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12 September 2019

Subplots aplenty in Sky-Liberty game of fiber

Although formal confirmation has yet to come, all the signs are there that Comcast’s European operation Sky will invest in a wholesale fiber network being planned for the UK by a new company set up by previously-archrival Liberty Global, as revealed last week. We revisit this nascent story now as it has several subplots revolving around the fact that the UK (plus Ireland) is the one region where Comcast and Liberty Global are head to head as the two dominant pay TV operators, having acquired respectively Sky and Virgin Media at different times for large sums. Comcast’s $39 billion acquisition of Sky was one of the mega media deals of 2018, while Liberty Global raised eyebrows in 2013 when it paid $24 billion for Virgin Media with only about a fifth as many subscribers across Europe as a whole.

Sky and Liberty Global did compete in Germany and Austria but now the latter has divested most of its assets there, mostly to Vodafone, while in other European countries apart from the UK and Ireland only at most one of them is present. This competitive focus on the British Isles was acknowledged by Liberty Global CEO Mike Fries upon news of the Comcast Sky deal with his comment “the UK is where we’ll square up.”

But since then the heat has gone out of the battle as Liberty Global has continued to signal its European retreat. There is also a sense that legacy pay TV operators are making common cause and striking partnerships in their defense against the marauding OTT giants such as Netflix and Amazon, as well as live streamers. Sky and BT for example now distribute each other’s premium sports content, which reduced the intensity of battle in the last round of auctions for English Premier League rights in the UK, even if that proves to be just a temporary point of inflexion in the otherwise upward curve in values before the likes of Amazon or Facebook make bigger plays.

When it comes to Virgin Media in the UK, we can detect a shift in emphasis from TV towards broadband, with an admission that the primacy of the traditional set top is declining and that it must compete in streaming. At the same time, Sky, while still best known for its DTH services across Europe, is now certainly not resisting and – if anything – encouraging a migration from satellite to its standalone Now TV streaming service. It is this common factor that is bringing Comcast and Liberty Global together, accentuated by the lack luster execution of Virgin Media’s Project Lightning instigated in 2015 to roll out fiber to the home in the UK and Ireland.

The problem seems to have been that Virgin Media has never geared up to fiber roll out in the way that BT’s Openreach has with its dominance over that field in the country. The project was set up to maintain Virgin Media’s perceived lead over rivals, especially BT, in raw broadband speed which, while not relevant for many customers, was a selling point and gave a marketing edge. Virgin Media was well aware that as Openreach extended fiber to the home its advantage would disappear and so at the very least needed to deploy fiber faster within its existing footprint. Accordingly, Project Lightning targeted the 15.2 million UK homes – 56% of the 27.2 million total – mostly in relatively urban areas that were already passed by its cable network.

By contrast, Openreach is under regulatory and political pressure to cover the whole country and has been having to kick back against the government and industry to restrict investment to sustainable levels, while a few other players have moved in to cream off some custom in more lucrative locations, such as CityFibre with its plans to reach 5 million urban homes.

So far Project Lightning has underwhelmed in roll out performance, having succeeded in establishing just 1.7 million fiber connections, less than halfway towards its original ambition of reaching 4 million premises by the end of 2019 with speeds of 300 Mbps. There are no signs of it picking up the pace, having added 102,000 premises in Q2 2019 compared with 111,000 in the same quarter a year earlier. This is all despite about $3.9 billion being earmarked for the project.

It seems that Liberty Global has lost faith in this project and come in with a separate venture called Liberty Fiber Ltd that has just been registered with Companies House in the UK, even though rumors of the plans first surfaced around April 2019. There are two distinctions from Project Lightning however, one being that it is focused more on the whole UK to provide a viable alternative to the Openreach network, expanding Virgin Media’s footprint. Related to that is a focus on becoming a provider of wholesale capacity as a way of attracting new revenues as well as progressively reducing dependence on Openreach in rural locations. This aspect has attracted Sky, which has relied on Openreach increasingly as its incumbent wholesale partner as it has become more dependent on broadband and streaming. Sky has been critical of Openreach’s market dominance and not entirely satisfied with regulator Ofcom’s efforts to offset this by imposing various constraints and obligations, particularly on pricing and legal separation from parent BT.

Sky now sees a chance to become part of a second incumbent, but this will require substantial investment given that the cost of deploying fiber is nearly all in the last few hundred meters, which therefore escalates in rural areas where there may be just a handful of promises at the end of a long cable run. There are also existential risks for Virgin Media, which will face competition from a new generation of start-up service providers if competition between Liberty Fiber and Openreach brings down wholesale prices. That will dismantle the operator’s strategy of maintaining a premium for extra high bit rates, even if consumers do not really need them. Virgin Media will be the “anchor tenant” for the new network and therefore could have a window of opportunity to expand its TV and broadband customer base. But as that window closes so Virgin Media’s competitive edge could disappear, given that it has no stake in original content. That is partly why we see Liberty Global retreating across Europe.

The other sub plot here concerns the respective CEOs of Liberty Global and Comcast, the American billionaires John Malone and Brian Roberts respectively. Between them they have dominated the US cable market for decades, but have only recently locked horns outside in the UK. In the US, power gradually transferred from Malone to Roberts, culminating in Comcast’s acquisition of Time Warner Cable to become by some distance the country’s biggest MSO. With the Sky acquisition coupled with Liberty Global’s decline, this trick is being repeated in Europe.

There is also the mobile dimension, where both Sky and Liberty Global have been pursuing MVNO (Mobile Virtual Network Operator) strategies to gain traction and position for provision of premium services including video. On this front, Liberty Global is well ahead in the UK with just over 3.1 million subscribers, compared with around 1 million for Sky. This makes Virgin Media the UK’s largest MVNO running over the BT-owned EE network and now has control over billing, SIM cards and other network components, or what is known as a “thick MVNO” Sky runs over Telefonica’s O2 network and is making a play for 5G, although it looks set to remain a small player in mobile.