In seven out of nine markets Liberty has seen an improved performance driven by the two planks of broadband internet and digital TV rollout. The latter is particularly significant, as the staged rollout of digital TV from UPC hasn’t always kept pace with the availability of digital terrestrial services and in some markets commercially available direct-to-home satellite services. Once digital video services are in place – not just the linear TV channels but the other benefits such as VOD and PVRs – the triple play proposition becomes a truly workable marketing tool.

In an investor call on the company’s second quarter financials, Mike Fries, CEO & president, Liberty Global said that by far the most improved market was The Netherlands, where UPC added 38,000 RGUs boosted by new triple play bundles. “This is not an anomaly, this is a significant trend for us and one that should continue for us as we reach 80% of our footprint with DOCSIS 3.0 by the year end,” Fries said there had also been a halo effect for its voice business as customers took up the triple play option.

Romania was not so lucky, amid major competition from the DTH sector accounted for 40% of sub losses for the quarter. Excluding Romania, the figure was 20%.

In some markets it just doesn’t work out, with hardly any DTT to speak of and little in the way of DTH, Switzerland’s Cablecom had just got it wrong. Over the past year though Cablecom has been put under new management, introduced HD, VOD, DOCSIS 3 and even dabbled in 3D. New resources have been put into customer care and UPC is so confident that a rate increase can be introduced in the second half of 2010. The newly found confidence also extends to Cablecom starting to take the UPC name.

“At this point we’ve seen good signs that Cablecom is about to turn the corner, specifically we’ve seen strong net RGU performance year on year, although weaker than budget and that was largely due to an aggressive assumption on the reduction of churn,” said Gene Musselman, president and chief operating officer, UPC Broadband.

The Netherlands, where KPN now has over one million subscribers to its pay DTT and IPTV services, posted its lowest video subs loss in three years. As the first European country to switch off its terrestrial analogue services, way back in November 2006, Holland is once more a mature market.

High definition is beginning to play its part, an additional 260,000 HD subscriptions were taken on the quarter, helping to deliver a combined total of 2.4 million HD and DVR subscribers across the continent. Typically HD is able to command a premium of between €5 and €10.

With hardware costs coming down, it is less painful on the capital expenditure to get new HD boxes into the homes of subscribers that are happy to pay for the privilege. It has also brought down the cost of the proposed Liberty Media network device that with six-tuners might have initially been seen as high-end in the extreme. “We are making great progress with Samsung, Intel and NDS on the development and integration on the hardware and software components here and we continue to feel very positive about the impact that this IP device for the home will have on our digital TV and broadband business,” said Fries, pointing our that the company had received a good reception from operators in both the US and Europe.

Fries described how subscribers would be able to use the gateway to communicate with multiple Wi-Fi devices while sitting in front of the TV, moving content to an iPad from another device elsewhere in the home, over the IP network. “This isn’t just a slightly better user interface, this is an entirely different approach to the user experience, but more than that this is about putting a device in the home that has all the bells and whistles that your PC has today in terms of a very fast processor, multiple Wi-Fi chips, six tuners, and importantly the ability to communicate with your Wi-Fi devices.”

Because Liberty still has close to ten million homes that use no set-top box at all – the cableco has not set a date for an analogue switch-off – Fries said this presented a unique opportunity.

There are also opportunities in acquisition, Fries said Poland remains a very appropriate and obvious consolidation market and pointed to obvious consolidation in the Czech and Slovak markets. In the Czech Republic there were also “interesting opportunities”.

Liberty Global Q2 Financials

• Organic RGU2 additions of 169,000 increased by 80% or 75,000 RGUs
• Revenue of $2.17 billion and Operating Cash Flow (“OCF”)3 of $985 million
• Reflects reported revenue and OCF growth of 20% and 21%, respectively
• Represents 5% rebased4 revenue and OCF growth
• Operating income expanded by 120% to $327 million
• Cash provided by operating activities from continuing operations

Source: Liberty Global

At the same time, Telefónica ended June with 5.6 million wireline broadband accesses, giving it a market share of over 54%. Double and triple play customers also accounted for nearly 90% of the company’s retail broadband internet accesses in mid-year.

In terms of revenues, the €5,687 million Telefónica has posted for the first half for its Spanish wireline business was 6% down year-on-year, which was an improvement on the 7.7% year-on-year reduction in the first quarter.

In the general scheme of things, data just published by the Spanish regulator CMT for Q1 rather than H1 give Telefónica a 17.8% share of a domestic pay-TV market numbering just over 4.1 million subscribers. This put it in third place behind Sogecable (43.8%) and ONO (23.6%) and also some distance in revenue terms behind Sogecable, which accounted for two-thirds (almost 67%) of the total.

