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22 November 2019

Liberty and Vodafone have contrasting quarters after asset transfer

Liberty Global, now firmly rooted in the UK, may be regretting the sale of its operations in four other European countries to Vodafone – or at least its shareholders will be, as the two firms’quarterly results move in opposite directions.

Liberty Global’s total revenue from continuing operations – left over after the sale of the businesses in Germany, Hungary, Romania and the Czech Republic – were $2.84bn for its third quarter, a year-on-year fall of 3%. Vodafone, by contrast, enjoyed an instant uptick from acquisition of those Liberty Global assets, reporting revenues up 0.4% year-on-year to €21.9bn ($24.1bn) for the first half of the fiscal year.

This was not all just about asset transfer. Compounding the contrast in fortunes, some of Vodafone’s older subsidiaries did quite well, while some of Liberty Global’s remaining ones did badly. For instance, in the UK, Virgin Media, now Liberty Global’s flagship European nbusiness after the dispersals, reported flat revenue of £1.28bn in Q3, but a decline in real terms. It shed 3,000 net customers and 50,000 video RGUs (revenue generating units), a fall only partially offset by a gain of 5,000 broadband RGUs.

The difference between these two last figures reflects some multiplay subscribers cancelling video or churning to another provider, while staying with Virgin for broadband, which has become a focal point in the UK with its competition over headline speeds.

Virgin Media’s response to this is Project Lightning, its £3bn ($4bn) project to boost UK broadband speeds by rolling fiber to the home, with an initial plan to reach 4m homes by the end of 2019. That has been scaled back considerably, with 2m the current number of homes reached directly, but instead Virgin is now aiming to upgrade virtually all homes passed, up to 15m, to DOCSIS 3.1 by the end of 2021, which should deliver 1Gbps bit rates downstream . Although this is a hybrid fiber/coax technology it is capable of attaining similar speeds to FTTP (fiber-to-the-premise) with the old EuroDOCSIS 3.0 standard, by using improved modulation and shortening the coax portions.

This has been a key shift in strategy because most of Virgin’s existing infrastructure has already been prepared for the upgrade to DOCSIS 3.1. This means the operator will able to step ahead of the infrastructure being deployed by BT’s Openreach, which will have to deploy FTTP to attain similar or even greater speeds. That will certainly not be done by the end of 2021.

While DOCSIS 3.1 is theoretically capable of 10Gbps peak downstream and 2Gbps upstream, in practice, consumer packages will start at around 1Gbps downstream and perhaps around 200Mbps upstream, although that will still be enough to give Virgin Media a marketing edge.

That being the case it is surprising Liberty CEO Mike Fries did not make more of Project Lightning during the earnings call, although he did mention it in the context of Virgin Media’s decline in video RGUs. He highlighted the importance of Lightning as a buttress in the UK broadband war that would in turn feed through to video. He conceded that meanwhile the pay-TV operation was facing growing headwinds, primarily increased content costs and competition at the bottom end of the market.

Tough quarter for Virgin and Liberty, while Vodafone gains from its new units:

Virgin Media CEO Lutz Schuler tried to put a positive spin on the net loss of RGUs. He pointed out that the operator had gained 100,000 RGUs a year earlier and only lost half of those. He then alluded to the company’s high value strategy which means it was no longer going after low end customers and that accounted for 25,000 of the RGU losses.

But overall these are tough times for a group that is dependent for its content on others, at a time of intensifying global competition. RGUs were also down by around 25,000 across Liberty Global’s other continuing operations in the Belgium, Switzerland, Ireland, Poland and Slovakia, with a total loss of 76,300 for the quarter out of total 25.18m RGUs.

One point of intersection with Vodafone lies in mobile service provision, with both companies agreeing that future competitive success lies in converged services. In the UK Virgin Media relies on Vodafone to host its MVNO, while Vodafone’s acquisition of the other Liberty assets was motivated by the drive for convergence.

Meanwhile Vodafone has reported a rapid impact on its operations from those ex-Liberty assets. In Germany, which accounted for 30% of Q2 service revenues, Vodafone claims integration of former Liberty subsidiary Unitymedia has started quickly, with 41,000 net cable additions in the first month of relaunch, September 2019. Meanwhile, in the group’s other European operations excluding Germany, Spain, UK and Italy, Q2 revenues were up 3.3%, compared to 2.1% in the previous quarter, with strongest momentum in the Czech Republic and Hungary where Liberty Global assets are being absorbed.

There is at least one fly still in the ointment for Vodafone though. This is that German cable operator association FRK intends to push ahead with legal action against the European Commission’s decision to approve the acquisition of Unitymedia from Liberty in Germany. The argument is that this gives Vodafone a dominant position in German cable to the detriment of the few remaining small local operators.

This argument alone would not suffice given that cable is already dominated by single operators in several other European countries, as in the UK by Virgin Media. It would boil down to competition in the largely converging media and communications marketplace, where Vodafone is up against Deutsche Telekom and to some extent Telefónica Deutschland in broadband and pay-TV, along with Sky Deutschland for the latter only.