interesting you pick that up because most people don't, and I list it as number one on my chart (of priorities) because I think the biggest single driver of growth in this business is getting people to understand why. The answer tot he why question is not because we offer cheap fixed line telephony. The answer is with one connection you can get all the communications and entertainment products that you need reliably with a high level of customer service and at competitive prices. Now I don’t think that case has ever been put well. I don’t think it has ever been explained well or been made attractive beyond and over reliance on economic pricing and uneconomic from the operators' perspective and not actually that motivating for the actual customer.

Q. So customers think cable is so cheap it must not be worth much?

A. Well they do they connect historically poor services levels with a cheap product and say that is the reason why it is cheap. I think we can legitimately scale both of those up and therefore give us a real reason for being in the market and a higher run rate in revenue. We need to articulate clearly what is the benefit.

Q. So part of this is education like this new national campaign with Telewest "Building Broadband Britian". Part of it also is to put better packages of services together and to sell better.

A. Market, sell, get closer to the customer, segment, get your prices right and sit close to your major competitors and offer alternatives and exploit your interactive functionality and go aggressively on broadband and continue to be competitive in narrowband so you can have the opportunity to upgrade them. Manage your analogue premium (customers) into digital because they are cheap (to upgrade) because they are existing customers.

Q. You have plans to increase your ARPUs (Average revenue per unit) from £39.60 today to a projected £60 by 2005.

A. The business plan pays out at (ARPUs) at £50.

Q. So what are the products that are going to get you to that kind of number? Is it broadband services and if so what are they?

A. At the moment peoples' definition of content on high speed Internet is always on and fast emails. That is actually what people are buying fast emails and I think in a bundle they will pay £40 to get high-speed internet, digital TV and a telephone. And we are not experiencing any difficulty in marketing or promoting that product. Now as the market develops will the price for access come down? Yes, it will. Will we need to provide compelling content? Yes we will. What will that compelling content be? I think it will vary actually depending on the segments you are marketing to. We are in conversation, like everybody is, with everyone from Sony, through to the BBC, through to local football clubs to provide compelling content that will work on the broadband distribution platform as well as (being) compelling content in broadcast.

Q. What does broadband content look like?

A. Well, I think that the Big Brother website is not my definition of broadband content. It's great but it is not broadband. We have put together with Telewest a demo site that has movie clips at 512kbps and movie clips at 56kbps. Movie clips at 512kbps will happen like that (snaps his fingers) like watching your DVD on your laptop or your TV. And I think there will be rich media content that will evolve. It will come here after the USA I suspect because the US has 5 or 6 million cable modem customers. BT has 70,000 DSL subscribers and that is a mix of wholesale and residential. And they cover the entire country. But I think this is a great opportunity for us. For the first time for cable we are not coming into a market after someone else has defined it. We followed BT into telephony. We followed BSkyB into television. We don’t have to follow anyone into broadband.

Q. BSkyB says that it is seeing increasing revenues from interactive services like betting and quizzes. Sky says that its ARPU is running at £313 for the year, which includes £11 of interactive revenues (betting, phone charges, interactive advertising and fees from content providers). Sky CEO Tony Ball sees interactive ARPU increasing to £50 in 2005 out of total forecast ARPU of £400. What do you see at NTL?

A. I would say that interactive will be a part (of the revenue mix) but I don’t think it will be a huge part. A large part of Sky's revenues on this side was from betting…we have a similar experience we launched pay for play a few months ago. Even I was surprised the degree to which people have taken it up. It's 60p a game per play. It's Tetrus and a basic bingo game and it is the kind of plain vanilla simple stuff. It's mind candy for the afternoon and 10s of thousands of people are playing it. And email is one of the biggest interactive service we have literally 100s of thousands of email users.

Q. But do you make money on that (email)?

A. No. But I think interactive services will be a significant contributor to revenue by beginning of 2003. By end of 2002 we will be at say, £48 ARPU or so and interactive will be about 7% to 10% of that.