Telefónica has extensive interests outside Spain, both in Latin America and Europe. Its total pay-TV subscriber base worldwide stood at 2.7 million at the end of June, equivalent to an 8% increase year-on-year in organic terms, with a reported figure of +10.4%.

Within Europe, Telefónica’s main pay-TV operation O2 TV is located in the Czech Republic. Launched in September 2006, this quickly developed into one of the most successful IPTV services in the CEE region but has since stalled. Indeed, the 133,000 subscribers it had at the end of June marked an increase of only 0.4% on the same period last year. Its operator, the incumbent telco Telefónica O2 Czech Republic, could nevertheless point to a 10.8% increase in its ADSL accesses, to 702,000, over the same period.

However, the telco’s overall financial performance in the first half of the year left much to be desired. Its consolidated business revenues in H1 were 6.6% down year-on-year at CZK12,273 million (€492.7 million), while OIBDA fell by 18.1% to CZK11,209 million. Its consolidated net income was meanwhile 23.9% lower at CZK4,354 million.

Globally, though, it was an altogether different picture for Telefónica. Its consolidated revenues rose 5.4% year-on-year to €29,053 million, with growth strong in both Europe (10.8%) and Latin America (10.2%). Its net profit amounted to €3,775 million in H1, which was a 9.4% increase year-on-year, with growth being even higher (+16%) in the second quarter.

Telefónica’s future results are likely to be positively impacted by last week’s purchase of a 50% stake of Brasilcel from Portugal Telecom. The deal, worth €7.5 billion, has given Telefónica sole control of what is the leading player in Brazil’s telecom market.

The picture was little different in the year ending June 30, with ONO losing 2.5% of its TV customers over the period.

According to the company, the churn in the second quarter was attributable to the difficult macroeconomic environment in Spain – the country has been amongst the hardest hit in Western Europe by the global economic crisis and is only just coming out of an 18-month recession – along with ONO’s decision to discontinue TV as a standalone product and increased focus on acquiring double and triple play customers.

Yet crucially, ONO sees this loss in TV customers as a temporary phenomenon and believes it can claw them back and gain additional revenues from what it terms “a set of innovative solutions.” The most important of these is the advanced TV platform it plans to develop following the signing of an agreement with TiVo this June.

ONO had a total of 4,156,000 RGUs (Revenue Generating Units) as of June 30, or 0.4% more than three months earlier. Of these, the vast majority (4,004,000) were cable, and the remainder (152,000) UUL. Its residential cable subscriber total stood at 1,821,000 (-0.1% down on Q1), and more positively net churn was down (13.4%, -0.8pp) while ARPU was up (51.5%, +0.1%).

ONO also grew its telephony and internet subscriber totals in the second quarter, in the latter instance by 13,000, or 1%, to 1,356,000. According to the company, its strategy of doubling the speed to its 3Mbps and 6 Mbps for an additional €2 has been successful.

ONO’s deployment of DOCSIS 3.0 technology, allowing for internet access speeds of up to 100 Mbps, is also going according to plan and it expects to have almost 70% of its network upgraded by the end of this year.

ONO’s revenues in the second quarter amounted to €368 million, or 3.2% less than in the same period in 2009. EBITDA was meanwhile down by 2% to €176 million and total net debt fell by 6.2% to €3,684 million.

Results published by the company show that it ended Q2 with 1,576,900 basic subscribers, or 0.9% less than a year earlier. Of these, 1,166,300 – a reduction of 1.1% – received cable services.

The number of ZON triple play customers, however, stood at 571,000 (+46.3%), and almost one in two cable subscribers (49%) received triple play services.

Furthermore, although the DTH subscriber total fell by 0.4% year-on-year in Q2 to 410,600, ZON could point to its blended ARPU rising by 7% to €35.4 in the first half of this year. Within the multiple play cable customer base, ARPU grew by 7.8% to €38.8 in Q2, while in the DTH customer base the increase was a much more modest 0.8%.

ZON’s strategy is clearly one of acquiring and retaining high-end customers, while the overall reduction in subscriber numbers in Q2 can be explained by across-the-board price increases of 2-3% that came into effect at the beginning of May.

The company says that its leading position in the marketplace is down to such factors as the number of HD channels it carries. This currently stands at 15, which is more than any other company in Portugal, with the latest additions, in Q2, being Nat Geo Wild, Discovery Showcase HD and – exclusive to ZON – Económico TV HD.

ZON had an installed HD set-top base of 740,000 at the end of H1 and coverage of the recent World Cup in South Africa in HD helped communicate its position as “the operator with the most comprehensive and best quality HD offer in the market.”

