NTL/Virgin Mobile April 2006 [2006-e15]

• NTL’s acquisition of Virgin Mobile will improve NTL’s prospects for revenue growth and enable it to exploit the Virgin brand and marketing expertise

• However, we do not share NTL management’s optimism concerning the power of the ‘quadruple play’ – to date triple play has proved attractive to less than one third of cable households

• If NTL does not integrate Telewest rapidly and launch a competitively priced triple play package with vastly improved customer service, it risks zero or negative growth in fixed customers once Sky and BT have launched improved offerings in the Autumn

Although Virgin Mobile has been a great mobile success story, NTL’s recent conference call with analysts did not inspire great confidence regarding the benefits of its Virgin Mobile deal.

Virgin Mobile will provide the combined NTL/Telewest with: • A proven brand in return for around £9M per annum in revenue share • Access to Virgin Mobile concessions in 100 Virgin Megastores • Marketing and customer service expertise • The opportunity to sell fixed services to Virgin customers and Virgin Mobile to cable households • The only quadruple play in the UK

Given the current state of the NTL brand and the real challenges involved in growing a consumer brand from scratch, NTL could certainly do worse, particularly given the appropriateness of the Virgin brand for entertainment. Examples of possible future applications of the brand by NTL include Virgin Sport, Virgin Music and Virgin Movies.

Our concerns centre on the power of the Virgin brand when it is applied to a pre- existing service with a reputation for poor customer service and high prices. Virgin’s brand values work best when they are applied to organically-grown businesses providing low prices and good customer service in a ‘fun’ way. We struggle to see how this can apply any time soon to the combined NTL/Telewest where management is focused on solving the very considerable challenges of integrating Telewest, reducing costs and launching Video-on-Demand. Sir Richard Branson himself has said that NTL’s rebranding will only happen once customer service issues are resolved.

The combined entity’s Chief Marketing Officer will come from the ranks of Virgin Mobile management, but he or she is likely to find a considerable contrast with the setup at Virgin when faced with ‘new’ NTL’s Operational Support Systems (OSS). The fact is that good customer service, like good content, costs good money and it is easier to Telecoms Ian Watt +44 (0)7968 969438 [email protected] James Barford +44 (0)7785 288438 [email protected] NTL/Virgin Mobile April 2006

face up to that cost when you have an advantageous outsourced network deal like Virgin Mobile’s with T-Mobile or are reselling BT’s IPStream services like Virgin.Net. Injecting Virgin-style customer service into a company the size and complexity of ‘new’ NTL will probably involve hiring and training a large number of new staff and will be a mammoth task.

As we have said before, exuberant hype behind the quadruple play is pretty suspect for a range of reasons. • Mobile and fixed purchasing decisions tend to be unrelated – a customer buys NTL services when they move house or wish to upgrade their TV and/or broadband service. A new mobile is bought typically when the old one is perceived to be obsolete. Persuading a customer to bring these decisions together is difficult in practice, particularly given the high proportion of prepay users in the Virgin Mobile customer base. The limited appeal of a proposition based on bundling is illustrated by the 70% of cable households not taking the triple and the 60% of households within the cable footprint that choose not to take any service from cable. In the USA, Verizon has found quadruple play marketing to be completely ineffective • There are few if any network cost savings from quadruple play. The triple play of TV, fixed and broadband run on the same network, giving massive cost savings to a triple service customer, but none of these apply to mobile. NTL appears to have no plans either for unified billing or to move a proportion of Virgin’s mobile traffic from T-Mobile’s fixed network to NTL/Telewest • Fixed/mobile ‘converged’ offers are complicated, both to engineer and in terms of the customer proposition, especially with respect to handsets and pricing. BT’s Fusion product has failed to offer a compelling proposition to customers and any similar offering from NTL/Telewest is likely to be two years away • Even NTL’s own management admits that the likely incremental reduction in churn, due to the move from a triple to a quadruple play, will be low

Ironically, the absence of integration of Virgin Mobile is good news for those who see the company as more of a tactical acquisition than a long-term must-have. Virgin Mobile may prove a useful asset to trade in the fullness of time.

Right now what is required is integration of NTL with Telewest onto a lower cost platform, enabling the launch of a compelling triple play package including VoD and HDTV at a more competitive price, backed up by a decent call centre. This needs to be achieved rapidly. Otherwise, plans to cross-sell cable into the Virgin customer base, or to anyone else, look pretty hollow.

The autumn will see a substantial increase in competitive activity directed at cable's core propositions. These will include a new triple bundle offer from Sky revitalised by LLU-based broadband, and the launch of TV over broadband by BT. In the mean time, there are dark rumours circulating that Carphone Warehouse will next week launch a ultra-low price bundle of telephony and broadband which, when combined with Freeview, may be enough to attract away some cable customers.

NTL needs to accelerate its existing initiatives, not be distracted by the longer term and more ephemeral attractions of Virgin Mobile.

2 NTL/Virgin Mobile April 2006

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