Virgin Media digs in for fibre battle as major network expansion beckons
The under-pressure firm is investing in an extra 200,000 homes to revitalise stalled growth among its TV and broadband customer base in Ireland. Chief executive Tony Hanway spoke to our technology editor
What do you do when your TV subscriber base is sliding and your broadband customer base has plateaued?
If you're Tony Hanway, you start building again.
The Virgin Media Ireland boss has been overseeing a major network expansion in Ireland for the past 12 months and is now gearing up for more. When finished, Virgin aims to extend its service to an additional 200,000 new homes and businesses, a 25pc bump on its previous footprint.
"We cover 50pc of the country at the moment," says Hanway from a low-key office in a north Dublin business park. "I don't see why that shouldn't get to 60pc or 70pc. We'll expand to almost a million homes in the next two years."
Those in satellite towns benefiting from the expansion - places such as Enniscorthy, Gorey and Drogheda - will regard it as a bonus.
But, in truth, Hanway has to do something. In Ireland, Virgin has lost a third of its TV customers in recent years. This is largely down to competition from new entrants to the TV market, particularly Saorview, Eir, Vodafone and Netflix.
Meanwhile, its broadband business, once peerless and still dominant in the residential areas that Virgin serves, is also showing signs of teetering for the same competitive reasons. Arch-rival Sky has raced to a 7pc market share in just three years, thanks to the strength of its TV business and 'bundling' offers. Eir and Vodafone, meanwhile, are building their own Death Stars of broadband connectivity - fibre-to-the-home services capable of blowing most rivals away, including large chunks of Virgin's cable infrastructure. (The two telecoms firms, however, have said they will avoid direct competition with Virgin on fibre services in the short term.)
This competition has led to a halt in Virgin's broadband subscriber growth. So now, the entity formerly known as UPC, NTL and Cablelink must figure out a way of returning to growth across its platforms.
In one area, it is seeing progress. According to its most recent accounts, its Irish revenue grew 20pc last year (to around €350m, based on nine-month figures) with more money eked out of each customer.
Hanway believes that a turning point is at hand.
"We grew last year in revenue terms," he says. "So I'm happy with our financial performance. This business is definitely not going backwards. But we're in a very competitive market. One of the biggest drivers of growth will always be network expansion. We haven't been growing the network aggressively until last year, the same as everyone else. The reason for that was that Ireland was in freefall. There were very few new houses built and businesses weren't expanding. Even still, last year we connected 40,000 homes, which was double the amount of the year before. And next year we go up by 50pc again."
That would take Virgin within touching distance of a million Irish homes and businesses, a big extension and a substantial statement of intent. It would see the company expand to cover large regional towns as well as outer-lying city 'exurbs' such as the Fingal regions of Balbriggan, Skerries and Lusk.
But that's the limit, he says.
"At that stage, we'll have reached a logical place where it wouldn't make sense economically to go beyond that. We're never going to be a rural connectivity provider. We can't be that kind of operator with our technology. In any case, the National Broadband Plan is going to address that area and we're not part of it."
Still, he says: "that's still an extra 200,000 homes we'll connect".
One additional ballast for the company is its recently-acquired status as a mobile operator. It now has over 20,000 mobile customers, the "vast majority" of which are existing Virgin customers taking advantage of bundling offers. That number is still a small fraction of what established mobile operators have (Vodafone and Three have over 3.5 million mobile customers between them). But it gives Virgin a 'quadplay' defence against rival quadplay merchants, Eir and Vodafone. It also gives the company a quadplay offence against Sky, which has no mobile offering.
Nevertheless, Virgin's legacy, from the days of Cablelink and NTL through UPC and its current incarnation as Virgin Media, has always included a strong television offering. In this market, Virgin has felt the effect of fierce competition.
A quick look at the company's TV subscriber figures is sobering.
In 2010, the company had 495,000 TV customers in a network footprint of 621,000 homes able to receive its service. By late last year, that had shrunk to 312,000 customers out of 850,000 potential homes. In other words, its TV penetration has fallen from 80pc to 30pc in six years.