Q. So really you see that main revenue drivers as more premium channels, more high speed access.

A. And more customers. Next year we will accelerate that. (ntl will add 100,000 customers this year on broadband and 300,000 more in 2002)

Q. Will you be developing some kind of navigational device so people can navigate around all these services? Is the EPG (electronic programme guide) enough and what about your ntl world home page?

A. ntl world is our narrowband offer. We are actually in the process of developing our broadband portfolio in fact that is one of the things we are collaborating with Telewest one. I could easily see us having a joint portal for the broadband product. The EPG is staggering in how much time people spend on it. It is minutes, like 20 minutes, it is a lot of time. We already sell ad space in the EPG. By comparison to broadcast spots it is chump change but it's great. The role of the EPG started out as what's on but it will develop and personalise. And then it won’t be a programme guide it will be my guide, my user point, my home page, my whatever you want it to be. And I think you will see a lot of interesting functionality. Come to our develop ment lab. We have EPGs that do weird and wonderful things.

Q. Is this proposed joint broadband portal with Telewest a revenue generator in itself?

A. I think you can make it a revenue generator either as a destination site or an advertising vehicle definitely. The EPG real estate will have merchandising value like a retailer's shelves do.

Q. When you look at what is going on with your churn. It is still high above where Sky's is (Sky had just under 10% churn; NTL has 17.6% in Q2 2001)

A. Our customer service today is noticeably better than it was last year. Is it where we want it to be? No. That definitely has an impact. If you have a problem and you can't get through it is unsatisfying and that makes you less inclined to be a loyal and faithful customer. Also we face some aggressive competitors, who are not shy of exploiting strong and large positions in their respective markets.

Q. But you will have neutralised your biggest competitor Sky with this agreement on pricing of their premium channels if its gets through the OFT, right?

A. There is mutuality there. They are our biggest supplier of content and they have 5.5 million of their own subs and many more to other distribution platforms and we want to be able to provide all content to our customers. I would be disappointed if we have this conversation in 2003 and our churn rate is not a hell of a lot smaller.

Q. And BT?

A. I think you always have to be wary of the aggressive competitors and BT is aggressive and getting more so. They are the installed incumbents. You know as I do that the force of inertia in markets is hard to battle against. We are always the alternative. But are we noticing high levels of churn from our customers back to BT? No. Are we noticing they are more aggressive and more visible and more challenging? Yes we are and that means you have to deal with two big beasts in the jungle.

Q. What is broadband? Is it 512 kbps or is it 10 megabits? And what can you guarantee your subscribers in terms of speed as you sign up more customers? Will this be an issue?

A. I think that most markets define themselves by what people do rather than what they are told it is. If we had a broadcaster sitting here they probably would say the definition of broadband is 4 megabits. A regulator would likely say it is 2 megabits. If you had BT they would say broadband is ISDN. From our point of view we are marketing broadband benefits: speed, always on, at 128 or at 512. Most people are migrating at 512. 80% are buying 512. Until the Internet starts providing enormous amounts of content that requires faster speeds 512 is broadband in colloquial terms. I am sure there is a broadband users council somewhere that will define it as something. But I think that this is how the market is going to define it. We are showcasing fibre to the home in Dolphin Square (in London) with 10 megabits and it is am azing. But I have to say 2 megabits is amazing. I am an ISDN user (56k both ways) at home. It is better than dial up but it doesn’t compare to our half a meg broadband product.

Q. So we have talked about the plans going forward but it all is a bit overshadowed by the huge net debt pile of $15.6 billion. How do you or your CEO Barclay Knapp sleep at night with all this debt?

A. Well, business is risk and reward. The world is full of professional sceptics. I was with (advertising and marketing giant) WPP in 1992. Then we were toast. Everyone had written us off. We were massively laden in debt. (We were called) greedy because we bought too much and paid too much. The market has gone into the doldrums and the advertising industry was finished. Now Sir Martin Sorrell (CEO of WPP) is golden boy. No one can get enough of him. He is a hero after the event. The proof of the pudding it who hangs around and believes in you when all the professional sceptics are talking you down.