BoAML: Virgin Media – double or quits?

Virgin Media’s announcement that it will double broadband speeds for all customers “appears bullish” at first glance, according to Bank of America Merrill Lynch (BoAML) – who says it will potentially lift ARPU and lower churn, while demonstrating its cheap pathway to higher speeds.

However, BoAML predicts that Virgin’s latest announcement is the first of a two-part strategy to “defend itself against one of several problems facing it” – including BT’s decision to roll out fibre in cable areas, which undercuts Virgin’s offering.

BoAML says it is “concerned about [Virgin] losing some of its c.40% market share” and that it sees Virgin’s announcement as a reaction to BT’s plans to double FTTC speeds by 1 July 2012.

“In our view, [Virgin] is facing a unique combination of serious structural and cyclical challenges with the effect on cash-flow magnified by operational and financial gearing,” BoAML’s report says.

“In our detailed note last year looking at strategy, we argued that each of Virgins core triple play products is under attack (phone from mobile substitution, TV from YouView & IPTV, and broadband from BT’s fibre roll-out) while at the same time it has gone ex-growth in highly profitable triple-play cross sell and faces increasing difficulty with 85% of revenues from the UK customer.”

The report claims that the ‘positive’ from this announcement is that it makes future price rises more acceptable and reduces churn.

Virgin Media is currently the UK’s largest cable operator with 4.8 million customers.