Virgin Media moves into black

The UK cable industry and its only major operator, Virgin Media, have turned in a net profit for the first time, after sustained investment in infrastructure and services, while shying away from content production.

Virgin Media made net income of £75.9 million ($120 million) for the calendar year 2011 on revenues up 3 percent at £3.991 billion, compared with a loss of £141.4 million on revenues of £3.875 billion ($6 billion) in 2010. Total Pay TV subscriptions were in fact slightly lower at 3.763 million compared with 3.778 million in 2010, reflecting the difficulty cable operators are having retaining their market share in many markets. But, the decline was reversed in the last quarter of 2011, with a small gain of 1000 customers, attributed to the growing success of its TiVo hybrid box delivering Internet-sourced content, such as YouTube, “through the middle” over DOCSIS 3.0 alongside the traditional HFC (Hybrid Fiber Coax) broadcast services, integrated into a common EPG.

The premium TiVo package was launched in December 2010, and rate of deployment has since accelerated to reach almost 2000 a day now, with the number of subscribers to that doubling over the last quarter of 2011 to 435,000, accounting for 12 percent of the customer base. Virgin Media says that demand is outstripping the current rate of TiVo installation and so the operator is hiring an extra 600 people, including backroom staff and onsite engineers to ramp up deployment. The aim is to convert all customers to TiVo over the next few years, with quite likely around 1.5 million having it by the end of 2012. Virgin Media hopes that the resulting boost in ARPU will more than offset the costs, as it appears to have done so far. The TiVo service helped increase cable ARPU 7 percent over the year to £47.85.

Sky, the UK’s biggest operator, is in different position as it delivers its premium services via satellite, having posted decent results for 2011 with subscriptions up 100,000 at 10.471 million, but feeling more threatened by emerging Over The Top (OTT) rivals than Virgin Media. Netflix is perceived as a potentially strong competitor over the next few years following its recent UK launch, providing it can get its hands on more premium content, which it has largely failed to do initially. The broadcasters themselves are also likely to add linear content to their current catch up services such as the BBC iPlayer and ITV Player, delivered to TVs via the impending YouView hybrid set top box, as well as directly over the web to PCs and tablets.

Virgin Media’s OTT strategy is currently based on TiVo for access within the home, with likely extension to home networking. Outside the home the strategy is to extend coverage, primarily via FTTH. Even though its cable coverage has been expanding steadily over the last few years, its network still only passes about 50 percent of the UK’s 25 million homes. So, while for Sky a high priority is to boost further OTT access for existing customers, for Virgin it is to expand its footprint. It is doing so through various infrastructure projects.

Virgin Media was formed in March 2006 from the merger of two operators, NTL and Telewest. Before then, the UK cable industry had languished in a state of chronic chaos, suffering from under investment and poor quality of service, lagging far behind equivalents elsewhere including the U.S., making sustained losses as a result. But, under the Virgin Group’s stewardship, steady investment and a clear strategy around Quality of Service as an operator rather than content provider has turned things around and made it a serious competitor to Sky. With Sky’s stranglehold over premium content, primarily football and movies, now under attack from regulators, Virgin Media looks in a pretty good place.