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1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 (Fee required)
For the fiscal year ended December 31, 1996 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (No fee required)
For the transition period from to
Commission file number: 33-83740
DIAMOND CABLE COMMUNICATIONS Plc
(Exact name of registrant as specified in the charter)
ENGLAND NONE
(State or Other Jurisdiction of
Incorporation or Organization) (I.R.S. Employer Identification No.)
DIAMOND PLAZA, DALESIDE ROAD,
NOTTINGHAM NG2 3GG, ENGLAND NONE
(Address of Principal Executive Offices) (Zip Code)
011-44-115-912-2242
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None
Name of Each Exchange
Title of Each Class on Which Registered
- ---------------------------------------- ------------------------------------
NONE NONE
Securities registered pursuant to Section 12(g) of the Act: None
NONE
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K. [X]
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INTRODUCTION
Diamond Cable Communications Plc (the "Company") is a public limited
company (with registered number 2965241) incorporated under the laws of England
and Wales. The Company is a holding company which holds all of the shares of
(i) Diamond Cable Communications (UK) Limited ("DCL") (formerly Diamond Cable
(Nottingham) Limited) and (ii) the group of companies comprising LCL (as
defined below), in both cases through an intermediate holding company, Jewel
Holdings Limited ("Jewel"). In this Annual Report, except as the context may
otherwise require, references to the Company refer to the Company and/or its
predecessor, references to the "Group" refer to the Company and its
subsidiaries, including as of September 27, 1995, LCL, and references to
"Diamond" refer to the Company and its subsidiaries excluding LCL.
The Group operates a telecommunications and cable television business
focused on the East Midlands area of England. The Group is currently
constructing a broadband fiber-optic network to serve its fifteen contiguous
franchise areas, comprising approximately 1.2 million homes and an estimated
60,600 businesses. As of December 31, 1996, the Group's cable television and
telecommunications network had passed by civils construction approximately
453,500 homes and an estimated 23,900 businesses, of which portions of the
network passing approximately 347,200 homes and an estimated 17,900 businesses
had been activated. As of that date, the Group had approximately 104,500
residential telephone lines, 59,200 cable television subscribers and 18,900
business telephone lines. Through that date, L.317 million had been invested
(at original cost) in the construction of the network and related systems. For
certain operating data as of December 31, 1996, see Item 1. "Business --
Certain Operating Data".
On September 27, 1995, the Group acquired substantially all of the share
capital of East Midlands Cable Group Limited ("EMCG"), East Midlands Cable
Communications Limited and East Midlands Cable Holdings Limited (collectively
"LCL"), and on October 4, 1995 the Group acquired the remaining share capital
(less than 1%) of LCL. For financial accounting purposes, the acquisition was
given effect as of September 30, 1995. At and prior to September 30, 1995,
substantially all of LCL's operating activities were carried out through LCL
Cable Communications Limited ("LCL Cable") (now Diamond Cable (Leicester)
Limited). On April 26, 1995, LCL Cable became the principal operating
subsidiary of EMCG. References herein to LCL may also refer to LCL Cable or
EMCG as appropriate.
This document contains certain forward-looking statements, identified as
such, with respect to which the Company is seeking to utilize the safe harbor
provided by the Private Securities Litigation Reform Act of 1995. These
statements are accompanied by, and should be read in conjunction with,
explanations of important factors that could cause actual results to differ
materially from those in the forward-looking statements.
The Company operates only in the United Kingdom and, accordingly,
publishes its financial statements in pounds sterling. References herein to
"pounds sterling", "L.", "pence" or "p" are to the lawful currency of the
United Kingdom and references to "U.S. dollars", "dollars", "$" or "c." are to
the lawful currency of the United States. Merely for convenience, this Annual
Report contains translations of certain pound sterling amounts into U.S.
dollars at specified rates. These translations should not be construed as
representations that the pound sterling amounts actually represent such U.S.
dollar amounts or could have been or could be converted into U.S. dollars at
the rate indicated or at any other rate. Unless otherwise indicated, the
translations of pound sterling amounts into U.S. dollars have been made at
$1.7123 per L.1.00, the noon buying rate in The City of New York for cable
transfers in pounds sterling as certified for customs purposes by the Federal
Reserve Bank of New York (the "Noon Buying Rate") on December 31, 1996. See
Item 6. "Selected Financial Data -- Exchange Rates" for information regarding
the Noon Buying Rate for the past five fiscal years. On March 19, 1997 the Noon
Buying Rate was $1.5968 per L.1.00.
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PART I
ITEM 1. BUSINESS
The Group offers three basic services over its network infrastructure: (i)
residential telephone services allowing customers to place and receive local,
national and international calls and to use additional services such as
conference calling, call waiting, call forward, call barring and Internet
access, (ii) business telecommunications services which include the services
provided to residential customers as well as advanced telecommunications
services such as Centrex (which provides businesses, including those with
multiple sites, with virtual PABX and network services), direct dialing inward
(DDI), high speed data services and private circuits, and (iii) cable
television services offering more than 50 channels including movies, sports,
news and information, music, children's programming and general entertainment.
See "-- Business Telecommunications and Residential Telephone" and "-- Cable
Television".
CERTAIN OPERATING DATA
The following table sets forth certain data concerning the Group's
franchises at and for the years ended December 31, 1994, 1995 and 1996. The
combined operating data at and for the year ended December 31, 1995 reflects
the acquisition of LCL on a pro-forma basis as if it had been completed at the
beginning of 1995.
DECEMBER 31,
1994 1995 1996
DIAMOND LCL COMBINED
Homes passed by civils construction(1). 55,919 222,335 58,976 281,311 453,496
Homes activated(2)..................... 32,033 105,951 51,955 157,906 347,246
Homes marketed(3)...................... 31,330 77,657 48,950 126,607 252,601
CABLE TELEVISION
Basic service subscribers.............. 8,936 20,261 10,488 30,749 59,242
Penetration rate of homes marketed(4).. 28.5 % 26.1 % 21.4 % 24.3 % 23.5 %
Average monthly revenue per
subscriber(5).......................... L. 14.71 L. 16.80 L. 18.89 L. 17.62 L. 18.03
Churn(6)............................... 28.5 % 35.5 % 31.0 % 33.8 % 40.9 %
RESIDENTIAL TELEPHONE
Residential lines connected............ 14,150 36,122 16,576 52,698 104,460
Penetration rate of homes marketed(4).. 45.2 % 46.5 % 33.9 % 41.6 % 41.4 %
Average monthly revenue per line(7)(8). L. 18.83 L. 18.68 L. 22.19 L. 19.88 L. 18.40
Pro-forma average monthly revenue per
line(8)................................ L. 18.83 L. 18.11 L. 21.35 L. 19.22 L. 18.64
Churn(6)............................... 13.8 % 13.9 % 17.2 % 15.0 % 20.6 %
BUSINESS TELECOMMUNICATIONS
Business customers accounts............ 979 1,627 772 2,399 3,935
Business lines connected............... 3,928 7,036 2,843 9,879 18,932
Private circuits(9).................... 70 151 10 161 226
Average lines per business account(10). 4.0 4.3 3.7 4.1 4.8
Average monthly revenue per line(8)(11) L. 88.68 L. 74.60 L. 59.60 L. 70.23 L. 50.17
Pro-forma average monthly revenue per
line(8)................................ L. 88.68 L. 72.02 L. 56.88 L. 67.70 L. 51.25
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(1) Homes passed by civils construction is the number of homes that have had
ducting buried outside.
(2) Homes activated is the number of homes that are capable of receiving
cable service without further extension of transmission lines, apart from
the final connection to the home.
(3) Homes marketed is the number of homes activated for which the initial
marketing phase has been completed.
(4) Penetration rate of homes marketed is calculated by dividing the number
of homes receiving basic cable television or the number of residential
lines connected, as the case may be, on the given date by the total number
of homes marketed for the given service as of such date, expressed as a
percentage.
(5) The average monthly revenue per cable television subscriber is calculated
by dividing total cable television subscriber revenues (excluding
installation revenues) for the period by the average number of cable
television subscribers (calculated as a simple average of the number of
basic service subscribers at the end of each month during the period) and
dividing that amount by 12.
(6) Churn is calculated by dividing net disconnections (total disconnections
less the number of disconnected accounts for which service is later
restored) in a period by the average number of subscribers in the period
(calculated as a simple average of the number of subscribers at the end of
each month during the period).
(7) The average monthly revenue per residential telephone line is calculated
by dividing (i) line and equipment rental, outgoing call charges and
incoming call charges for the period by (ii) the average number of
residential telephone lines (calculated as a simple average of the number
of subscribed lines at the end of each month during the period) and
dividing that amount by 12.
(8) The calculation of the average monthly revenue per line (for both
residential telephone and business telecommunication revenues) for the
year to December 31, 1996 reflects the reduction in revenues stemming from
rebates to BT on incoming termination revenues relating in part to 1995
but recorded in full against revenues in 1996. The rebates were calculated
in accordance with recently revised interconnect agreements with BT that
were made effective retroactively from April 1995. The pro-forma average
monthly revenue per line (for both residential telephone and business
telecommunications revenues) gives effect to the revised interconnect
agreements as if they had been in effect from April 1995 and allocates to
each period the portion of the rebates that relates to such period.
(9) Private circuits are point-to-point customer specific connections for
which a fixed annual rental charge is made.
(10) Average lines per business account is calculated by dividing the number
of business lines connected on the given date by the number of business
customer accounts on such date.
(11) Average monthly business telecommunications revenue per line is
calculated by dividing (i) business telecommunications line and equipment
rental, outgoing call charges and incoming call charges (including revenue
from private circuits) for the period by (ii) the average number of
business telecommunications lines and private circuits (calculated as a
simple average of the number of subscribed lines and private circuits at
the end of each month during the period) and dividing that amount by 12.
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INDUSTRY OVERVIEW
Following the initial granting of licenses in 1984, development of the
cable television and telecommunications industry in the U.K. proceeded slowly.
This occurred for a number of reasons, including high construction costs (due
in large part to the fact that cable networks in the U.K. generally must be
buried underground), limitations on the cable companies' ability to offer
telephone services, the lack of access to attractive programming and the lack
of access to capital.
