MEDIA SPOTLIGHT ON: CABLE TV - Telewest and Flextech line up for vertical integration game. A merger made in heaven or a mis-match? Alasdair Reid ponders the alliance

A confusing business, this cable lark. Doubly confusing in that what happens in the UK is often merely the faint aftershock of decisions taken in a far bigger global game. Business models are replaced with such regularity that you’re never very far away from inheriting the one you first thought of.

A confusing business, this cable lark. Doubly confusing in that

what happens in the UK is often merely the faint aftershock of decisions

taken in a far bigger global game. Business models are replaced with

such regularity that you’re never very far away from inheriting the one

you first thought of.



Take the Flextech discussions with Telewest revealed last week - all the

talk there was about the merits of vertical integration. Flextech’s

parent company has been around this particular block several times in

the US. Flextech was previously owned by the US cable giant, TCI, but

when TCI was merged with another megasaurus, AT&T, the company’s

programming entities, including Flextech, were restructured into a

separate company, Liberty Media.



Here was a clear division between programming and infrastructure. Oddly

though, and perhaps rather untidily, Liberty retained a piece of

infrastructure property in the form of its 21.6 per stake in Telewest:

in short, Flextech and Telewest are already kissing cousins. But the

main point is that, when it comes to structural models, Europe appears

to be different - in the US, where integration is a potential regulatory

issue, it has not always been pursued with great enthusiasm.



Will it work here? Vertical integration evangelists point to several

potential advantages. They argue that a deal between the two companies

will put cable, or at least Telewest’s share of the UK cable industry,

on ’more of a level playing field with BSkyB’. Flextech, they argue,

would have a guaranteed distribution route for its programming, while

Telewest would have a more attractive platform on which to build its

digital interactive offerings in the future. Last week, Telewest

coincidentally revealed that it is planning to sign up 300 content

providers for its interactive services over the next three years -

including retailers, financial institutions and entertainment

brands.



Others, though, have pointed out that this sort of vertical integration

only really makes sense when the content is of a high value. Think of a

TV network - ABC, CBS or Fox/Sky - tying up with a Hollywood film studio

- Disney, Paramount and 20th Century Fox, respectively.



The proposed Telewest-Flextech deal isn’t in that league, obviously. But

some observers are doubly sceptical. For instance, as things stand, not

everyone in the UK can sign up to Telewest cable (around 15 per cent of

UK homes are passed by its networks), and aside from its UK TV joint

venture channels with the BBC, Flextech’s strongest properties are the

Trouble, Living and Bravo channels. How, they also wonder, does

Flextech’s avowed philosophy of being ’platform neutral’ - in other

words, keen to supply programming to any distribution channel - fit with

a vertical integration model?



Paul Longhurst, the managing director of Quantum New Media Services,

questions the relevance of vertical integration in this case. He says:

’For me, these talks are all about Telewest ensuring it is less

vulnerable should the deal between the other two major cable players

(NTL and Cable & Wireless Communications) go through.’



Flextech’s agreement last week to supply NTL with channels for its

digital cable service was heartening for those who feared that a

Telewest-Flextech deal might restrict other broadcasters’ access to its

contents.



There are those who believe that the value of a Telewest-Flextech deal,

should it go through, could lie principally in the bargaining chips it

creates. And, as many pointed out last week, the timing was

immaculate.



The proposed NTL/Cable & Wireless merger referred to by Longhurst was

referred to the Monopolies and Mergers Commission two weeks ago - so

this latest development certainly gives everyone something to think

about.



If, as many predict, cable ownership is bound to consolidate eventually

into one company, the odds on that company being Telewest could now

shorten considerably.



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