Everyone except Charles Dunstone has fumbled the ball on this one ‘ as Tiscali UK has changed hands for about a third of what it would be worth in ‘less interesting’ times, and Dunstone’s Talk Talk, the soon to be demerged part of Carphone Warehouse, has landed the prize.
Throughout the past three years across Europe companies as diverse as Vodafone, AOL, Deutsche Telekom, Telefonica, BT, BSkyB, France’s Free and Orange as well as Telecom Italia, have all been involved either bidding for, winning deals to buy ISPs or selling them off, and every single deal was at a higher value per subscriber than this deal with distressed Tiscali.
Tiscali in the UK had built up its own dial up service in the 90s which it has gradually converted to broadband, and acquired both IPTV service Homechoice for around $190 million in 2006 and Pipex, one of the oldest ISPs in the UK for $426 million. But after spending all that cash, and selling off all of its operations except its original Italian broadband base and its UK assets, it has been forced to sell the business for £236 million ($360 million).
Part of the pressure on Tiscali was that its market value at home had fallen below even this deal value, on the Italian stock exchange due to a mountain of debt that it had built up which it looked like it could never repay. It made losses of some €242 million ($330 million) for the year just gone, leading some to suggest that it would default on its loans and that debt for equity swaps would mean that the bulk of the company would end up owned by debt holders ‘ hence the share crash which made raising more cash almost impossible.
The fire sale of Tiscali UK began after BSkyB pulled out of exclusive negotiations back in March. BskyB had won the bidding contest for Tiscali UK in November, but the deteriorating financial conditions meant that Sky was suddenly nervous of the reported £450 million (at the time $720 million) price.
Even that price put each Broadband customer at a value of $400 each, whereas in the previous European landgrab for broadband customers prices had gone as high as $1,000.
When Vodafone bought Tele2 Italy and Tele2 Spain it paid around $1,708 per broadband subscriber, but the price included 2.2 million dial up customers in Italy and 310,00 in Spain.
Neuf Cegetel bought Deutsche Telekom’s French Club Internet unit and AOL France in 2006 in deals where each broadband customer was worth over $800. And Orange picked up the Deutsche Telekom owned ISP in Spain for around $1,000 per broadband customer in June 2007.
This Carphone Warehouse deal values each broadband customer at around $200 a head. Even though broadband subscription prices have fallen, especially in the UK where there are far too many ISPs chasing too little business, and price cutting is rife, this still amounts to around 1 year’s subscription revenues, when previous deals were closer to 2.5 years subscription revenues.
All of this goes to show that the idea of chasing a triple or quad play, where a single bundle of services can capture a customer for life across mobile, fixed telephony, broadband and TV services, has almost been forgotten. Right now in the current climate operators are doing their utmost to get shareholders off their backs, not plan a service proposition way off into the future. IPTV operators are looking at 7 or 8 years of constant marketing investment in order to get a substantial proportion of their base over to TV services, and it’s not a story that investors want to hear right now.
For Sky this was an opportunity to bring itself to neck and neck with British Telecom in the broadband stakes, a move that may prove necessary in the long term if it is to secure its pay TV position with a triple play ‘ offering broadband and voice alongside its pay TV services.
One motivation for Sky to pull out was that Sky has seen very little to challenge its dominance in pay TV in the UK. It has 9 million customers compared to les than 4 million at cable based rival Virgin Media, and neither of them are growing appreciably. BT with its BT Vision IPTV service is focused purely on VoD, alongside existing free to air digital terrestrial, and the Tiscali IPTV service ‘ one of the best in Europe in its day ‘ has not managed to attract more than 100,000 customers because it is available solely around London and because the company has always been cash constrained in terms of subscriber acquisition costs. Neither appear to be a threat to Sky, so perhaps it doesn’t have to worry about a quad or triple play offering.
Things could however be different with Talk Talk, especially when it separates from the retail arm of Carphone Warehouse. It already has its own mobile voice service, courtesy of an MVNO with Vodafone, it is now the second largest broadband supplier in the UK, with 4.25 million broadband lines which it claims gives it 24.9% of the UK broadband market, compared to BT’s 27.3% and even goes further, claiming that it has more domestic broadband lines than BT (because almost all of its lines are to UK homes, not business).
The first job for Talk Talk is to take the Tiscali lines and get them onto its own DSLAMs as quickly as possible. Right now it says that 50% of the Tiscali lines are unbundled, which means that 50% are not, and it will be paying exorbitant fees to British Telecom for wholesaling and backhauling those lines, the bulk of its revenue in some cases. By moving the traffic onto the Talk Talk backbone and its own DSLAMs (it has DSLAMS at 2,212 of the UK’s roughly 5,500 telephone exchanges) it will immediately cut costs and should be able to manage much of that in the first 12 months after completion of the deal. The aim is to reach 80% unbundled penetration of both its existing base and the Tiscali customers within 24 months, but some benefit will occur sooner.
The billing switchover will take at least that long, but it must do this in order to offer bundled triple play services ‘ and have the future potential for Quad play.
After that Talk Talk has to decide if it wants to push for a fully enabled quadruple play or not by adding video as the last leg of the four services. The Homechoice service has a few hundred channels, no HD as far as we can see, but strong catch up TV services (which has been weakened somewhat by the introduction of catch up TV on iPlayer, but none the less remains strong).
It has promised to clarify the future for Homechoice over the coming months, but could find that BSkyB is unhappy about continuing channel relationships with Homechoice if Talk Talk does proceed with a TV offering. Virgin had a two year war with Sky over pricing on its Sky channels on Virgin Media TV services, which has the potential to be repeated here.
But we suspect that Carphone Warehouse and Talk Talk will go ahead and integrate IPTV in some of the major metro areas around the country, slowly over the next few years. It is a big investment, but the management at Talk Talk has shown that it has the stomach for that kind of investment in the past and it could be a compelling Quad play, as it made its name in broadband by offering virtually free services in return for taking paid fixed voice, and a similar marketing campaign may well prove attractive.
Carphone already has revenues of £4.47 billion ($6.7 billion) has £216 million profit before tax ($326 million) and generated cash of £468 million ($707 million) last year, and has been virtually untouched by the recession with 74,000 broadband additions in the fourth quarter, and now up to 3 million total mobile connections, as well as opening 267 net new stores. The deal is meant to be accretive almost immediately and will be paid for out of existing bank facilities in cash.
If the investment community was not still caught in the jaws of economic turmoil this would have sent Carphone Warehouse shares up considerably, but then again it has already been rising steadily since the start of the year.