Negativity crept into the Sunday papers yesterday. They were talking about the proposed NTL Virgin Mobile merger, and it would appear many in the City fail to see how such a merger can be a good deal.
The Observer quoted media analyst Anthony de Laranaga as saying, “you tend to find choosing a mobile provider is a very personal choice. I am not sure you can bundle it into a package of other services.”
One of the justifications of the deal is that NTL and Telewest have a bad customer service record whereas Virgin is strong in precisely that area. But the Independent reckons this could work the other way, and that since the NTL Telewest company will be re-branded Virgin, Sir Richard’s precious brand name could be seriously damaged by the deal.
One of the benefits of the deal is slated to be the quadruple playing offering that will be created: Cable, broadband, fixed line and mobile telephony. But the Sunday Times quoted Claire Enders from research house Enders Analysis as saying, “The value of quadruple play is much more dubious. We cannot see this as a competitive advantage.”
Elsewhere, it was argued that the Virgin Mobile users tend to have a lower disposable income than other mobile phone users, and are unlikely to take on TV subscription services, while others reminded us that Virgin is just a virtual mobile phone operator, and that without any real infrastructure, they felt that the brand name aside, the merger offered little benefit to NTL. We disagree with the cynics. As TV, Telephony and the Internet converge, content will be the key. And to compete on content you need scale, and the inclusion of a mobile phone service, will ultimately prove to be another outlet for content the company can acquire.
Secondly, the City, as is so often the case, is not thinking ahead. It failed to account for VoIP for many years, even though it has been obvious to the techies that this technology would take off; now it is failing to take into account the migration of VoIP to mobile phones via Wi Max. Virgin scores over other mobile phone companies, because it’s not encumbered by heavy infrastructure investment, which could be made superfluous by new technology.
A Virgin NTL merger does not guarantee success. But standing still and waiting for events to unfold guarantees failure.
Meanwhile, it emerged that Sir Richard Branson stands to gain a lot more than previously realised from the merger.
The Virgin brand name is owned by Virgin Enterprises, which is 100% owned by Sir Richard. And the newly merged company will have to pay Enterprises a percentage of revenue for use of the name. Virgin Mobile pays Enterprises just 0.3% of turnover in royalty, much less than the usual 1% rate, but as Sir Richard owns 72% of the company, it seems unlikely he is crying in his Virgin Cola over that rate.
But with his equity watered down to around 14% of the new merged company, Sir Richard is not likely to be so generous.
So significant is this royalty stream that it was speculated in the FT this morning, that Sir Richard may actually agree to allowing other shareholders in Virgin Mobile to receive a better deal per share for their 28% holding, than he receives for his 72%. That way, NTL can offer a greater incentive to Virgin Mobile minority shareholders to agree the merger, and Sir Richard will be kept happy by the ongoing royalty payments.
Sir Richard will also be the largest single shareholder in the merged company, giving him a rung on the media mogul ladder, just as media is set to be transformed.
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