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Coverage Initiation: Virgin Media (VMED)
Value Line recently initiated coverage of Virgin Media (VMED) in its flagship product, The Value Line Investment Survey. The company is a provider of broadband internet, television, mobile telephone, and fixed line telephone services in the United Kingdom. It serves both the consumer (84% of 2011 revenues) and business (16%) segments.
The consumer segment includes the distribution of television programming over Virgin’s cable network and the provision of broadband and fixed line telephone services to residential consumers, both on and off the cable network. This group also includes mobile telephone and mobile broadband operations, which are provided over third party mobile networks. The business segment provides voice and data telecommunication and internet solutions services provided through Virgin’s cable network and third party networks to businesses, public sector organizations, and service providers.
Virgin Media has a fiber optic network in place that enables it to offer fast and high quality broadband services as compared to digital subscriber line (DSL) competitors. As a result, it believes that it provides a leading “next generation” broadband service and a more advanced on−demand service than its United Kingdom competitors (which largely use slower technology). At the end of 2011, it had 4.8 million residential cable customers. With regard to its wireless offerings, the company uses a “virtual” network, effectively reselling mobile bandwidth owned by third parties. It had approximately 1.5 million prepay mobile customers and about 1.5 million contract mobile in 2011. On the business side, the company provided services to approximately 50,000 U.K. businesses, almost 250 public sector organizations, and communications services to around three quarters of the United Kingdom’s health and emergency services providers and nearly one half of the country’s police force.
The company’s product offerings are structured to foster “bundling,” whereby customers are cross sold additional services for a larger overall price, but at what would be discounted individual prices. On average, customers subscribing to three products (so called “triple-play”) are more profitable than those subscribing to two (“double-play”), which, in turn, are more profitable than those subscribing to a single product. As of December 31, 2011, 86% of Virgin Media’s cable customers received multiple services, with 64% considered “triple−play” customers (receiving broadband internet, television and fixed line telephone services). Importantly, multi-play customers are believed to be “sticky”, since it is harder to leave a provider that is supplying two or more services.
Overall, Virgin Media operates in a relatively small market when compared to U.S. telephone and broadband providers. Moreover, Virgin’s competitors are often also its partners. For example, BSkyB, partly owned by News Corp. (NWS), is a leading content provider over its own satellite network and is also a provider of valuable content to competitors. Virgin’s efforts to resell third party cellular bandwidth (in a relationship with Everything Everywhere) is another example. Any difficulty with these interrelationships could result in a degradation of Virgin Media’s product offering. Some of its major competitors include BSkyB, BT Group (BT; the former British Telecom), TalkTalk, and O2.
The cable, cell, and media businesses in which the company operates are highly regulated. As such, Virgin Media must conform to all laws and taxation that is dictated by the U.K. government and the localities in which it operates. Failure to do so would be problematic. In addition, recent government efforts to increase broadband access could have a negative impact on the company’s leadership position in that space and, thus, could require increased infrastructure spending for the company to remain competitive.
In fact, Virgin Media recently announced a plan to double the speed of its network. Although upgrading is a necessary component of remaining competitive, it is also a costly one. Indeed, laying fiber optic cable and upgrading hardware and software is expensive and time consuming. Such projects also tend to be multi-year in nature, further increasing the risk of such endeavors. That said, some projects, such as the recent introduction of TiVo (TIVO) set-top boxes are less onerous and provide material benefit for customer and provider alike.
Although some would not consider phone and television services to be discretionary, they are still economically sensitive. In difficult times, customers will look for ways to save and that will impact Virgin Media’s top and bottom lines.
An additional issue for investors to keep in mind is that Virgin Media does not control the Virgin brand. Indeed, this brand is affiliated with a number of other products, including music and an airline, among others. It is, however, most associated with eccentric billionaire Richard Branson. Although something of a world-wide celebrity, there is always the risk that he or another Virgin branded company could taint the Virgin name.
Investors interested in broadband and media companies operating in The United Kingdom should consult Value Line’s regular quarterly reports for Virgin Media, noting that supplemental reports highlighting important news as it occurs are also important to watch for. The company has an interesting market position that helps it stand out from the crowd and a well-respected brand image.
At the time of this articles writing, the author did not have positions in any of the companies mentioned.