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14 November 2019

Liberty’s loss is Vodafone’s gain, as results go in opposite directions

Liberty Global, now rooted in the UK, may be ruing the sale of its operations in four European countries to Vodafone, or at least its shareholders will be as respective quarterly results move in opposite directions. Liberty Global total revenue from continuing operations left over after the sale of the businesses in Germany, Hungary, Romania and the Czech Republic, were $2.84 billion for its Q3 ended 30 September, a year-on-year fall of 3.0%. Vodafone, by contrast, enjoyed an instant uptick from acquisition of those Liberty Global assets, reporting revenues up 0.4% year-on-year to €21.9 billion ($24.1 billion) for the first half year ending on the same day.

Admittedly, this dichotomy was not a result of those transferred operations making all the difference, because some of Vodafone’s other subsidiaries did quite well, while some of Liberty Global’s remaining ones did badly. In the UK Virgin Media, now Liberty Global’s clear flagship business after the dispersals, reported flat revenue of £1.28 billion in Q3 YoY but a decline in real terms, while it shed 3000 net customers and 50,000 video RGUs (Revenue Generating Units) only partially offset by a gain of 5000 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 more of a focal point in the UK with Project Lightning and great efforts to lead in the league of headline speeds.

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

Indeed, this is a key shift in strategy because most of Virgin’s existing infrastructure has already been prepared for the upgrade to Docsis 3.1 and crucially this means the operator will able to step ahead of the country’s telco infrastructure being deployed by BT’s Openreach, which will have to deploy  FTTP (Fiber to the Premise) 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, nobody pretends those speeds will be anywhere near attained. In practice consumer packages will start at around 1Gbps downstream and correspondingly less upstream, perhaps around 200 Mbps, although that will be enough to give Virgin Media a marketing edge.

That being the case it is surprising Liberty Global 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.

Virgin Media CEO Lutz Schuler then chimed in trying 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. So by smoke and mirrors he succeeded in cutting the losses by half.

Schuler could at least point to slightly higher income and ARPU up 0.5% at £51.41 (about $65) as evidence that the higher value strategy was working. 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 25.18 million RGUs.

One point of intersection with Vodafone lies in mobile service provision, with both companies agreeing that future competitive success lies in converged services, or what we used to call quad play. In the UK Virgin Media relies on Vodafone for its mobile infrastructure as an MVNO (Mobile Virtual Network Operator) there. Then Vodafone’s acquisition of the Liberty Global assets was motivated by that same drive for convergence on its part.

Meanwhile Vodafone has reported a rapid impact on its operations from those ex-Liberty Global assets. In Germany, which accounted for 30% of Q2 service revenues, Vodafone claims Unitymedia integration 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 Global 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 then boil down to competition in the largely converging media and communications marketplace, where Vodafone is up against Deutsche Telekom and to an extent Telefonica Deutschland in broadband and pay TV, along with Sky Deutschland for the latter.

It is true that Germany is experiencing consolidation in the converged marketplace but it is hard to argue this is much different from what is happening elsewhere, or on the larger pan European, even global, stage. FRK’s legal action looks unlikely to succeed, although it is possible some small concessions might be extracted.