Significantly, ZON is also a pioneer in the 3D sector, having launched a channel in the format in Q1 this year. The company in addition has a VOD library of over 3,000 titles and is making strong headway in the rollout of ultra-fast internet access, having introduced a service in Q2 offering connection speeds of up to 200 Mbps. Indeed, the upgrade of its network to DOCSIS 3.0 is now almost complete.

On the financial side, ZON had operating revenues of €216.2 million (+9.5%) in Q2, along with EBITDA of €76.2 million (+15.9%). Its net income meanwhile rose by an impressive 41.7% to reach €13.6 million.

Solon finds cable in a good state, despite the current financial woes, with operators able to take advantage of the technical prowess afforded them by industry leading broadband speeds often in excess of 50 Mbps. Through the move to EuroDOCSIS 3.0, cable has managed to leave what Solon describes as the “ruinous price competition with DSL”. Participating cable operators project revenues to grow by 6.6% annually 2008 – 2012, while EBITDA gains 8.6% per annum.

Furthermore, the successful upselling to higher speeds has resulted in an increase in broadband ARPU higher than that anticipated by respondents to Solon’s 2007 study. The figures represent the first over-performance in internet ARPU development since the survey began in 2004.

Western Europe is ahead of Central and Eastern Europe in terms of broadband speeds. By 2012, it is anticipated that the average speed in Western Europe will be 60 Mbps, but CEE will lag behind on 30 Mbps.

A new, but perhaps predictable, trend has been a shift in strategy towards interactive surveys, particularly catch-up TV and transactional on demand services. However, some cable operators running on older networks have found they are unable to offer these services because of the lack of a back channel. This contributes towards Capex levels of 25% of revenues as they look to keep up with the telcos.

Operators fear two negative effects from the economic situation. The first is a greater amount of spindown as customers show a greater propensity to move away from more expensive packages. The second is pure price pressure on one side while coping with the effects of downgrading subscribers. However, the recession does not bring just bad news for operators. Some are expecting an increase in broadband subscriptions as customers that have recently been made unemployed look to replicate the broadband speeds that they previously enjoyed at work. Operators also see an opportunity in entry packages as users look to cut back on more expensive activities.

Operators are doing the same in the current economic climate. Cost savings ranked 3.9 out of 5 importance points as the key lever in addressing the downturn. This was followed by less network expansion  (3.2), less upgrade constructions (2.9), personnel restructuring ( 2.8) and financial restructuring (2.6).

Solon says that stepping back from network upgrades is not yet on the agenda, but warns that it may yet factor as cable’s private equity owners look to balance the budgets.

The downside for broadband offers is that markets are now maturing, competition coming from sometimes publicly funded fibre activities. Telcos, which may no longer be the first choice for fixed broadband, are introducing mobile broadband services, with operators in Austria, Sweden and Ireland coming under pressure during 2008.

However, in 2009 the picture has cleared as operators suspend their often-costly market entry campaigns. A total of 50% of all cable operators have now introduced their own mobile strategy, with another 35% planning to do so. The reasoning is entirely defensive, as no operator expects such a strategy will actually increase revenues.

As ever, competition looms on the horizon. IPTV operators are slowly gaining ground and DTT is extending its influence, but satellite remains the biggest threat, particularly in Central and Eastern Europe. Over half  (57%) of operators expect their TV subscriber base will be smaller in 2012 than it is today, with the remainder expecting there to be limited growth of no more than 1.5%.

To counter balance this, operators are planning to introduce more services. A change in strategy has meant that rather than introducing more and more digital channels – lesser performing stations are finding their carriage deals are no longer being automatically renewed – attention and capacity is instead going the way of on demand services.

Before 2009, only a fifth of all European operators had launched VOD offers, though by the end of 2010 the share is expected to reach 90%. The same is true for catch-up TV. Currently only 15% of operators allow for such an option, but the figure can be expected to increase to 70%.

As services are built up operators are beginning to focus on the customer experience, with a reprioritisation of customer services that puts it in the top three strategic issues listed by operators for 2009/10.

Despite disappointment from cablenets over the lack of available HD content, HD set-top boxes are anticipated as being the standard by 2010. Some 70% of basic boxes are leased to customers at a cost of €2-5 per month; others are fully subsidising the cost of the box. For advanced set-top boxes the rental model is not prevalent, the number of subscribers renting at an average of €9.90 is equivalent to the number of boxes sold. Once again, IPTV comes into the equation with the possibility that free set-tops in the sector might force cable into costly Capex.

VOD Service Take-up 2010

Economic Downturn/Expected Impact on Cable Operators

Cable vs. incumbent-marketed bandwidth: Cable in the lead