UPC feels the pinch

Like many cable companies at this time, UPC is having a hard time convincing the financial community that it has an economically viable business plan. After a particularly bad 2000, surely the only way is up from here?

Despite an announcement by UPC (United Pan-Europe Communications) to analysts in January 2001 in which the company outlined its intentions to reduce it cash burn rate from 150m Euros per month in 2001 to 125m Euros in 2002; immediately following the meeting, the company's share price continued its, seemingly, inexorable journey south - dropping another 14%.

The reason the share price fell on the announcement of apparent 'good' news was simple: UPC stated that it would reduce its cash burn rate by reducing the scope of its ambitious broadband services rollout program in favour of concentrating the deployment of these services in the Netherlands and Austria.

Unfortunately, less customers means less revenue, and so the announcement was exposed to be little more than a public relations exercise - rather than providing analysts with any good reasons to change their increasingly pessimistic outlook for UPC.

Of course, the company was not helped by the fact that credit ratings agency, Moody's, chose the same day to announce that it was placing UnitedGlobalCom's (which owns 51% of United Pan-Europe Communications) and UPC's debt under review for a possible downgrade. This was another bad day for a company that has seen its share price fall 85% in 2000, to a low of 10.5 Euros - barely above its 1997 flotation price of 9.6 Euros.

A familiar story
The problems facing UPC are all too characteristic of those faced by many companies in this era of high technology. In simple terms, the company has borrowed heavily to fund the development of its pan-European broadband network that will eventually enable it to offer its subscribers the 'triple play' of television, telephony and broadband Internet access. While this may be viable in a buoyant market, as soon as any economic clouds begin to gather or the company fails to meet its growth targets, it is likely to quickly feel the squeeze from the financial community.

Sadder still for UPC is the fact that this latest piece of bad news comes just months after the company announced that it had 'ceased discussions with Excite@Home regarding the creation of the proposed Excite Chello joint venture (JV) - which would have created the largest broadband Internet company outside the US. The JV - had it been completed - would have made Excite's content available to subscribers of UPC's broadband services division, Chello.

However, due to 'differences of opinion' the two companies were unable to reach an agreement and the JV collapsed. According to UPC, the JV had failed because while UPC had wanted to concentrate shared resources in developing the access business, Excite had wanted to concentrate on the development of the new portal. Shortly after this announcement, however, the company said that it would combine its Chello unit with another unit, UPC Media - which includes broadcast television and radio operations, pay TV channels and video-on-demand (VOD) services.

A market barometer?
In terms of subscriber numbers, UPC is the largest cable operator in Europe with approximately 6.5m cable customers. Additionally, the company has almost 370,000 telephony subscribers and about 280,000 Internet customers. And there is the rub.

Despite its best efforts, UPC - and many other European cable operators - are finding it difficult to convert their millions of passive cable TV subscribers into higher spending consumers of TV, telephony and the Internet. This has prompted some observers to declare that the sector is suffering a 'funding crisis' and, also, that it is in danger of losing its lead. In terms of a market lead, it is doubtful whether it ever really had one at all - converting broadcast cable networks into two-way multimedia networks is far from straight forward; and then there are cable modems.

With regards to funding, despite the 'panic' in the financial sector, the European cable industry's story is a good one and will one day pay handsome dividends - so long as its backers remain faithful. Cable does have its advantages over telecomms and satellite networks and the Internet as we approach the era of broadband communications. In an era of converging technologies and marketplaces, a cable platform is the only one really capable of supporting the 'triple play' of television, telephony and broadband Internet access.

And when the price of cable modems - which support broadband access to the Internet - fall to a reasonable price, cable will become a highly attractive communications option for Europe's information consumers. Moreover, until now, cable operators have given a higher priority to the development of their networks rather than the acquisition and maintenance of a profitable customer base.

Happily, in many cases, much of the network infrastructure is now in place and operators are now turning their attention to a subscriber base. What should make UPC interesting to observers is not the fact that it seems to be a magnet for bad news - in the current economic climate, this is a characteristic that could be attributed to any number of technology companies - but the fact that its technologies and physical location place it at the very heart of Europe's communication revolution.

Rather than becoming a victim of the market, UPC should be helping to set Europe's broadband economic agenda. When confidence does return to the market, UPC with its huge potential customer base and attractive service packages, should be an integral part of this. However, as long as the financial community remains sceptical, Europe's broadband revolution will have to wait.