Daiwa EuroTelcoblog No. 43 Thursday, 27th May 2004: What Comcast means for Europe

Yesterday's news from Comcast of its plans to offer residential IP telephony to 40m US households within two years highlights a message we have been repeating to investors over the past year - European cablecos should not be underestimated as market disruptors. It may be old news for us, but for the market generally, yesterday's Comcast news may rightly rekindle investor interest in European cable as a telco competitor worthy of some respect. The sector is shedding the baggage of its period of large scale value destruction, and NTL, UPC, Telewest, Cablecom, et al are all coming out of financial restructuring as more disciplined, focused operators. For markets where cable is already operating from a position of relative strength, we expect to see more agression by year end. This group would principally comprise the Netherlands, Belgium, Austria, and Switzerland. We would also be inclined to add France to this list, given Liberty Media's recently approved acquisition of Noos and our expectation that the Newco formed by FT Cable and NC Numericable will eventually end up in Liberty's hands. All of the developments discussed below figure in our current UNDERPERFORM ratings on KPN, France Telecom and Swisscom. We think the markets most insulated from the cable threat are Italy, Spain and Germany, and believe the situation in the Nordic markets to be broadly neutral given the strength of legacy cable businesses retained by the incumbents there. Here are some signposts from the past month or so:

We recently highlighted (EuroTelcoblog No. 40, 14th May) the "ISDN-buster" product from Cablecom (100kbps cable modem with IP telephony bundled, launched mid-April), and we understand that demand for this product, even with minimal promotion, is currently running at more than double the company's initial expectations.

Early in the month we saw orders from Telenet in Belgium for IP telephony kit from Nortel and Arris, and also press reporting that Telenet is to launch an MVNO as part of its bundling strategy.

Dutch cablecos UPC and Essent are both advanced with VoIP deployments, with UPC's parent UnitedGlobalCom announcing at its Q1 results on 10th May that it is moving forward the commercial launch date to late summer 2004. We think UPC's franchise in Austria may also be in a strong position to move in this direction as well.

France is a more difficult call given the historically weak market position of cable in broadband, and the arrival of the IP Triple Play over ADSL. However, it is interesting to see Liberty Media now controlling assets in the French market, even moreso in light of the deal announced last week between Liberty's Puerto Rico subsidiary and Net2Phone. In this transaction, Net2Phone is to supply a hosted IP telephony service for Liberty's entire footprint (310k homes passed, 120k subs) for a minimum of six years. We can only speculate as to what, if any, strategic relationship this agreement has to Liberty's market positioning in France, but we suspect there is more to come.

As for the UK market, we have never expected NTL and Telewest to jump on the VoIP bandwagon, given the success of their switched telephony businesses. However, it was interesting to see reporting earlier this week in The Register (http://www.theregister.co.uk/2004/05/25/ntl_adsl/), claiming that journalists have seen company documents outlining plans for NTL's impending entry into the ADSL market as a strategy for footprint expansion. This is something we have been expecting for some time, but the really interesting question is whether NTL will seek to leverage its existing TV programming on an ADSL platform, and what implications such a move might have for BT Group's own plans for video.