Fundamental changes in the U.K. regulatory framework in 1990 and 1991,
combined with increased availability of programming, have resulted in
significant investment in the cable industry since that time. In 1991, the
Secretary of State completed the liberalization review of the U.K.
telecommunications market (the "Duopoly Review"), which resulted in major
policy changes designed, among other things, to foster competition in the local
telephone loop, where BT held almost all of the market share. Pursuant to such
policy changes (i) new entrants (including foreign companies) could apply to
the government to operate new telecommunications networks over fixed links,
(ii) cable operators were permitted to provide voice telephony services and to
switch their own telephone customers' calls, instead of acting as agents of BT
or Mercury, and (iii) cable operators were permitted to form expanded
telecommunications networks by interconnecting their systems with one another.
See "-- Certain Regulatory Matters -- Cable Telecommunications -- Duopoly
Review" and "-- Certain Regulatory Matters -- Cable Telecommunications --
Interconnect Arrangements".
To further encourage cable companies to construct cable television and
telephone networks, current U.K. government policy restricts the ability of BT
and Mercury to use their telephone networks for conveying broadcast
entertainment to homes in cable franchise areas until at least 1998. U.K.
regulatory policy has also been to award only a single cable television license
for each franchise area. As a result of these government policies, cable
operators currently hold the only licenses to provide both cable television and
telecommunications services within their franchises. By operating a single
fiber-optic network infrastructure to provide both cable television and
telecommunications services, the cable operators can achieve significant
economies in designing, constructing, marketing and operating their networks.
BT cannot offer broadcast entertainment on its dedicated telecommunications
network and achieve similar economies of scope in existing cable franchise
areas, and BT has stated that these government policies have limited its
ability to develop and implement a national fiber-optic local access network in
the U.K. See "-- Certain Regulatory Matters -- Cable Telecommunications --
Restrictions on National PTOs".
Further, the extensive use of fiber optics and digital switches, the use of
synchronous digital hierarchy ("SDH") and other advanced technologies, have
enabled cable operators to offer advanced telecommunications services. In
addition, the availability of programming has improved substantially since the
1980s. As a result of the foregoing factors, significant investment in U.K.
cable television followed the conclusion of the Duopoly Review. In particular,
several North American cable operators and telephone companies initiated
significant investment in the U.K. cable industry. In addition, cable companies
in the U.K. began to access capital markets to finance construction. The U.K.
cable industry has also begun to consolidate as evidenced by the 1995 merger of
SBC CableComms and TeleWest Communications plc and the announcement on October
22, 1996 that NYNEX CableComms Group plc, Videotron Holdings Plc, Mercury and
Bell Cablemedia plc intend to merge.
BUSINESS TELECOMMUNICATIONS AND RESIDENTIAL TELEPHONE
OVERVIEW
The Group derives its business telecommunications and residential
telephone revenues from connection charges, monthly line rental charges, call
charges, special residential service charges, special business service charges
(e.g., private business circuits) and interconnection fees payable to the
Group. In the U.K., the historical practice has been that all calls, local or
national, are charged by time and distance.
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Switching its own traffic enables the Group to offer a wider range of
services than would otherwise be possible, to monitor usage and manage doubtful
accounts, to gather information about customer calling patterns and use this
information in its marketing programs, and to structure rates and discount
programs accordingly. As part of the Company's strategy of increasing the
volume of calls switched locally and minimizing interconnect charges payable to
BT, Mercury, Energis and other telecommunications providers, the Group has from
time to time discussed with other cable operators the development of
inter-franchise telephone networks. However, no assurance can be given as to
whether or when any such inter-franchise networks will be developed.
BUSINESS TELECOMMUNICATIONS
The Group has achieved its share of the business telecommunications market
in the areas which its network has passed by providing high-quality services at
competitive prices. The Group had 3,935 business telecommunications customer
accounts at December 31, 1996 including connections to a number of important
corporate and governmental entities such as The Boots Company, Imperial
Tobacco, Cargill, CCN, the Nottinghamshire County Council, the Nottingham City
Council, Leicestershire County Council, Leicester City Council, Ashfield
District Council, North East Lincolnshire District Council, Lincoln City
Council, the Nottinghamshire Constabulary (including the local 999 emergency
number), the Leicestershire Constabulary and the Lincolnshire Constabulary, the
U.K. Inland Revenue national headquarters and their main sites in Leicester,
Nottingham, Lincoln and Mansfield, the Nottingham Health Care N.H.S. Trust, the
Nottingham City Hospital N.H.S. Trust, Nottingham Trent University, Leicester
University, Lincoln University, BBC Radio Nottingham, Radio Trent, the
Nottingham Building Society, Vision Express Group, Knoll Pharmaceuticals,
Pedigree Pet Foods and the Northcliff Newspaper Group (four regional newspapers
including Nottingham's Evening Post and the Leicester Mercury).
The focus of the business marketing effort in the Group's franchise areas
has been to attract large and medium-sized corporate and governmental
customers, which generate high volumes of traffic and revenue. At December 31,
1996, the Group provided 18,932 business lines to its 3,935 business accounts
giving the Group an average of approximately 4.8 lines per business account. In
many cases these customers have transferred all or a portion of their telephone
lines to the Group's service from those of the Group's principal competitors. A
number of these customers have been specifically targeted, and in some cases
the network has been built out to pass these customers. The Company plans to
continue this strategy of focusing a portion of the Group's network build and
marketing effort on town centers and industrial estates in its other franchise
areas in order to capitalize on business telecommunications opportunities. The
Company believes that its success in attracting these important customers has
fostered a positive image in the community and enhanced the Group's credibility
with other business customers.
The Group currently offers a range of special business services,
including:
o Custom Calling Features. The Group offers business customers
three-way conference calling and fully itemized and analyzed monthly
billing at no extra fee. At an extra charge, the Group provides
services similar to those offered to residential customers including
call waiting, call forward and alarm calls. Additionally, billing data
on high density 3.5" floppy disks is made available to customers.
o Centrex. Centrex allows the customer to use the facilities of
the Group's central exchange instead of purchasing its own PABX
(electronic switchboard), and allows the customer to link
geographically separated sites within the Group's network with common
numbering, features and facilities. Centrex offers significant
advantages over networking PABXs including reduced call charges and
data calls using ISDN instead of point-to-point data circuits.
o DDI (Direct Dialing Inward). Direct Dialing Inward offers
multiple unique numbers at a customer's premises via a smaller number
of access lines.
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o Private Circuits. Private (leased) circuits permit the
subscriber to rent a circuit between two points, for example between
two office buildings, at fixed rates. This permits the rapid exchange
of data between subscriber owned computers or exchanges without
passing through the public network. The subscriber can choose from
among different circuit capacities, such as 64 KBit/s for low speed
applications, and 2, 8, 34 and higher MBit/s speeds for other
computer, moving image, multiplexed voice and other high capacity data
applications such as main frame computer lines, video conferencing and
local area networks (LANs) between local offices.
o Digital Services. The Group offers digital connection to the
public network using DASS2 (Digital Access Signalling System) and Q931
(European specification). The Group offers Primary Rate ISDN (30 X
64kbps channels) for voice and data, or Basic Rate ISDN offering 2
channels of 64kbit and a 16kbps overhead which the Group is planning
to use for "D" channel services (i.e. telemetry, alarm circuits etc).
The network allows transparency for DPNSS (Digital Private Network
Signalling System) where customers are linking privately owned
telephone systems over the public network.
C Caller ID. Caller identification allows the customer to identify
the origin of the inbound call, which is essential for the successful
operation of computer telephone integration.
The Group has recently commenced other telecommunications services such as
Internet access, which it is making available to business and residential
customers, as well as voice mail which it has begun test marketing and expects
to make available during the second quarter of 1997. In addition, the Group is
currently conducting trials on a fully managed data service based upon frame
relay technology.
In the business telecommunications area, the Group generally competes on
the basis of the quality of services provided rather than on price, although
the Company believes that its charges for services to business customers are
competitive with those of BT, Mercury and other operators.
The Company believes the Group has achieved favorable penetration in the
business telecommunications market due to three factors. First, the Group's
strategy in business telecommunications is to target large and medium-sized
corporate and governmental customers, which generate the most revenue and the
Company has given priority to building out its network to such customers.
Second, the Group's fiber-optic network infrastructure provides customers with
several advantages including superior service reliability (due to the
self-healing loop architecture), greater system capacity and the ability to
provide an extensive range of digital services. Third, the Group provides a
high level of customer service including custom tailored network services and
frequent communication with major customers. The Company believes that this
combination of quality service and attractive rates has enabled the Group to
achieve a substantial share of the market of large and medium-sized business
telecommunications customers in the areas it has marketed.
Telephone subscribers changing to the Group have to change their telephone
numbers. As a result certain business customers have been reluctant to switch
carriers because they would lose their existing telephone numbers. In response
to this, Diamond has provided its business customers with the opportunity to use
the Group's telephone service for their outgoing telephone calls, which carry
higher revenues than incoming calls, and for their specialized
telecommunications needs, while retaining their existing service provider (and
their existing telephone number) for incoming telephone calls. For a description
of certain developments relating to number portability, see "-- Certain
Regulatory Matters -- Cable Telecommunications -- Number Portability" and "--
Competition -- Business Telecommunications".
RESIDENTIAL TELEPHONE
The Group had residential telephone line penetration of 41.4% of homes
marketed at December 31, 1996. The Company believes the Group is achieving these
residential telephone penetration rates due to (i) Diamond's well-recognized
brand name and (ii) the Group's competitive rates (including free voice calls
between the Group's residential customers in the same local and adjacent calling
areas during off peak evening and weekend hours). In the residential telephone
area, the Group generally competes on the following basis:
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Reliability. The Group's fiber-optic network infrastructure provides
reliable, high-quality transmission across a modern network. In addition, the
Company believes that the Group's early concentration on attracting prominent
business and governmental customers has enhanced its credibility with
residential customers.
