Whenever we take a deep dive into Liberty Global’s figures we are always impressed at the predictability and control that runs through their thinking and how well the company can project growth, profits and free cash flow. And ever since it embarked on the creation of the Horizon video platform and all the businesses associated with it, such as Horizon Go and MyPrime, the SVoD competitor to Netflix, churn control, rising ARPU and the quad play have looked more and more within its grasp.
In the future quad play world that we are heading to at an incredible pace, the one weakness which stood out at Liberty Global, was its lack of a viable cellular option.
But when the idea of a Homespot emerged at the end of 2012, it always looked like Liberty Global had finally found a way into mobile. The issue was who would be its Europe wide MVNO partner and just how fast could its Homespot program take off.
At this week’s results in a single sentence it made it clear that by the end of 2015 it would have 10 million Homespots, often called Community Hotspots, across Europe, created by downloading new software to allow a second SSID to be run as a series of connected Hotspots under the Liberty Global brand.
We estimate that only Comcast in the US can remain ahead of that curve anywhere in the world. Remember Iliad’s Free had just 5 million Homespots and this enabled it to offload cellular traffic, while carrying the remainder of its cellular traffic on a small 3G build out of a few base stations and, more widely, through a roaming deal with Orange. This resulted in 10 million new mobile customers for Free inside France within 3 years (and a lot of Euros in roaming charges to Orange), while disrupting the mobile eco-system there and slashing average phone contract pricing. In the process this put SFR and Bouygues up for sale, the 2nd and 3rd placed MNOs, due to the pricing pressure (see our story this week on consolidation in Europe).
While we never expect to see Liberty Global (see paragraph one) ever undermine a market in that way, destroying potential profits by seriously undercutting its rivals, we can still expect a slightly less dramatic pricing advantage using these 10 million hotspots, right the way across Europe.
Mike Fries, Liberty Global CEO said, “Europe is a Quad-play market and we’ve now launched mobile in 9 countries. Telenet and Virgin are already 20% quad play penetration and we see no reason why we can’t reach those sorts of levels or higher in other markets. All of our MVNO deals already provide or allow us to get to 4G services, which we know drives mobile data usage. And with our fixed networks we’re ideally setup to offload that traffic for better economics.”
Interestingly we modelled the growth of Homespots for Liberty Global last year in each country. This model was based on what we thought of quality of the existing home gateways installed, and how many of them could cope with a software upgrade. We came up with something just shy of 12 million by the end of 2015. But we based those calculations on the experience that Liberty Global had in Belgium and the Netherlands. In both of these markets CPE is more advanced and replaced more often, and we noted that there was a rapid surge to 65% of installed devices supporting second SSIDs, and then incremental improvements from there, based on home gateway replacement. This resulted in a forecast at Liberty companies of some 75% penetration, across its entire footprint by end of 2015, which was 12 million. But the rest all Europe takes in markets such as Romania and Slovakia and it is clear now that a smaller number of home gateway devise were ready for upgrade, so the number is closer to 62.5% of installed devices at end of 2015, which will have a second SSID.
Even so this is confirmation of the general pace of rollout and perhaps the most important statistic that the Liberty Global management came up with during its results conference. It confirms that it has raced, in just over two years, from zero to 10 million Homespots, out of 16.1 million broadband lines that it supplies. It said that it reached 5 million at the end of last year, but then again Liberty Global did not own Ziggo then, and that would have bumped up its figures as it was the first European operator since Free, to roll this out and had perhaps 1.5 million of them.
Comcast predicted that it would reach 9 million by the end of 2014, but has yet to confirm that it actually reached those numbers, and has not yet given us a target for end of 2015. We expect to see precisely what Comcast does with those Hotspots sometime in the middle of the year. In the past we have guessed May for a services launch, but have been privately told that we are perhaps a little early on that assumption.
The remainder of the messages which came out of Liberty Global’s figures were mostly predictable – broadband is the key driver, and it added 900,000 broadband homes this year across its footprint; revenues were up 3%, down a fair bit since last year at 4% and the year before at 6%. Organic growth slowing is hardly a headline for a company that mostly grows by acquisition and clever manipulation of cash and assets.
We can see that priming the fuse for massive cellular expansion is the key to future growth, as it bring a quad play offering to all of its markets, and the key to that, is the rollout of WiFi.