In the same period, Sky has increased its TV customer base from 500,000 to 700,000.
While stark, this hasn't inflicted a terminal wound on the company, partially because it has more than doubled its broadband business over the same period.
"Look, Sky's core business is TV and ours is broadband," says Hanway. "We have three times more broadband customers than they do. And even when people have changed their TV habits, they're often streaming more and using connectivity on our broadband network. So I wouldn't call us a net loser in any migration."
But 300,000 TV customers is still a substantial base that the company presumably intends to fight for. Is there any end in sight to the haemorrhage in Virgin TV customers?
"I think so, yes," he says. "Our TV losses are definitely slowing. And I'd like to stem them altogether in 2017."
To this end, the company is doing a couple of things. On the marketing side, it is embarking on a service-wide rebranding exercise, shepherding a gaggle of products back from sub-brands such as 'Horizon' or 'Bitbuzz' to a centralised Virgin banner.
Other initiatives include a global deal with Netflix to give the online streaming service its own channel within Virgin's TV interface.
But the most interesting shift may be yet to come. Virgin Media's parent company, Liberty Global, has started to buy up TV companies in a bid to control more of its own programming.
It appears to have learned a few valuable lessons from Sky, HBO and Netflix, who gain subscribers largely by producing their own exclusive content such as Game Of Thrones, House Of Cards or Premier League football.
"It's no big secret that we've been buying TV stations," said Hanway. "Liberty Global now has a lot of TV assets. It's a general move that platforms and content are seen to be coming together. It's true convergence. Increasingly on our own service in TV3, we have shows that are initiated by us, paid for us and unique to our services."
A few factors are driving this, he says.
"The cost of content is escalating wildly. So your choice is whether or not to pay a much higher amount just become a player yourself. Often you find that it might be cheaper to actually commission yourself. And that's the challenge that's facing us and others. Do you keep getting bidded up by 18pc or 20pc per year? At what stage do you think to yourself that you could actually do it yourself and even start driving sales yourself?"
Virgin has already shown that there's a line beyond which it won't go when it comes to meeting others' escalating content costs. It saw Eir pull the Setanta (now Eir Sport) channel from Virgin Media when Hanway refused to pay a higher content fee. The move meant that Virgin TV customers don't get access to certain football and rugby games anymore. It was a bruising PR episode for both companies. But Hanway believes that some of Virgin's TV future lies in commissioning its own content instead of being totally dependent on others'.
"Look at one of the big successes of last year, Gogglebox," he says. "That was produced by All3Media, which is partially owned by Liberty Global. It was commissioned by us here, localised to an Irish audience and then broadcast to our free-to-air channel with some exclusive elements on Virgin Media. That's a great example of where the ecosystem is coming together.
"If you think about our staff now, we have 300 people in TV." We already have significant content experience in our group, people with a TV background. So there's an increasing blur between a telco guy and a TV guy. We're now a connected entertainment business, which covers both things. It's not just going to plumb in connectivity, it's also going to provide content as well."
Hanway does not believe that TV is suffering a steep decline at the hands of cord-cutting. "An awful lot of people are writing off TV," he says. "But TV's not dead, it's evolving. People talked about Netflix killing TV and said that there was going to be a huge problem for us. But we've announced a worldwide partnership with Netflix and it's integrated into our system. At a more basic level, people aren't watching less TV. They're just watching it in different ways. Maybe some of it now is on a handset, a tablet or a laptop. But they're still watching TV just as much as they always have - three-to-four hours a day."
Hanway can be bolstered by the fact that Virgin Media's billionaire Irish-American owner, John Malone, is a long-term investor in his businesses and doesn't quit easily. There looks little chance that Virgin Media is about to shy away from a TV, broadband and mobile business in Ireland. The Irish wing of the company is part of a €3.5bn upgrade investment program across Ireland and the UK.
Will this mean that Virgin could ultimately become a bidder for sports rights or embark on more ambitious TV series creation in the same way as HBO, Sky or Netflix?
Whatever happens 2017 will be a fascinating year to watch the company in Ireland.