Special Services. By switching its own traffic, the Group is able to
offer a variety of special services to residential customers. All residential
customers receive three-way conference calling capabilities and fully itemized
monthly billing at no extra fee. The Group provides three-way conference
calling free of charge in order to stimulate additional call and/or termination
charges. Additional "Custom Calling Features" offered by the Group for an extra
charge include: call waiting, call barring (prevents unauthorized outgoing or
incoming calls) and call diversion (i.e., call forward). The Group's network
architecture provides a flexible platform for the Group to offer a wide range
of additional telephony services as they become available in the future. These
services are expected to include voice mail and distinctive telephone rings for
different members of a household.
Cost Savings. The Group seeks to provide residential telephone customers
with savings on the cost of line rental and usage charges compared to BT. In
order to encourage customers to subscribe to both television and telephone
services, the monthly line rental charge for customers who subscribe to both
services is offered at a discount to the monthly charge for customers who
subscribe to telephone service only. Further discounts are available if a
customer remains a subscriber to both services for an extended period of time.
Free Evening and Weekend Voice Calls. The Group allows free voice calls
between the Group's residential customers and by the Group's residential
customers to the Group's business customers located within the same local and
adjacent calling areas during off-peak evening and weekend hours. The
incremental cost of these calls to the Group is negligible because they do not
require interconnection with another operator. The Company believes that this
service has encouraged its subscribers to recommend its services to other
potential subscribers, particularly friends and family members, and is believed
by the Company to increase calling traffic generally. The Company believes this
word-of-mouth marketing reinforces its well-recognized brand name.
The Company regularly evaluates its pricing strategy and intends to remain
price competitive in its residential telephone business. The Company believes
competitive pricing is particularly important initially as it introduces
services and seeks to gain market share. However, over time the Company expects
customer service to become a more important component of its marketing
strategy.
The Group recently launched an Internet access service, Diamond Cable
Online, in its operating area. This service, available to both Diamond
telephone subscribers and others, is the result of an alliance with Cable
Online Ltd., a subsidiary of International CableTel Ltd., and provides users
with access to the Internet and World Wide Web. The Group expects to offer
expanded Internet services, including ISDN and leased line connections, during
the second quarter of 1997. The Group is also test marketing voice mail
services which it intends to make available to residential telephone customers
during the second quarter of 1997.
CABLE TELEVISION
PROGRAMMING
The Company currently offers a wide range of cable television programming,
including satellite and broadcast channels, tape delivered channels and FM
radio. This range includes more than 50 television channels, many of which are
available 24 hours a day. Local programming is provided only on a limited basis
and may be offered on a larger scale in the future. In addition, the Company
has carried pay-per-view events. The Company also offers a digital music
service providing 30 channels of continuous music.
The Company believes that the availability of a wide variety of quality
programming is one of the most important factors influencing a consumer's
decision to subscribe for and retain cable television service.
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Consequently, the Group devotes considerable resources to obtaining access to a
wide range of programming that it believes will be appealing to both existing
and potential subscribers of its basic and premium services. The Group may from
time to time pursue investments in programming providers.
The following sets forth the television programming currently offered by
the Company.
PROGRAMMING DESCRIPTION
- ----------- -----------
NEWS AND INFORMATION
CNN International 24-hour international news service
European Business News(1) European business news service
Parliamentary Channel Live coverage of the U.K. Parliament
Sky News(2) 24-hour U.K. news service
The Weather Channel 24-hour weather information
Channel Guide Summary of programming schedule
Preview Channel Sampling of all cable channels
Diamond Vision/Cable 7 Local programming
Bloomberg Information TV(3) News and financial information service
- ---------------------------------------------------------------------------
GENERAL INTEREST
BBC1 U.K. terrestrial television
BBC2 U.K. terrestrial television
ITV U.K. terrestrial television
Channel 4 U.K. terrestrial television
Bravo(1) Classic movies and television series
NBC Super Channel U.S. and world news and entertainment
QVC -- The Shopping Channel(4) Home shopping
Sky One(2) Drama, films and serials
Sky 2(2)(5) Drama, films and serials
Discovery Channel(6) Science and education programming
The Challenge Channel(7) Game show programming
The Learning Channel(6) Education and documentary programming
The History Channel(4) History programming
Travel Channel(3) Travel programming
TNT(8) Movies and other entertainment
U.K. Gold Classic U.K. television programming
Live TV 24 hour U.K. entertainment and news
Sky Soap(2)(4) Repeats of soap dramas
The Sci-Fi Channel Science fiction programming
Sky Travel(2)(4) Travel programming
Vision(9) Religious programming
Christian Channel(4) Religious programming
Carlton Select(10) Classic U.K. Television programming
Carlton Food Network(10) Food programming
Granada Plus(11) Classic U.K. Television programming
Granada Men and Motors(11) Male oriented programming
Granada Talk Talk shows
Granada Good Life Health, shopping and gardening programming
- -----------------------------------------------------------------------------
MOVIES
Sky Movies(2)(12) 24-hour feature movies
Sky Movies Gold(2)(12) Classic movies
Playboy TV(12) Adult entertainment
The Movie Channel(2)(12) 24-hour feature movies
HVC(12)(13) Cult thriller movies
The Adult Channel(12)(13) Adult entertainment
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CHILDREN
The Disney Channel(2)(12) Children's entertainment
Cartoon Network(8) Children's cartoons
TCC(7) Children's entertainment
Nickelodeon(5) Children's entertainment
- ---------------------------------------------------------------------------
MUSIC
VH-1 Music videos
CMT Europe Country music videos
MTV Europe Music videos
Performance(9) Classical music and opera
The Box Music videos selected by customer requests
Landscape(9) Classical music accompanying scenic videos
MCM Euromusique Music Videos
- ---------------------------------------------------------------------------
SPORTS
Eurosport International sporting events
Sky Sports(2)(12) U.K. and international sports
Sky Sports2(2)(12) U.K. and international sports
Sky Sports3(2)(12) U.K. and international sports
- ---------------------------------------------------------------------------
INTERNATIONAL
Zee TV(12) Asian sub-continent related programming
Asia NET Asian programming
Namaste(14) Asian programming
ATM(14) Asian programming
SAT 1 German language programming
TV5 French language programming
CNE Chinese news and entertainment
(1) European Business News and Bravo share a single channel.
(2) Programming acquired from BSkyB and governed by the BSkyB rate card.
(3) The Travel Channel and Bloomberg share a single channel.
(4) Sky Soap, Sky Travel, QVC, the History Channel and the Christian Channel
share a single channel.
(5) Sky 2 and Nickelodeon share a single channel.
(6) The Discovery Channel and the Learning Channel share a single channel.
(7) The Challenge Channel and TCC share a single channel.
(8) TNT and Cartoon Network share a single channel.
(9) Landscape, Performance and Vision share a single channel.
(10) Carlton Select and Carlton Food Network share a single channel.
(11) Granada Plus and Granada Men and Motors share a single channel.
(12) These services are offered for an additional charge or upon subscribing
to other services requiring an additional charge.
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(13) HVC and the Adult Channel share a single channel.
(14) ATM and Namaste share a single channel.
The Company believes that an important factor influencing a consumer's
decision to subscribe for and retain cable services is the consumer's ability
to choose and pay for only those channels the consumer desires. The Group has
been constrained in its ability to offer a range of channel packages due to
requirements imposed by programming suppliers to provide certain channels to
all subscribers if provided to any. The Group has recently negotiated with
certain suppliers reductions in these requirements which will allow the Group
greater flexibility in designing the packages of channels it can offer
consumers in certain franchise areas.
The Group currently charges L.13.99 per month (after a L.1 direct debit
discount) for its basic cable television service (49 or 50 channels, depending
on the franchise area, and one converter box that provides cable service to one
television) and offers additional premium pay services. In two of its franchise
areas, Nottingham and Mansfield, the Company has introduced a "Connect Pack", an
entry-level package of 13 channels of television plus telephone line rental for
L.12.98 (L.5.99 for cable television and L.6.99 for telephone line rental).
This package, which does not include access to premium channels, is aimed at
the Group's large base of telephone-only subscribers as well as first time
subscribers to multichannel television. In these franchise areas, the Group
also offers its Variety Pack, which consists of 29 channels and is offered for
L.9.99 per month (after a L.1 per month direct debit discount). This package
provides subscribers access to premium channels without having to purchase a
full basic package. The Company also believes that these programming packages
will encourage existing subscribers to remain as cable television customers by
providing a less costly alternative to a full programming package. Generally,
there is no charge to the subscriber for service or repair of the cable
television network or customer premises equipment.
The Group obtains most of its programming from suppliers pursuant to
informal arrangements that are typically contemplated to run from three to five
years. The arrangements generally provide for payments by the Group based on
the number of subscribers to the service. Some programming, such as that
provided by the BBC and other terrestrial broadcasters, is provided to the
Group without charge.
BSkyB PROGRAMMING
BSkyB currently provides the Group with 12 channels on a non-exclusive
basis and also offers this programming (together with additional programming)
directly to its DTH satellite customers, in competition with the Group and
other cable operators. BSkyB is the leading supplier of cable programming in
the U.K. and the exclusive supplier of certain programming. Its programming is
generally popular in the U.K. and is important in terms of attracting and
retaining cable television subscribers. In the absence of more alternative
programming sources, BSkyB may be able to set and raise prices for its
programming without significant competitive pricing pressure. In addition,
BSkyB distributes 18 other programming channels on behalf of other providers
(including some providers partly owned by BSkyB).
The Group pays a monthly fee to BSkyB for programming based on the number
of the Group's subscribers taking the various BSkyB channels at the end of each
month. The fees vary by channel. The aggregate amount payable by the Group to
BSkyB during the year ended December 31, 1996 was L.3.6 million.
It was reported on September 3, 1996 that the ITC was investigating the
bundling of certain channels by BSkyB and, in particular, requirements that
cable companies must acquire a package including two premium movie channels in
order to obtain the Disney Channel from BSkyB. The ITC has not yet reported a
decision.
The prices that BSkyB charges the Group have been governed by rate cards
established by BSkyB from time to time. The two most recent rate cards were
approved by the Director General of Fair
- 11 -
12
Trading("DGFT") following inquiries by the Office of Fair Trading ("OFT").
Under its rate cards, BSkyB implemented significant price increases. BSkyB
submitted a revised rate card to the OFT in July 1996, which has been approved
and which was operative as of February 16, 1997.
