Market Insight

Virgin Media acquisition boosts Liberty Global results despite customer losses on both sides

August 04, 2013

Martyn Hannant Martyn Hannant Manager – Research and Analysis, Service Providers & Platforms
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Virgin Media proved the highlight of Liberty Global's second quarter 2013 results, which otherwise saw a lack of growth in connected households and revenue generating units (RGUs) for the cable company. Excluding Virgin Media's 4.879m customers, Liberty customers decreased from 19.61m in second quarter 2012 to 19.59m in second quarter 2013. In addition, a slowdown of year-on-year RGU additions continued in the second quarter, with Liberty adding 191,000 RGUs on an organic basis compared to 364,000 additions in the same period last year. The slowdown in RGUs was blamed on lower promotional activity in Germany, changes in pricing and increased competition in Central and Eastern Europe. Liberty also reiterated that the continued intensity of competition in another key Liberty market, the Netherlands, contributed to reduced RGU growth.

Liberty Global's second quarter revenues were noticeably driven by the inclusion of Virgin Media, which increased revenue by 25.2 per cent on the previous year to $3,161.9m. With out Virgin, revenue stood at $2,760.6m, up 9.4 per cent on a year earlier. This increase stemmed largely from Western Europe, where revenue grew eight per cent (excluding Virgin Media) to $2,005.7m, despite a 1.6 per cent decline in customers. This was mainly due to strong performance from Belgium-based Telenet and Germany's Unitymedia KabelBW. Telenet's revenue increased 14.6 per cent year-on-year to $534.4m for the quarter, and coincided with the Belgian operator's lowest quarterly churn rate since second quarter 2008. Unitymedia KabelBW also increased its revenue 10.3 per cent year-on-year to $624.6m. Central and Eastern European revenue was up 2.4 per cent on 2012's second quarter figure at $281.5m. Including Virgin Media, Liberty Global's consolidated ARPU increased 13.3 per cent year-on-year to $40.74 (€56.76) in the quarter.

Despite providing a clear boost to Liberty Global's second quarter figures, Virgin Media also experienced customer decline in the second quarter 2013, with a loss of 34,000 RGUs. Whilst the second quarter is typically weaker for the UK cable operator, the RGU loss is greater when compared to a year earlier when Virgin lost 2,900 RGUs. Virgin also lost unique customers during the second quarter this year, which fell from 4.90m to 4.87m. Virgin blamed the drop on student churn at the end of the UK academic year. Nonetheless, on an annual basis, Virgin grew its customers by 67,300. In addition, Virgin's TiVo service continues to perform well, reaching a 44 per cent penetration of TV subscribers in the second quarter. Consumer cable revenue increased year-on-year by 4.2 per cent to £740.3m for the quarter, whilst ARPU stood at £48.80, up 3.4 per cent on 2012's figure.

The addition of Virgin Media has cemented LGI's position as the world's largest cable operator, but current trends suggest that the combined entity will continue the steady flow of customer decline as a result of strong competition in its core markets. Liberty continues its long-established strategy of buying cable assets, despite losing out to Vodafone in its attempt to buy Germany's Kabel Deutschland. Most recently, it increased its stake in Dutch cable competitor Ziggo to 28.5 per cent, further fuelling speculation of a full takeover. According to Dutch law, Liberty can make a full bid for Ziggo if it owns more than 30 per cent, however a merger is likely to be subject to much regulatory scrutiny.

Slowdowns in digital TV customers were a further characteristic mirrored in both Liberty and Virgin's second quarter results. Excluding Virgin Media, Liberty grew its total digital cable subscriber by 89,000 in the quarter compared to 246,800 a year earlier. The majority of Liberty's digital cable slowdown has come from Western European operations. Virgin's also lost 1,900 digital customers in the quarter. Liberty faces further competition from Sky in Ireland, where its UPC brand has seen limited growth in its digital cable and MMDS subscriber base in the past year.

Bundling remains crucial for Liberty's growth and competitiveness, and the addition of Virgin Media to its portfolio of customers is a key gain in this respect. At the end of the second quarter, Liberty's triple-play consumer base increased 54.2 per cent over the quarter to 9,358,000, following the addition of Virgin's 3,200,886 strong triple-play customers. Furthermore, the addition of Virgin has served to increase Liberty's RGUs per customer relationship dramatically from 1.71 in the first quarter of 2013 to 1.93 in the second quarter. Along with Virgin's TiVo growth and Liberty's continued roll-out of its Horizon service, this suggests that Liberty's latest purchase particularly provides an opportunity for ARPU uplift, despite the slowdown in RGU growth.

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