Another landmark was that it had reached 1 million Horizon boxes, which does cement key, high value customer relationships, but what is more important perhaps is the way Horizon to Go has stretched to offering multiscreen TV to something like 20% of the base where it is available – that means the App, which came far later than the Horizon box in most countries, is launched in 8 countries and has individuals in 20% of homes its more advanced territories, accessing it regularly. As a TV Everywhere system, that is a high take up rate and better than the Horizon box itself.
Mobile growth was up 500,000 customers on the year with revenues up 8% and it generated $1.3 billion of revenues on its own.
While the Liberty Global management wanted to focus on its new tracking stock for growth in Latin America and on its increased liquidity and how far into the future the payback terms for its debt are – all indicators of financial health, we keep coming back to that combination – out of home video on mobile devices, which have cheap access to WiFi offload almost everywhere across Europe. Remember it can offer that 10 million hotspot footprint to other operators and aggregators and in return negotiate for perhaps another 10 million Hotspots, free of charge for its customers, and that will make the number of cellular minutes a customer needs on an MVNO scheme, very low indeed.
But as CEO Mike Fries said at the outset, it is all based on broadband and the slide showing that in every one of its major European territories it now offers significantly faster headline speeds, all up above 150 Mbps in the more advanced territories, and has grown that speed by the percentages list below in each of the countries over two years.
Germany Netherlands Belgium Switzerland UK
100% 67% 33% 150% 52%
On average across the entire European footprint, customers are getting 70 Mbps and consuming 70 gigabytes each month and those numbers grow 40% to 50% year-over-year. But these figures also take in far lower ARPU markets like Romania.
Fries also waxed lyrical about Liberty’s MyPrime service, which is its own OTT service for people outside the footprint and is also given free to high end customers to fight churn, and he said “We are getting nearly 40% usage in the MyPrime App both on the TV and on other devices, in Holland and Switzerland.” We’re not quite sure what he meant by 40% usage, but he seems delighted with this. It clearly has not stopped a drift to Netflix in those countries, but it adds an OTT offering that people would miss if they cancelled the core service. Fries has been keen to ridicule Netflix as a business model, saying he knows which company he’d rather run due to the slimness of its margin. But he may have noticed how Netflix’ margin is on the rise and how much of a thorn in his side it is becoming.
The first time we saw a set of Liberty Global figures we were shocked at the video losses, but the company says these have fallen as a percentage of the base from 2.5% 5 years ago to just 1% today. If net video churn ever drops to nothing, then the company will throw off even more cash.
Liberty also reported that its deal to acquire Kabel BW was finally agreed, after it had paid the two companies who appealed against the deal some €183.5 million, which will be split between Deutsche Telekom and local cable operator NetCologne we understand. The objections to the merger will be removed from the court, later in the first quarter and then Kabel BW will be consolidated with Unity Media and the Kable BW name will disappear.
Finally the company added details of how Virgin Media in the UK will increase its footprint, spending some £3 billion ($4.6 billion). He told the story of how Virgin Media’s network had grown through consolidation of various cable companies, which led to it being a patchwork which just missed lots of homes. This isn’t really true as 14 of the 21 UK cable franchises were acquired by NTL, and Telewest got all the rest but one, and that went to BT who sold it quite rapidly. So only two companies were merged, and then merged with Virgin Mobile in the UK to create Virgin Media.
He said, “We’ve identified 4 million premises that are within 50 meters of our existing infrastructure, with two third of those actually just 20 meters from the current network. The close proximity of these premises combined with lower build cost today means that the value creation opportunity here is very attractive.” We don’t buy that at all, not at those short distances, but we expect this is as close to a version of the truth that we are going to get. Virgin had considered using BT infrastructure to grow its footprint in the past and internal investigations to going back into “build out” mode were jumped on by bank which had become investors. They are now gone and we are pretty sure that Liberty Global simply dusted off an old Virgin Media plan which had been vetoed in the past, and took credit for it.
The project to bring these properties into the fold will be called Project Lightning and it will be funded by debt and almost immediately pay for itself, which means that it will not require access to central Liberty Global funds. It is supposed to be accretive by 2017 when the company should be able to generate £1 billion ($1.5 billion) of incremental revenue.