In addition, under the new rate card, BSkyB has introduced a separate
charge to the Group for a third sports channel, which it currently provides to
its DTH sports subscribers at no additional charge. The Group has decided to
pass on this separate charge for this service to subscribers to the other BSkyB
sports services unless the subscriber takes three BSkyB premium channels.
During 1995 and 1996, the OFT conducted reviews of BSkyB's position in the
pay TV market. Following its review in 1996 of BSkyB's supply of programming to
pay TV (including to cable operators) and access to encryption and subscriber
management services, the OFT concluded that although BSkyB was not acting
anti-competitively, the competitive process was being impaired. BSkyB was not
referred to the Monopolies and Mergers Commission (the "MMC") but gave new
informal undertakings and accepted modifications to those it had previously
given in March 1995. BSkyB agreed not to require carriage of basic channels in
excess of 80% of homes; to unbundle channels, with the exception that two BSkyB
channels could be linked with specified other BSkyB channels; to ensure that
its Videocrypt conditional access system is made freely available without
discrimination to programmers on the basis of a published rate card on
cost-related terms; to maintain separate accounts for its DTH business, with
actual or notional charges not less than offered to cable operators; and to
revise the structure of the cable rate card.
The DGFT has announced that the informal undertakings given by BSkyB would
be reviewed by the end of 1998 or earlier if appropriate. The DGFT has also
concluded that BSkyB should offer cable operators reasonable contractual
security in terms of length of contract and that the OFT would regard a
demonstrable and unreasonable unwillingness to do so as an abuse of BSkyB's
market power.
The OFT has also reviewed agreements between BSkyB and subsidiaries of
NYNEX CableComms Group PLC and TeleWest Communications plc, which among other
things permitted the licensing of BSkyB's programming at rates not provided by
the rate card. These agreements originally included undertakings by the two
cable companies not to compete with BSkyB with respect to film or sport
programming. Following a suspension of these provisions, the DGFT announced in
July 1996, that the agreements had been amended to address the concerns
expressed by the DGFT.
On February 6, 1996, the DGFT announced that he was referring an agreement
between the Premier League, BSkyB and the BBC, by which the Premier League
sells the exclusive television rights for Premier League football matches, to
the Restrictive Practices Court (the "Court") because the agreement contained
significant restrictions on competition. The Court will decide whether the
restrictions are against the public interest in which case the Court may order
the parties not to give effect to, enforce, or try to enforce the restrictions
in the agreement and not make any other similar agreement. BSkyB, the Premier
League and the BBC are understood to have successfully resisted an attempt made
by the OFT to accelerate the review and the review has not yet been completed.
The OFT is currently considering whether a number of other arrangements
for televising soccer and other sporting events contain significantly
anticompetitive restrictions.
The Group has commenced discussions with other cable operators and media
companies for the purpose of exploring ways in which it could obtain viable
sources of alternative programming and has from time to time discussed the
development of cable television channels to provide programming, including
local programming, through the Group's network.
FUTURE SERVICES
The Group's network has been designed to enable it to provide customers
with a wide range of advanced interactive services as they become available. The
Company also currently expects to introduce a more extensive pay-per-view
service once one becomes more generally available to the industry. Such
- 12 -
13
a service would enable cable subscribers to order specific sporting events,
concerts, feature films or other special events on a per-event basis for an
additional charge. However, the Company cannot provide any assurances as to
whether or when such a service will be generally implemented.
Other interactive services that may be offered by the Group in the future
include video games that would be transmitted periodically (or possibly upon
subscriber request) to a special converter box at a subscriber's home where
they would be available for use by the subscriber (as with a traditional video
game) and video-on-demand services that would enable individual subscribers to
request specific programming from the service provider's inventory for viewing
at a specific time. See "-- Competition -- Cable Television". Additional
services could include video telephone services and video conferencing, access
to on-line databases and interactive transactional services. However, there can
be no assurance that the Group will be able to develop and deliver any of these
products on a timely and competitive basis.
Digital technology allows operators to provide more channels, through
digital compression, and higher quality pictures and sound. The Group believes
that its network leaves it well placed to provide digital television services
if in the Company's view providing these services in its franchise areas
becomes commercially attractive. However, the Group has no immediate plans to
introduce digital television services.
The Group currently receives negligible revenues from advertising, and
does not expect to receive any significant advertising revenues until its
subscriber base has expanded significantly. The Company believes that there may
be potential for meaningful advertising revenues in the future due to the
relatively limited alternative outlets for local advertising in the Group's
franchise areas.
SALES AND MARKETING
Cable television and residential telephone services are marketed to the
residential customer on an integrated basis. Until February 1997, the
residential sales teams were comprised of approximately 150 residential
specialists employed by independent sub-contracting companies supervised by the
Company and paid on a commission basis. Since February 1997, DCL has begun to
employ residential salespeople directly. These employees are now paid on the
basis of a salary plus commissions.
During construction of the Group's network, a customer relations program
is in place, beginning with a "Sorry to Disturb You" pre-construction notice
providing general information about the Company's services and describing the
construction process, followed by a "Thank You for Your Patience" packet
containing an apology for the inconvenience caused during construction,
complete information on the cable television and telephone services offered by
the Company, and ending with an after-sale satisfaction survey. This approach
is designed to inform potential customers of construction status, to minimize
inconvenience during construction and to foster a loyal customer base.
COMPETITION
The Group's business telecommunications, residential telephone and cable
television businesses compete with various companies using a variety of
technologies.
BUSINESS TELECOMMUNICATIONS
The Group competes primarily with BT and Mercury in providing business
telecommunications services. The Group competes primarily in the business
telecommunications area on the basis of quality of service and to a lesser
extent price. The Company believes the Group's call charges are competitive
with those of BT and Mercury.
The Company believes that the Group's ability to compete effectively with
BT had been adversely affected, particularly with respect to businesses, because
there had historically been no telephone number portability in the U.K. (i.e., a
new customer could not transfer its BT telephone number to the Group's system).
The Company believes that this discouraged some customers from changing from BT
to the
- 13 -
14
Group's service because of the costs and inconvenience associated with changing
numbers. In response to this, the Company provided its customers with the
opportunity to use its services for all outgoing telephone traffic, while
continuing to use other providers for incoming traffic. For a discussion of
certain regulatory developments regarding the introduction of number
portability in the U.K. See "-- Certain Regulatory Matters -- Cable
Telecommunications -- Number Portability". The Company believes that number
portability will offer little improvement to the Group's results in residential
areas but could offer marginal increased sales in the small business area where
number recognition and number advertising for the two and three line customer
is an issue. Overall, the Company believes that number portability will be
relatively neutral in its effect on the Group's business.
Both BT and Mercury have resources substantially greater than those of the
Group, and each has a national presence which may permit it to offer
telecommunications, data transmission and other services on a national basis to
business telecommunications customers with national operations beyond those
that the Group is currently able to offer on its own. The Company expects that
competition with Mercury and BT and other service providers, including the AT&T
group, entering the business telecommunications market will continue to
intensify.
Energis has nearly completed construction of a national network along
existing electrical power pylons and has launched telephony services. To date,
Energis has not marketed residential telephony lines and generally has
concentrated on the larger business telecommunications market. Energis' service
offering, along with indirect service from ACC and other, smaller, long
distance operators, and the emergence of International Simple Reseller
companies have increased competition in the long distance and international
telecommunications markets. It is also possible that utilities, such as rail or
water companies, will seek to use their existing infrastructures to construct
telecommunications networks that will compete with the Group's
telecommunications business.
RESIDENTIAL TELEPHONE
BT, with the large majority of the residential telephone market in the
U.K., is the Group's principal competitor in providing residential telephone
services. BT has a fully built national telephone network and, due to its
extensive experience in the marketing and operation of telecommunications
services in the U.K. and its large financial resources, it is a formidable
competitor to the Group. However, BT's ability to respond to price competition
from local cable operators is restricted by its license obligation not to show
undue preference to, or unduly discriminate against, different classes of
customers throughout the U.K. This effectively obligates BT to price all of its
services equally to the same classes of customer throughout the U.K., although
BT may provide discounts to high volume users. However, as the U.K.
telecommunications market becomes more competitive, there can be no assurance
that BT will not be given greater pricing flexibility in the future.
The Group seeks to compete with BT in the residential market primarily by
emphasizing the competitive cost and, to a lesser extent, quality of service
advantages of its cable telephone services. For example, the Group currently
seeks to provide its telephone subscribers with monthly savings on the cost of
calls compared to BT. To date, the Group generally has been able to price its
cable telephone call charges below those of BT; however, there can be no
assurance that the Group will be able to continue to do so in the future. BT
currently is subject to regulatory controls over the prices it may charge
customers, which last until July 31, 1997. OFTEL has issued proposals for
revised price controls to be in effect until 2001. See "-- Certain Regulatory
Matters -- Cable Telecommunications -- Price Regulation". These current controls
impose significant downward pricing pressure on charges in the U.K. telephone
service market. As a result, BT has implemented significant price reductions for
certain categories of calls and has implemented a new price initiative
concerning per second pricing, which has led to further price reductions for
certain users. In the past, the Group has generally reduced certain of its rates
following BT's price reductions in an effort to maintain its price
competitiveness versus BT. OFTEL's proposals for revised price controls until
2001 indicate that BT will be required by its telecommunications license to
reduce the average level of its prices further in each of the next few years.
The impact of BT's price reductions on the financial performance of the Group
has been partially offset by reduced interconnection costs charged by BT for the
conveyance
- 14 -
15
of calls. There can be no assurance, however, that any such price cuts will not
adversely impact the financial performance of the Group's telephone operations.
BT has also started to market its services more aggressively to maintain
its market position over other service providers. For example, BT recently
began providing voice mail services on a national basis and caller ID services
in digital switch areas, and has implemented on a national basis other services
currently offered by the Group in its franchises, such as itemized billing and
time-based charges. BT has also implemented extensive marketing campaigns to
win back customers from cable operators.
The introduction of international facilities licensing in 1996 has
increased competition for international traffic, and the Group's telephone
subscribers can obtain access to these alternative international service
providers.
