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Liberty Global sizing up partnerships to expand reach of Virgin Media's network

Liberty Global has plans to expand the Virgin Media network to an additional 7 to 10 million homes in the UK and is exploring a wide range of options to get it done.

While a portion of that will come from its ongoing Project Lightning fiber-to-the-premises initiative, the operator is also taking a look at potential partnerships involving investors and other network operators.

But, for now, Liberty Global isn't sharing a ton of detail about what types of partnerships it is exploring, despite recent reports that the company is already in talks with Comcast-owned Sky about a fiber joint venture and possible cable wholesale deal.

"I'm not going to get into great detail about what we might or might not be doing" with respect to potential network-facing partnerships, Mike Fries, Liberty Global's CEO, said Friday on the company's Q4 2019 earnings call. But he acknowledged that any way to expand the reach of Virgin Media's network in the UK would create a "very positive outcome."

"We're examining all options," Fries said, noting that it's part of a longer-term strategy at Liberty Global and not something that will be solved Q1 2020. "We would be interested in not just financial partners but also network operators who are interested in the same opportunities."

But Liberty Global is not interested in sacrificing free cash flow to make this happen, mirroring the financial strategy it's employing today for Project Lightning. That FTTP-based project added 505,000 premises passed in 2019, ending the year with 2.1 million premises passed, 454,000 customers and about £236 million ($307.79 million) in revenues.

"While we're not willing to sacrifice free cash flow to do that [network expansion] on-balance sheet… we would certainly entertain ideas [and] ways of achieving that off-balance sheet that could accelerate the reach of 1-gigabit speeds and the Virgin brand," Fries said.

Fries said Virgin Media is also looking into wholesale opportunities that could bring cash flow immediately to the company's bottom line, noting that 40% of the operator's network is currently being utilized. The con in that scenario is possibly cannibalizing Virgin Media's business, he added. Bloomberg reported last month that Liberty Global applied to Ofcom to pursue wholesale opportunities in the UK.

More generally, Fries noted that the UK market remains a tough one (Virgin Media lost about 110,000 revenue generating units for all of 2019), highlighted by an increasingly competitive (and promotional) broadband market alongside flattening video subscriber growth. That's being amplified by "external headwinds" over the past three years involving broadband tax increases, inflationary programming contracts and changes to mobile regulations. Those headwinds will continue into 2020 in the form of an anticipated operating cash flow reduction of about £100 million ($130.36 million).

Despite those challenges, "we are more than holding our own in this market," Fries said of the UK.

Regarding the company's video strategy, Fries noted that Liberty Global still sees pay-TV as a service "worth protecting," though the operator won't chase after less profitable, lower-end customers – essentially replicating a strategy being undertaken by major US cable operators such as Comcast and Charter Communications. As it focuses on more profitable customers, Virgin Media will soon roll out the company's new user interface, Horizon 4, on its V6 boxes (replacing TiVo), and the ongoing integration of OTT apps such as YouTube, Netflix and Amazon Prime Video.

"We are open for business when it comes to app integration," Fries said.

The Horizon 4 rollout in the UK will also mark Liberty Global's expansion of a video product that utilizes the Reference Design Kit, a preintegrated, open source software platform being managed by Comcast, Liberty Global and Charter.

"We think it will be transformational to the consumer experience in the same way X1 was for Comcast," Fries said. "The bundle matters, and video is a big part of the bundle."

Liberty Global hit its 2019 financial targets, but growth is becoming harder to come by in the wake of the company's sale of operations in Germany, Hungary, Romania and the Czech Republic to Vodafone last July.

Liberty Global Q4 2019 revenues were $2.98 billion, down 0.5%, and $11.54 billion for the full year, down 0.6%.

In the fixed services category, Liberty Global added 15,700 broadband subs in Q4, compared to a gain of 24,800 in the year-ago period. The company lost 91,300 video customers, versus a loss of 74,900 a year earlier; it also lost 52,700 voice subs, compared to a year-ago gain of 17,600.

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— Jeff Baumgartner, Senior Editor, Light Reading

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