Virgin: stop whinging and deal with the debt
Sky battle self-inflicted
Business and mobile: churn to come
Business is a very important segment to Virgin Media – representing £163m of revenues in Q1 compared to £637m across the whole of the consumer segment. I was extremely interested to hear murmurs that the business might be up for sale. Personally, I just can't see how the consumer and business segments could be separated. I also think Virgin Media has never fully exploited its network assets especially in the SME sector.
Virgin Mobile has effectively withdrawn from third party acquisition, and this accounts for the falling subscriber numbers and the increased OCF in Q1. I believe this is a very interesting change of approach, but Virgin Media has to be really quick in building its own distribution network and gaining traction on its base. I am currently a total non-believer in the quad play, but if Virgin Media could minimise subscriber acquisition costs, allied to a very good network services contract with T-Mobile and generate enough traffic, I could be converted in the near future.
I am certain the prepaid MVNO model that Virgin Mobile operated upon previously has a very short life span. The figures published in Q1 imply there is some pain to come in bridging the gap: a drop in prepaid numbers allied to an increase in contract customers should theoretically indicate a jump in ARPU figures. The fact Virgin Media's ARPU has dropped by five per cent without a big drop in prepaid rates, implies there is a large number of people with very low activity – in other words there is a big buffer of churners to come.
Despite the well published drop in Sky payments, the division actually managed to increase OCF. Apparently, the increase was all due to litigation - enough said.
Virgin Media was struggling before the partially self-inflicted wound of the removal of Sky Basics channels from the Virgin Media TV offering. I feel that Virgin Media is using Sky as a convenient scapegoat for its lack of performance in the ultra-competitive UK communications market.
The other problem for Virgin Media is that when you examine the BSkyB recent quarterly results - especially when you look at its cash flow performance - it is also suffering, but the big difference is that Sky is making large infrastructure investments in developing a triple play.
Another problem is that after the noise abates and the economists have spent months or years studying the UK communications market, I can't see how anyone can say that that Sky is a monopolist. In fact, I wouldn't be surprised if Sky gains more flexibility because convergence has actually reduced its historical market power.
But the biggest problem for Virgin Media is that its balance sheet is based upon the premise of extracting monopoly rents from appreciating assets. Unfortunately for Virgin Media, there is no monopoly in the UK market or even a situation comparable to the US cable companies, and neither is there likely to be. Furthermore, I don't believe that even political and media lobbying of gargantuan proportions will change the situation. ®
This article first appeared on the Telebusillis blog.