Broadcast: Liberty’s Virgin masterplan

Story from Broadcastnow:

Chairman John Malone realises his 10-year ambition to become a player in the UK market Liberty Global’s swift swoop to acquire Virgin Media caught much of the industry by surprise.

But the deal is the result of a patient process for Liberty founder John Malone, who has been keen to buy big in Britain for more than 10 years.

Liberty was a shareholder in forerunner Telewest and lost money when the latter failed – but its founder and dominant chairman John Malone will expect a very different outcome this time.

The £10bn buyout is one of the sector’s largest M&A deals in recent years and will mean that Liberty has 25 million customers in 14 countries.

The company expects to close the transaction in the second quarter and Peel Hunt media analyst Patrick Yau predicts smooth progress. “The fact that Liberty doesn’t already have a signifi cant presence in the UK means that regulatory scrutiny should not be too onerous,” he said.

Another factor in ushering through the deal is the work Virgin Media (VM) chief executive Neil Berkett has done steadying the ship in recent years.

“Virgin Media is now much better organised than it ever was,” said a source familiar with the company. “A couple of years ago, it was dithering about a lot of things – about whether to be in B2B telecoms, whether to be in content. It has now made those decisions.”

Those strategic decisions saw it effectively “bury the hatchet” with BSkyB after a low point in 2008, when Virgin customers missed out on shows such as Lost and 24 following a breakdown in carriage talks with Sky 1.

But Liberty’s takeover could edge Virgin back into the content game. Malone, who sits on the Discovery Communications board, understands the power of programming and has had success with Chellomedia’s profitable portfolio of 66 mid-tier pay-TV channels in Europe, including kids’ network JimJam, Extreme Sports Channel, the Horror Channel and the likes of CBS Action and CBS Drama in the UK, through a joint venture with the Hollywood studio.

The Chellomedia division is run by president Niall Curran and key lieutenants including executive vice-president of entertainment development Susan Elkington, and it has been striking significant deals with the likes of MGM, where it acquired 78 international channels across Europe, Asia and Latin America.

Liberty could ramp up its UK channels base along these lines, rather than compete on top-tier channels akin to Virgin’s former channels Living or Bravo.

While Liberty also operates a number of sports channels in the Netherlands and across Central and Eastern Europe, it will not dive straight into the big-money battle for premium sports that BSkyB and BT are currently fighting.

Liberty will keep the Virgin brand name, which is under licence from Sir Richard Branson, and will inherit a deal with the Tivo set-top box that is set to run for at least another four years.

Virgin’s Tivo now has 1.33 million subscriptions in the UK, after adding 896,000 this year, but Liberty is likely to be making a long-term bet that its interactive set-top box – Horizon – will ultimately help it attract new UK subscribers, reduce churn and boost average revenue per user.

Horizon has launched in the Netherlands and Switzerland and is expected to launch in Germany and Ireland before the end of the year.

Liberty is working with YouTube, Facebook, Twitter and about 60 content partners to develop apps for its app store, and Horizon offers an online video store, which already has 3,000 titles.

The box has the ability to record up to four channels at any one time and allows subscribers to watch shows concurrently on their computer, iPad or iPhone.

It can also record up to 175 hours of standard-definition shows or 65 hours of HD shows.

Other areas for investment could include VM’s cable and superfast broadband network.

Yau said: “A key question is whether Liberty is prepared to put resource into growing VM’s footprint more aggressively. VM has been investing capital expenditure of 15-17% of revenue building its network, filling in around the edges, but the size of the potential audience isn’t going to grow at that rate. There’s an opportunity for Liberty to really go for it.”

Liberty Global is also well versed in digital platforms and has had success rolling out online video services across its European networks.

It will likely build on VM’s digital video service, TV Anywhere, which could escalate the competition with Sky for traditional pay-TV customers and online eyeballs, as well as nascent players such as Netflix and Lovefilm.