In both the business telecommunications and residential telephone areas,
the Group faces additional competition from (or may in the future compete with)
Mercury and mobile telecommunications providers such as Vodafone, Cellnet,
Mercury One2One and Orange and also faces competition from radio based
telecommunications providers such as Ionica.
CABLE TELEVISION
As a result of the ITC's practice of not granting more than one cable
television license within a franchise area, the Group does not compete with
other cable operators for subscribers within its franchise areas. The Group
does, however, compete with programming provided by terrestrial stations, DTH
satellite services, video cassette rental stores and SMATV systems and may in
the future compete with programming provided by video-on-demand and other
entertainment services provided by national PTOs and others.
The principal current (and potential) competitors for the Group's cable
television business are the following:
Broadcast. Television viewing in the U.K. has long been one of the most
popular forms of entertainment, and daily viewing time in the U.K. averages
over 230 minutes per person (Source: BARB). Until 1989, four broadcast channels
were the only source of television programming. Although the national
television channels in the U.K. generally are perceived as providing
high-quality programming, the Company believes that most viewers prefer a wider
variety of television programming. The market share of cable television and
satellite service programming is approximately one-third of all viewing in
homes with cable television and satellite services (Source: BARB). In addition,
the Company believes that the penetration of cable and DTH satellite services
and the widespread use of VCRs, indicates a willingness on the part of many
consumers in the U.K. to pay for additional programming.
In addition to the four existing terrestrial channels, an additional
commercial terrestrial channel (Channel 5) is expected to commence broadcasting
before March 30, 1997.
The Company believes that its primary competitive advantages over existing
terrestrial television are significantly more programming options, access in
the future to advanced interactive services and, in some areas, improved
television reception. The Company believes that terrestrial television benefits
from its position as the traditional source of low cost television in the U.K.
Under the Broadcasting Act 1996, the ITC has been given responsibility for
the licensing and future regulation of digital terrestrial television which, on
introduction, is expected to provide an additional 30 or more new terrestrial
channels serving between 60% and 90% of the U.K. population. Forty percent of
the channels will be reserved for digital broadcasting by the existing
terrestrial broadcasters. In January 1997, BSkyB, Carlton Communications and
Granada Group announced they had formed a joint venture and applied (in
competition with another applicant) to the ITC for three frequency ranges to
provide 15 digital terrestrial television channels, which will broadcast
programming that may include BSkyB programming currently available only through
DTH satellite or cable television as well as programming from the BBC.
- 15 -
16
Digital terrestrial television would broadcast from land-based transmitters and
could be received by consumers with conventional aerials. A digital decoder box
would be needed to view the new channels, which would have digital picture and
sound quality. The introduction of digital terrestrial, as well as digital
satellite, television will provide additional competition for the Group. See
"-- Certain Regulatory Matters -- Future Developments -- Digital Broadcasting".
The Group believes that its network has been designed such that the Group
would be well placed to provide digital television services if providing these
services in its franchise areas were to become commercially attractive.
However, the Group has no immediate plans to introduce digital television
services.
DTH Satellite. DTH satellite television service providers obtain
programming from a variety of sources (including some of those used by the
Group) and transmit the programming signal up to a satellite which then
retransmits the signal down to customers. In order to receive a satellite
service, the customer must have an outdoor reception dish.
DTH satellite services are widely available in the U.K., and the number of
DTH satellite subscribers has increased from 500,000 in 1989 to approximately
3.5 million at December 31, 1996. BSkyB is the leading supplier of satellite
programming in the U.K. See "-- Cable Television -- Programming". The Sky
Multi-Channels package provided by BSkyB currently offers subscribers
approximately thirty channels.
In the multichannel television market, BSkyB is the Group's principal
competitor as well as one of its most important sources of programming. The
Group provides to its subscribers all of the channels included in the Sky
Multi-Channels package. There can be no assurance that BSkyB will continue to
provide programming to the Group on acceptable terms. However, as other
programming sources become available, the Company believes that the Group may
become less dependent on programming from BSkyB. See "-- Cable Television --
Programming".
The Company believes that DTH satellite services will continue to be
significant competitors in the future. However, the Company believes that cable
television has a number of competitive advantages over DTH satellite service,
including the following: (a) the significant up-front or ongoing costs for the
purchase or rental of a satellite dish and related equipment required for DTH
(normally starting from approximately L.150 for the purchase of a satellite
dish and related equipment, including typical installation charges of
approximately L.50, or approximately L.12.50 per month for rental of a dish and
related equipment); (b) the perception that satellite dishes are unsightly; (c)
the long-term contracts (one-year) generally required for DTH satellite
services; and (d) the ability of cable networks to offer telephone services and
in the future to offer interactive and integrated entertainment,
telecommunications and information services in addition to television
programming.
The Company believes that the principal competitive advantage of DTH
satellite service is the monthly service charges for basic services and premium
services which are lower than those for comparable services provided by the
Group. BSkyB has announced its intention to introduce a digital DTH satellite
service (offering the possibility of over 200 television channels) by the end
of 1997. The Company believes that DTH satellite services may become more
competitive with cable service if digital compression technology is
successfully introduced in the U.K. such that satellite services can provide
more channels and direct specific programming to particular subscribers.
Other Competitors. The Group also faces competition from video cassette
rentals and SMATV systems (which receive signals from either broadcast or
satellite sources and then distribute them by cable to a discrete group of
subscribers). Currently, no video-on-demand service is commercially available in
the U.K. (although BT has conducted residential trials). However, the successful
introduction of a video-on-demand service in the Group's franchise areas,
particularly by a national PTO, would result in the Group's services being
subject to increased competition. See "-- Certain Regulatory Matters --
Restrictions on National PTOs". SMATV systems can compete with cable television
within a franchise area, but currently there are no SMATV systems licensed to
provide service to more than 1,000 homes in the Group's franchise areas.
- 16 -
17
New Technologies. The extent to which new media and technologies will
compete with cable television systems in the future cannot be predicted and
such media or technologies may become dominant in the future and render cable
television systems less profitable or even obsolete. Certain operators
currently are deploying digital compression technology in the U.S. If digital
compression technology is deployed successfully in the U.K., it will enable the
Group, as well as its terrestrial and digital DTH satellite competitors, to
increase significantly the number of channels they are currently able to offer
to their customers. An increase in the number of channels offered by
terrestrial and DTH satellite services at competitive costs could affect the
Group's current competitive position.
FRANCHISE AREAS
The Group has been granted cable television licenses to provide cable
television services in fifteen franchise areas that form a contiguous cluster
of approximately 1,229,900 equity homes. The Group has been granted
telecommunications licenses in eight of its fifteen franchises. In addition,
DCL has applied for a national telecommunications license which will enable the
provision of business and residential telecommunications in the Group's seven
remaining franchises and elsewhere in the U.K. The table below sets forth the
number of homes in the individual franchises areas according to CACI
Information Services (for the franchises governed by telecommunications
licenses and the Burton-upon-Trent and Hinckley LDLs) and the ITC (for the
other LDLs).
OWNERSHIP EQUITY HOMES
TELECOMMUNICATIONS LICENSES
Nottingham....................... 100 % 270,000
Mansfield........................ 100 % 85,000
Newark-on-Trent.................. 100 % 42,000
Grantham......................... 100 % 22,000
Melton Mowbray................... 100 % 19,000
Lincoln.......................... 100 % 52,000
Grimsby and Cleethorpes.......... 100 % 64,000
Leicester and Loughborough....... 100 % 203,000
LDLS(1)
Burton-upon-Trent................ 100 % 94,000
Hinckley......................... 100 % 45,000
Ravenshead....................... 100 % 2,900
Bassetlaw........................ 100 % 41,000
Lincolnshire and South Humberside 100 % 174,000
Chesterfield..................... 100 % 107,000
Vale of Belvoir.................. 100 % 9,000
---------
Total............................ 1,229,900
=========
(1) The Group has been granted an LDL for each of these franchise areas and is
awaiting the grant of the necessary telecommunications license. It is
expected that these franchises will be covered by the national
telecommunications license.
Diamond's original franchise areas comprise a substantial regional market
centered around the City of Nottingham. In addition, the LCL franchises and the
Ravenshead, Bassetlaw, Lincolnshire and South Humberside, Chesterfield and Vale
of Belvoir franchise areas are contiguous to the original Diamond franchises.
All of the Group's franchises are concentrated in a single region and the Group
owns a 100% interest in the licenses associated with each franchise. The
Company believes that the Group's regional focus provides it with a number of
advantages, including the ability to (a) achieve significant cost benefits in
designing, constructing and managing a single network infrastructure and
providing telecommunications services over an extensive area, (b) be more
responsive to customer needs than its national competitors, thereby increasing
customer loyalty and (c) increase its name recognition.
- 17 -
18
Under present rules, the telecommunications licenses covering these
franchises last for 23 years from the date from which the cable system first
becomes operative. Thereafter, these licenses are not extendable and
application must be made for a new license. The telecommunications license for
the Nottingham franchise, which was the first to become operative, expires in
2013. The telecommunications licenses currently held by the Group all
incorporate construction milestones which are reviewed by OFTEL. LDLs include
milestones that are reviewed by the ITC. See "-- Milestones". For further
descriptions of the Group's licenses, see "-- Certain Regulatory Matters".
The Company may from time to time seek to acquire one or more new or
existing franchises either in public tenders by the ITC or by private purchases
from third parties. The Company anticipates that it will generally seek to
acquire franchises that are contiguous to the Group's existing franchises and
therefore can effectively be integrated into the Group's existing operations.
No agreement for any specific material acquisition has been reached or is
currently pending. The Group currently operates solely in the U.K. and
currently expects that any future acquisitions would be of franchises or
businesses in the U.K.
An LDL enables an operator to provide cable television and (when held in
conjunction with a telecommunications license) telecommunications services,
utilizing not only cable networks but also microwave distribution systems. See
"-- Certain Regulatory Matters". When such licenses are applied for by one
operator, they are then generally advertised for competitive auction by the
ITC. No license has been awarded for certain other geographic areas that are
contiguous to the Group's franchise areas. The Group may bid for additional
LDLs, if the bid price (including the estimated additional capital costs to
complete the network) for the additional franchise areas provide an attractive
return, in order to further improve the Group's operating leverage and increase
asset value. If the Group were to be awarded any of the LDLs it may bid for in
the future, the areas would be constructed in parallel with the existing
franchises, but it is expected that the completion of the network for the
enlarged area would be later than that planned for the existing area. In
addition, to complete construction of an enlarged franchise area, the Group
would be required to expend additional funds which, depending on the size of
the franchise area, could be significant. See Item 7. "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources".
