Yahoo Finance Virgin Media hit by Lightning in cable row
It was all going so well for Virgin Media. At the turn of the year, Mike Fries, the chief executive of the cable giant’s hard-charging US parent company Liberty Global, faced Wall Street and City analysts in Las Vegas. He sang the praises of Project Lightning, the £3bn UK network expansion programme that is the cornerstone of its growth plan.
“2016 was a first full year of that build and it’s going great,” said Fries, a jet-setting 54-year-old known for his $112m (£87m) pay packet and his passions for heli-skiing and rock music. “I mean from our perspective, it is going extremely well.”
Project Lightning is the biggest investment in Britain’s internet infrastructure for a decade, a debt-fuelled expansion of Virgin Media’s network to cover an extra four million homes by 2020. It came as a boost to ministers and regulators struggling to nudge the telecoms industry into major investment in upgrades.
The scheme is also viewed as a challenge to rivals BT, Sky and TalkTalk, who all rely on BT’s Openreach network. In areas where the superior internet speeds offered by cable are available, about two out of five broadband customers are willing to pay the higher price.
Fries and Liberty would soon discover that work had not been progressing as smoothly as they had been led to believe, however. Last month the company was forced to admit to investors that Virgin Media had connected nearly 150,000 fewer homes so far than it had previously reported. Four staff were suspended pending an investigation.
Liberty sought to reassure investors, saying the failing would have no impact on its financial performance, but also sent a team of trouble-shooters into Virgin Media. Project Lightning would now be overseen by an executive who would report directly to Liberty Global as well as to chief executive Tom Mockridge.
According to multiple sources close to the situation, the moves were seen as a rebuke from Fries to Mockridge, who is now under pressure to avoid any more problems. Dana Strong, a former Virgin Media executive who moved up into Liberty Global two years ago, has been sent back in by Fries as chief operating officer.
Though beyond Mockridge’s control, Ofcom’s decision last month to impose a price cap on Openreach’s wholesale services is another challenge. The new regulations will cut the price of the network’s cheapest superfast broadband package, encouraging BT’s retail arm, Sky and TalkTalk to shift customers off older, slower technology that was previously more profitable for them.
At up to 38 megabits per second, the basic superfast service falls a long way short of Virgin Media’s 100 megabits per second minimum. Yet for many households, the improvement on their current Openreach service is likely to be significant enough to satisfy them that they do not need to pay a higher price for cable internet.
According to some analysts, the resulting speed improvement for millions of households will undermine Virgin Media’s investment case for Project Lightning.
HSBC said Openreach’s new cheaper superfast broadband wholesale rates would have a “chilling effect” on investment.
“Because the build will only continue as far as the returns are thought to be attractive, the implication of less appealing regulatory conditions driving diminished returns [for Virgin Media] will mean that fewer homes are built [connected],” HSBC told clients.
According to the bank’s estimates, if Ofcom’s price cap is imposed as planned next year, more than a quarter of the homes due to be connected are at risk of being dropped from the project Lightning rollout. With more conservative assumptions, over half a million new cable lines may never be built, as Virgin Media can expect a lower return on its investment.
The operator says there are no changes to its plans this year, but the concern is clear and lobbying over the next few months is likely to be intense.
“Cheaper wholesale prices don’t help build better broadband,” Mockridge told The Telegraph.
“Lowering the cost of using BT’s infrastructure isn’t going to encourage those who rely on it to roll up their sleeves, get their hands dirty and lay fibre in the ground.”
With serious political pressure on the telecoms industry to improve the country’s internet infrastructure, Virgin Media will accuse Ofcom of undermining its own objectives by making it more attractive to rent service from BT than invest in upgrades.
“Building broadband isn’t easy,” says Mockridge, who spent most of his career at Murdoch companies including Sky Italia and News UK before joining Virgin Media.
“It requires money to be spent, risks to be taken, permissions to be granted, plans to be executed and hard work to deliver.”
“Ofcom and the Government should be doing everything they can to ensure the best possible climate exists in the UK to support significant infrastructure investments like our £3bn expansion of our ultrafast network.”
He will be able to count on support from Openreach in the coming battle. Facing the brunt of public and Government pressure to spend more on network upgrades, it is worried that broadband retailers Sky and TalkTalk will focus marketing on the most profitable, price-capped service.
Meanwhile more expensive, faster services such as the “full fibre” demanded by ministers or the G.fast technology due to squeeze better connections down existing copper telephone lines will be neglected, Openreach fears.
It has already complained that Ofcom’s plans “do not appear to incentivise more investment in ‘full fibre’ networks”.
Others are sceptical of Virgin Media and Openreach’s grumbling. Sources at TalkTalk and Sky said Ofcom’s plans include a tacit threat to lift the wholesale price cap if they do not begin investing in their own infrastructure within three years. The regulator insists it has found a balance that protects consumers from rising prices and will deliver widespread upgrades through competition between providers.
However it plays out, the path for Project Lightning, Virgin Media and Liberty Global, is not as clear as it seemed.