In addition, the Group operates a master antenna television service to
approximately 16,000 council properties in Nottingham. This service is provided
by the primary cable television network without the necessity to build and
operate a separate master antenna service system.
CONSTRUCTION
As of December 31, 1996, approximately 477,000 of the premises in the
Group's franchise areas had been passed by civils construction and a portion of
the network passing approximately 365,000 premises had been activated. The
number of premises activated represents 36% of the Group's aggregate milestone
requirements. Construction has now commenced in eight of the Group's franchise
areas. While the projected rate of construction is governed principally by the
applicable regulatory milestones, the path of construction in the Diamond
franchises has, to date, been driven in part by the Company's strategy of
targeting large business telecommunications customers. As a result, Diamond
often concentrated the build out of its network to business telecommunications
customers who were being solicited or to areas with a higher density of
potential business telecommunications customers.
The Group has undertaken a rapid acceleration in the build out of its
existing franchise areas. During 1996 and 1995 over 172,000 and 173,000 homes,
respectively were passed by civils construction as compared with approximately
27,000 homes passed during all of 1994. The Company intends to continue the
rapid growth and development of network construction and activation to meet the
Group's regulatory milestones. The Group may encounter difficulty in obtaining
qualified contractors and may encounter cost overruns or delays in construction.
As with other U.K. cable operators, the Group is generally required to use
underground construction and cannot broadly employ mechanized construction
methods due to existing underground utility infrastructure. The number of homes
passed by the Group's civils construction substantially exceeded homes activated
and homes marketed at December 31, 1996. At that date,
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19
approximately 23% of the network passed by civils construction had not been
activated (as measured by homes activated as a percentage of homes passed by
civils construction). At that date, approximately 27% of the homes activated by
the Group's network had not yet been marketed. The Company expects to accelerate
the release of homes for marketing as more homes are activated and as the
percentage of homes activated but not marketed is reduced. This may place
additional stress on the Company's management and operational resources. If the
Group is unable to manage its expected rapid growth and development
successfully, the Group's operating results and financial condition could be
materially adversely affected.
Diamond originally relied on its own construction team for the build out
of its network. Since 1994, the Group has primarily used outside contractors,
but believes that maintaining some in-house construction capability enables it
to reduce the costs of construction and to manage its build out better. In
particular, the in-house construction team provides a benchmark against which
to measure fees from outside contractors and provides a reliable construction
team for building out particularly difficult areas. Approximately 16% of the
network constructed during 1996 was constructed using the Group's in-house
team.
Cable operators have the benefit of and must comply with the New Roads and
Street Works Act 1991 (the "Street Works Act") which permits them to construct
on public highways on the same basis as public utilities. This has, to some
extent, reduced construction delays. See "-- Certain Regulatory Matters --
Cable Telecommunications -- Network Construction and Service Obligations".
For a discussion of the Company's plans to fund construction see Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources".
MILESTONES
The Group is obliged by the milestones in its telecommunications licenses
and LDLs to construct a network to pass an aggregate of 1,021,894 premises
within prescribed time periods. See "-- Certain Regulatory Matters -- Cable
Telecommunications -- Network Construction and Service Obligations".
Both Diamond and LCL failed to meet their original regulatory milestones.
Diamond had failed to meet the milestones in its original licenses due
principally to the unavailability of sufficient funding in periods prior to the
acquisition in May 1994 by European Cable Capital Partners, L.P. ("ECCP") of a
majority stake in Diamond and the decision to allocate resources to the
building out of the Nottingham franchise. Having obtained revisions to its
licenses, Diamond raised approximately $143 million at the end of September
1994 through the issuance of its 13 1/4% Senior Discount Notes due September
30, 2004 (the "1994 Notes") and, after a slight delay due to construction
planning and the hiring of contractors, began to accelerate the pace of the
build out of its network.
At December 31, 1995, the Group was obligated to meet specified milestones
in eight of the Group's franchise areas where building was due to have
commenced. Compliance with the milestones in these areas is in each case
monitored by OFTEL. During June 1996, OFTEL informed the Company that it did
not agree with the Company's historical method for calculating compliance with
its milestone obligations and that the number of premises passed should be
based only on the number of premises activated (the number of premises that can
be connected to the cable network without further extension of transmission
lines, apart from the final drop to the home). In calculating premises passed,
the Company had historically included premises passed by civils construction
(premises with ducting buried outside) but not yet activated. Based on OFTEL's
method of calculating premises passed, the Group failed to meet its year-end
1995 milestones in six of its eight franchise areas. In three of these
franchise areas -- Grantham, Newark-on-Trent and Melton Mowbray, the 1995
year-end milestones represented the final milestones required under each
license.
The Group has renegotiated its eight telecommunications license milestone
obligations with OFTEL. In five franchise areas where the final milestone has
not yet fallen due, the Director General of OFTEL has formally modified the
interim but not the final milestone obligations under the licenses to provide
new
- 19 -
20
quarterly milestones which the Group had met as at December 31, 1996. In the
other three franchise areas, OFTEL did not make any formal modification to the
existing licenses, and the final milestones in these three franchise areas have
now been met.
In four of the seven franchise areas covered by LDLs, the Group was
originally required to meet its first milestone obligations by the end of 1996.
However, due to delays by the DTI in the granting of telecommunications
licenses covering these franchises, which are required before construction can
commence, the ITC has formally modified the Group's licenses to remove
milestones that fell due at year-end 1996 and otherwise shift the annual
milestones for those licenses back by 12 months. DCL has applied to the DTI for
a national telecommunications license which it expects to be granted shortly.
Delays in obtaining this license may adversely affect the Group's ability to
meet LDL milestones for 1997.
The following table sets forth the milestones that are incorporated into
the Group's telecommunications licenses and LDLs. Since the actual milestones
that the Group is required to meet are specified individually for each of the
franchises, the Group could meet the aggregate milestones but still fail to
meet one or more individual franchise milestones and therefore subject a
telecommunications license or LDL to the risk of revocation or termination.
GROUP FRANCHISE AREAS 1994 1995 1996 1997 1998 1999 2000 AFTER
2000
TELECOMMUNICATIONS LICENSE
MILESTONES(1)
Nottingham....................... 45,000 80,000 132,000 190,000 230,000 230,000 230,000 230,000
Mansfield........................ 15,000 35,000 42,000 66,000 66,000 66,000 66,000 66,000
Newark-on-Trent.................. 3,000 13,500 13,500 13,500 13,500 13,500 13,500 13,500
Grantham......................... 3,000 14,000 14,000 14,000 14,000 14,000 14,000 14,000
Melton Mowbray................... 3,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000
Lincoln.......................... 3,000 20,000 18,000 43,000 43,000 43,000 43,000 43,000
Grimsby and Cleethorpes.......... 3,000 25,000 35,000 57,000 63,000 63,000 63,000 63,000
Leicester and Loughborough....... 40,620 53,620 76,000 100,000 149,000 200,670 200,670 200,670
LDL MILESTONES
Ravenshead....................... -- -- -- 2,500 2,500 2,500 2,500 2,500
Bassetlaw........................ -- -- -- 1,000 10,000 19,000 28,000 32,800
Lincolnshire and South Humberside -- -- -- 5,000 25,000 45,000 70,000 144,000
Chesterfield..................... -- -- -- 8,000 28,000 60,000 80,000 89,000
Vale of Belvoir.................. -- -- -- 1,000 2,000 3,000 4,545 4,545
Burton-upon-Trent................ -- -- -- 10,000 29,000 45,000 66,000 77,675
Hinckley......................... -- -- -- 8,000 16,000 23,000 31,204 31,204
Aggregate Cumulative Totals...... 115,620 251,120 340,500 529,000 701,000 837,670 922,419 1,021,894
Aggregate Annual Totals.......... 115,620 135,500 89,380 188,500 172,000 136,670 84,749
(1) Although reflected above on an annual basis, the Group's
telecommunications license milestones are measured on a quarterly basis.
- 20 -
21
The table below sets forth by franchise and date the number of premises
activated.
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1995 1995 1996 1996 1996 1996
Nottingham 57,697 79,866 98,504 110,548 123,910 139,286
Mansfield 11,686 11,686 20,863 32,755 40,474 46,916
Newark-on-Trent 5,634 7,420 7,420 8,392 12,707 13,509
Grantham 0 0 0 3,503 11,515 14,894
Melton Mowbray 0 0 0 0 9,819 10,045
Lincoln 0 5,177 5,177 12,459 16,887 20,131
Grimsby and Cleethorpes 7,806 8,057 13,386 21,604 30,699 37,130
Leicester and Loughborough 51,409 57,366 61,007 67,766 77,017 83,280
Cumulative Total 134,232 169,572 206,357 257,027 323,028 365,191
The Group is potentially subject to enforcement orders from the Director
General for failure to meet its telecommunications license milestones, which
could lead to revocation of the relevant licenses. Similarly, in the event that
the Group failed to meet the milestones for any of its LDLs, the ITC would have
power to shorten the LDL period, impose fines or commence proceedings leading
to revocation. In addition, under the Senior Banking Facility, failure to meet
the Group's milestone obligations could under certain circumstances prevent
further borrowing or result in an event of default. See "-- Certain Regulatory
Matters -- Cable Telecommunications -- Network Construction and Service
Obligations". The Group has not been subject to date to any enforcement action
by OFTEL or the ITC due to missed milestones; however, there can be no
assurance that OFTEL or the ITC will not take such action in the future.
SOURCES OF SUPPLY
The Group obtains services and equipment for the construction and
operation of its cable systems from numerous independent suppliers. As the
Group has grown and its construction and purchasing needs have increased, the
Group has sought to use its increased buying power to obtain more favorable
pricing and contract terms.
With certain exceptions, the Company believes that the Group can purchase
the services and equipment it needs to operate its business from more than one
source. However if a supplier of a product that involves significant lead time
for production and delivery were to be unwilling or unable to supply the Group,
the Group could suffer delays in the operation of its business, which could
have an adverse effect on the Group. Further, in the case of certain supplies,
limited competition in the provision of these materials has subjected (and may
in the future subject) the Group to price increases higher than those
experienced with other supplies.
For certain products, the Group depends on a single supplier. Diamond has
obtained exclusively from GPT certain telephone equipment, namely its switches,
primary multiplexers and certain telephone transmission equipment. LCL has
obtained such equipment from Nortel Limited. The Group obtains all of its cable
television transmission equipment and set top converters from Scientific
Atlanta. Scientific Atlanta, GPT and Nortel Limited are among the largest
providers of cable television and telephone equipment in their respective
markets. While the Group to date has experienced no significant difficulty in
receiving products from these companies, the failure or inability of any of
these companies to continue to supply the Group with these products in the
future would have a material adverse effect on the Group.
The Group has not experienced significant difficulty in obtaining timely
deliveries of equipment and services. In order to reduce warehousing expenses,
maximize inventory control and minimize the possibility that the Group will not
have the required inventory to proceed with construction in a timely manner,
the Group recently centralized its warehouse operations. Due to the high level
of construction in the U.K. cable industry, delays may be encountered in
obtaining certain supplies such as fiber optic cable; however the Group is
making efforts to avoid such delays.
- 21 -
22
NETWORK ARCHITECTURE
The network being constructed by the Group comprises an overlay of a cable
television network and a telecommunications network. Portions of the network
currently in the ground utilize conventional tree and branch architecture and
the other portions utilize optical fiber node architecture with nodes serving
up to 2,500 homes. Both of these portions of the network may need to be
upgraded to achieve higher capability and reliability. This upgrading is not
expected to require significant additional capital expenditure.
The Group is now constructing a cable system in which optical fiber is
employed to areas serving approximately 500 homes for both cable television and
telecommunications services. The geography of the Group's franchise areas and
the location of the cable television network's headends and the
telecommunications network's switches dictate to some degree the physical
construction of the cable television and telecommunications network. The
Nottingham central network control office will control and monitor all other
locations which will be interconnected to Nottingham supertrunking fiber
network.
Five switches are currently in operation in Nottingham, which is presently
interconnected with three other switches, Mansfield, Lincoln and Grimsby.
Leicester is presently interconnected with 2mb circuits to Nottingham. Two
switches in Leicester are in service, with a third recently commissioned. The
Company expects that an additional four switches will be commissioned during
the build out.
In addition to the existing switches, six remote concentrator units
("RCUs") are being interconnected to the Nottingham headend. The Company
expects that an additional eight RCUs will be added during the build program.
There are presently three cable television headend locations. The Nottingham
location will monitor all headend locations. The interconnects are all fiber
optics with two-way capability and status monitoring.
The cable television headends consist of Scientific Atlanta and Magnavox
fiber transmitters, fiber receivers, satellite receivers, signal processors,
modulators, encoding equipment and network status monitoring and Panasonic
automated tape distribution equipment. The cable television network is being
constructed with Scientific Atlanta transmission equipment and set top
converters. The Network's downstream upper frequency capability is 750 MHz.
From the headends, fiber is deployed to each node for feeder distribution and
from the node, coaxial cable is installed to the distribution points. The upper
side of the downstream bandwidth will be 750 MHz. From the headends, fiber is
deployed to nodes for feeder distribution, and from the nodes, coaxial cable is
installed to the distribution points. The Group has begun the deployment of 750
MHz Scientific Atlanta set top converters, with capacity for 75 channels, as of
February 1997.
The telephone switches are GPT System X and Nortel DMS-100 platforms. The
telecommunications network near the switch is fed directly by copper. Outside
the copper service area, the telecommunications network uses Nortel or GPT SDH
multiplexing equipment in a fiber self-healing loop configuration operating at
155 Mb/s ("STM 1"). Four nodes of 500 homes will be served off of each 2,000
home fiber ring. GPT and ASCOM 120 line primary multiplexers are located in the
same street cabinet with the SDH multiplexers, and from there copper is fed
down to approximately 30 homes per street cabinet. As the telephone network
grows more distant from the switch, additional SDH rings operating at 622 Mb/s
("STM 4") will support four STM 1 rings. The telecommunications network has
been designed so that as penetration and traffic intensifies, ring splitting
will enable additional capacity to be carried. All network equipment, both
cable television and telephone, is powered by battery backed-up power supplies.
Telecommunications and cable television services are transmitted to the
home through the same "Siamese" drop cable. The "Siamese" cable consists of two
twisted pair telephone cables and a cable television coaxial drop cable
manufactured in the same cable housing/insulation package so that both
services are installed at the same time. From a subscriber's home, the
telephone cable is run through the street cabinet up to the 500 home hub
cabinet where calls are processed through a primary multiplexer which handles
many calls and transmits them to the telephone switching equipment. The calls
are then
- 22 -
23
routed, if possible, to their final destination via the lowest cost routing, be
it BT, Mercury, Energis, Global One or the Group's own network.
The duct system is constructed with 89mm diameter duct with a 2.4mm wall
thickness. Trunk cable routes usually contain multiple fiber and coaxial cables
within four to six ducts. Distribution cable routes carry the drop cable to the
subscriber premises and usually contain one or two ducts. A subscriber drop is
placed inside either 25mm or 50mm duct which is buried in its approach to a
residence to reduce cable drop cuts and other maintenance.
The network will support 100% cable television penetration and 100%
telephone penetration based upon cabinet space but only 50% telephone
penetration based upon transmission equipment with hardware expandability to
96%.
The Company believes that the Group's network architecture design, with
respect to both telecommunications and cable television, will facilitate the
transition to greater fiber distribution. It should allow for efficient
utilization of primary multiplexers and eliminate the need for expensive
digital cross connects to maximize switch port utilization. The Company
believes that the network design has taken into account the need to be flexible
with respect to both node and hub sizes and future developments that may lead
to integration between the telecommunications and the cable television
networks.
The existing Diamond and LCL networks will be integrated in phases. The
initial objective has been to physically connect the two networks through a
fiber interconnect and this has been achieved with 2mb circuits, which are in
place. The main purpose of the interconnect is for the central network control
office (located in Nottingham) to have the ability to control the central
Nortel switch in Leicester, mainly for telephone purposes. This interconnect
will also enable Nottingham to monitor the Leicester cable television headend
and transfer data of route forwarding information between the two locations.
The physical connection point will be in Loughborough which is located
between Nottingham and Leicester and is the desired location for the third
switch for the LCL franchise areas.
Once the two networks physically have been joined and the interfacing is
complete, maintenance and monitoring of call traffic will be possible, followed
by integration of the wholesale and then the retail billing processes.
EMPLOYEES
As of December 31, 1996, the Group had 706 employees, including 581
employees in operations and 125 employees in civils construction. With effect
from February 1997, DCL has begun to directly employ residential salespeople,
which will increase the number of its employees. Previously salespeople had
been employed by independent companies engaged by the Group on a subcontracting
basis. The Group has not entered into any collective bargaining agreement with
employees and the Company currently believes that the Group's labor relations
are good.
CERTAIN REGULATORY MATTERS
GENERAL
Cable television and cable telephone service industries in the U.K. are
governed by legislation under the Telecommunications Act, the Broadcasting Act
1990, which replaced the CBA, and the Broadcasting Act 1996. The operator of a
cable television and cable telephone franchise in the U.K. covering more than
1,000 homes requires the following two principal licenses for each franchise
area:
(a) a telecommunications license, granted under the Telecommunications
Act by the Secretary of State and supervised by the DTI and OFTEL, which
authorizes the installation and operation of the telecommunications network
used to provide cable television and cable telephone services, and
- 23 -
24
(b) a cable television license, which authorizes the provision of
broadcasting services within a defined geographical area and which may be
either:
(i) a Prescribed Diffusion Service License ("PDSL"), granted
under the CBA prior to 1991, which allows an operator to provide cable
television and other entertainment services by means of a cable
network, or
(ii) an LDL granted since January 1, 1991 under the Broadcasting
Act 1990, which allows an operator to deliver television and other
programming services by means of a licensed telecommunications network
including a cable network.
Each type of license described above contains various conditions, and in
the event of the breach of such conditions, the Director General or the ITC, as
appropriate, could issue an enforcement order and ultimately commence
proceedings to require compliance or to revoke such licenses.
Under the Broadcasting Act 1990, cable operators may elect to replace
certain PDSLs with LDLs with similar terms.
The regulatory environment in the U.K. has generally encouraged the
development of the cable telecommunications and the cable television industry
by, among other things, licensing only one operator for each cable franchise
area and restricting the national PTOs from using existing telecommunications
networks to carry broadcast entertainment.
The Labour Party has stated that it would review the existing regulatory
structure if it came into power. See "-- Cable Telecommunications --
Restrictions on National PTOs".
CABLE TELEVISION
The Broadcasting Act 1990
The Broadcasting Act 1990 established the ITC to license and regulate
commercial television services (terrestrial and satellite) and the Radio
Authority to regulate radio services. The ITC's functions are, among other
things, to grant licenses for television broadcasting activities and to
regulate the commercial television sector by issuing codes on programming,
advertising and sponsorship, monitoring programming content and enforcing
compliance with the Broadcasting Act and cable television license conditions.
The ITC has the power to vary cable television licenses and impose fines and
revoke such licenses in the event of a breach of the license conditions. The
ITC also enforces ownership restrictions on those who hold or may hold an
interest in licenses issued under the Broadcasting Act. See "-- Cable
Television Licenses -- Ownership Restrictions".
CABLE TELEVISION LICENSES
General. As of December 31, 1996, cable television licenses had been
granted for franchise areas covering approximately 16.5 million out of
approximately 22 million total homes in the U.K. The ITC has indicated that it
will grant only one cable television license for each geographical area for the
foreseeable future. The ITC also has indicated that certain areas, for which
cable television licenses have yet to be awarded, may be advertised at the
request of applicants. Such licenses (LDLs) are generally awarded after
competitive bids. Before awarding an LDL, the ITC must be satisfied as to
certain matters, including the technical specification of the proposed system;
that the applicant has sufficient funding to run the franchise; and that the
applicant is a fit and proper person to be awarded a license. The ITC will award
the LDL to the highest bidder unless there are exceptional circumstances,
including that the coverage proposed to be achieved by another applicant is
substantially greater than that indicated in the technical plan of the highest
bidder, such that it is appropriate to award the license to that other
applicant. In addition, all applicants must undertake to pay a percentage of
qualifying revenue ("PQR") to the ITC in each year of the license.
- 24 -
25
Cable operators may carry U.K. licensed broadcast services, foreign
satellite programmes or text in their services. Cable television licenses also
require cable operators to ensure that advertising and foreign satellite
programs carried by them as part of their services conform to the restrictions
set forth in the codes on advertising, sponsorship and programming issued by
the ITC. Cable television licenses also impose an obligation on licensees to
provide any information which the ITC may require for purposes of exercising
its statutory functions.
Term, Renewal and Revocation of Cable Television Licenses. The Group
holds eight PDSLs which were issued for 15-year terms. The Group also holds
seven LDLs, four of which were granted on September 1, 1995 and three of which
were granted on September 13, 1996, all for 15-year terms.
An application may be made to the ITC to extend a PDSL for up to an
additional eight years if the cable operator holds a 23-year telecommunications
license. Fees would continue to be payable on the same basis as for the
unextended PDSLs and no PQRs or cash bids would be payable during this 8-year
term. If the Group elects to extend the PDSLs, the Group will upon expiration
of such PDSLs as so extended, be required to apply for a new LDL under the
competitive bid procedures described above. If the Group elects not to extend a
PDSL, the Group may apply to the ITC (no earlier than five years prior to the
expiration of the PDSL) for a replacement 15-year LDL, with respect to which it
must agree with the ITC on the amount of the cash bid and PQR payments that
will be payable over the term of the LDL (based on what would have been offered
if the franchise had been offered for competitive bids).
The Group's PDSLs will currently all expire in 2005. The Group has not yet
applied to extend any of its PDSLs, nor has it applied for any replacement LDLs
under the procedure outlined above, since more than five years remain before
their expiration.
The ITC may refuse an application for renewal, but only on limited
grounds, including that the ITC proposes to grant a license in an area
different from that described under the existing license or that the applicant
is not providing services through the whole of its franchise area.
The ITC may, after consultation with the DTI and the Director General,
revoke a cable television license if an operator fails to comply with its
conditions or with any direction of the ITC, and the ITC considers revocation
to be in the public interest. The ITC must be notified of changes in control of
the licensee, of changes in directors and of certain other changes in
shareholdings in the licensee. If there is any change in either the nature or
characteristics of an operator that is a corporate entity, or any change in
persons controlling or having an interest in it, the ITC can revoke the license
if, as a result, it would not have awarded the license had the new ownership or
control existed at the time the application for the license originally was
considered. The ITC can also revoke any cable television license in order to
enforce restrictions on ownership contained in the Broadcasting Act 1990 (see
below) and can impose fines and shorten the license period of LDLs.
A cable television license is transferable only with the consent of the
ITC, and several of the Group's cable television licenses have recently been
transferred to DCL from various of the Group's wholly owned subsidiaries with
that consent.
The Group also holds two licenses to provide television program services
under the Broadcasting Act 1990. The license for the Leicester Community
Channel came into force on June 29, 1992 and the license for Diamond Vision on
August 29, 1995. Both licenses are for a period of 10 years.
Ownership Restrictions. The ITC has a general duty to ensure that cable
television licenses are held by "fit and proper" persons and may exercise
control over who may hold a license where financial assistance is provided to,
or influence is exercised over, a licenseholder which may produce results which
it considers adverse to the public interest. The Broadcasting Act 1990 also
contains specific restrictions on the types of entities which may hold cable
television licenses or significant interests therein. Cable television licenses
may not be held by a local authority, an advertising agency, a religious or
political body (or one of its officers) or any entity controlled by them.
Ownership restrictions also apply to ownership of different licensed services
- 25 -
26
(including local delivery services, television, satellite and radio services and
newspapers), or associates of entities operating such services. See "-- Media
Ownership". While PDSLs in most respects continue to be regulated under the
Broadcasting Act 1990 and the Broadcasting Act 1996 as if the CBA remained in
force, the ownership restrictions for PDSLs and LDLs are substantially similar.
There is currently no restriction on the number of cable television
licenses which may be held by any person.
CABLE TELECOMMUNICATIONS
The Telecommunications Act
The Telecommunications Act provides a licensing and regulatory framework
for telecommunications activities in the U.K. and established OFTEL under the
Director General as an independent regulatory authority. Telecommunications
policy is overseen by the DTI. The DTI on behalf of the Secretary of State also
has primary licensing authority under the Telecommunications Act, although it
may delegate that authority to the Director General. The functions of the
Director General are, among other things, to monitor and enforce compliance
with telecommunications license conditions, establish and administer standards
for telecommunications equipment and contractors, and investigate complaints
and exercise certain functions concurrently with other regulators to promote or
ensure competition in telecommunications markets. The Director General may
modify telecommunications licenses either with the agreement of the licensee
following a statutory period of public consultation or following a report by
the MMC. The Director General is also empowered to issue enforcement orders
requiring compliance with telecommunication license conditions which have been
breached (see below).
Telecommunications Licenses
The Group holds eight telecommunications licenses and has applied for a
national telecommunications license to cover those areas for which it does not
presently hold a telecommunications license, including the areas for which it
has been granted LDLs. The national telecommunications license is intended to
cover the Group's LDL franchises, but the Group has the option of relying on
its original applications for individual telecommunications licenses for those
areas. However, no assurance can be given that a national telecommunications
license will be granted to the Group. In addition, the Group holds temporary
telecommunications licenses granted under section 7 of the Telecommunications
Act on September 16, 1994 and December 21, 1994 to interconnect
telecommunications systems run by Diamond Cable (Newark on Trent) Limited and
Diamond Cable (Lincoln) Limited, and to run telecommunications systems in the
Coalville area of Leicestershire, respectively. These temporary licenses may be
revoked by the Secretary of State on one month's notice. A telecommunications
license authorizes a cable operator to install and operate the physical network
used to provide cable television and cable telecommunications services. It also
authorizes the operator to connect its system to other television and
telecommunications systems, including those operated by the PTOs, the
terrestrial broadcasting authorities and satellite broadcasting systems.
Although the telecommunications license granted to a cable operator is for a
particular area, it is not exclusive and, as a result, a cable telephone
operator is subject to competition with respect to the provision of telephone
services from national PTOs such as BT and Mercury and other telephone service
providers in its franchise area. See "-- Competition -- Business
Telecommunications" and "-- Competition -- Residential Telephone". Following
the Duopoly Review, the Government has granted a telecommunications license to
any applicant provided the applicant has satisfied certain requirements,
including with respect to financial viability and, in some cases, service
commitments. See "-- Duopoly Review".
A cable operator's telecommunications license contains conditions
regulating the manner in which the licensee operates its telecommunications
system, provides telecommunications services, connects its systems to others and
generally operates its business. A cable operator's telecommunications license
also contains a number of detailed provisions relating to the technical aspects
of the licensed system (e.g., numbering, metering and the use of standard
technical interfaces) and the manner in which the licensee
- 26 -
27
conducts its business (e.g., publication of certain prices, terms and
conditions). In addition, a cable operator's telecommunications license contains
prohibitions on undue preference and discrimination in providing service and
unfair cross-subsidy of other services. The cable operator's telecommunications
license also requires the licensee to comply with certain codes of practice and
to provide any information which the Director General may require for the
purposes of carrying out his statutory functions. Failure to comply with an
enforcement order in respect of a breach of a telecommunications license
condition might give rise to revocation, an injunction by the Director General
or to a third party's right to damages.
On July 18, 1996, the Director General issued a statement (following
public consultation) setting out OFTEL's proposals for the introduction into
BT's license of a new condition, which would prohibit any abuse of its dominant
position and any agreement or concerted practice between BT and other entities
restricting or distorting competition in the telecommunications market. The
proposed condition formed part of a package with revised price controls
proposed for BT and came into effect on December 31, 1996. BT challenged the
introduction into its license of the fair trading condition, and on December
20, 1996, the High Court entered judgment against BT.
The fees payable for the telecommunications license consist of an initial
fee payable on the grant of the license and annual fees thereafter. The annual
fees are based on a proportion of the costs of the Director General in
exercising his functions under the Telecommunications Act and in certain cases
a proportion of costs of the MMC incurred in relation to license modification
references under the Telecommunications Act.
A telecommunications license is not transferable. However, certain changes
in ownership of an entity holding a license are allowed, subject to compliance
with a notification requirement.
Network Construction and Service Obligations
Where a cable operator holds a PDSL or an LDL replacing a PDSL (see "--
Certain Regulatory Matters -- General"), the milestones are contained in the
corresponding telecommunications license and are reviewable by OFTEL.
Where, on the other hand, a cable operator holds a new LDL which is not a
conversion from a PDSL, the milestones are contained in the LDL and are
reviewable by the ITC.
Each of the Group's existing telecommunications licenses prescribes
milestones which require the Group to construct its network to pass a specified
number of premises within prescribed time periods. The milestones may be varied
by the Director General if he considers that the variation would enable the
licensee to meet the final milestone more easily. The final milestones can be
modified only following a public consultation period and with the approval of
the Director General. If the milestones prescribed by a telecommunications
license are not met, the Director General may take enforcement action which, if
not complied with, could result in the revocation of such license. Similarly,
the LDLs which the Group has acquired contain build milestones which may be
varied by the ITC. See "-- Construction" and "Business -- Milestones". The
Company understands that all milestones from now on will be contained in LDLs.
The Company also understands that the ITC will have jurisdiction to enforce
these milestones. To date, the ITC has not published any guidelines on
enforcement of milestones.
Where a cable network has been installed, a licensee must provide a cable
television service to anyone who reasonably requests it. A cable operator is
not required to provide telephony services, but where it does so, and achieves
a 25% or more share of the relevant market for such services (as determined by
the Director General) within its licensed area, the licensee may, at the
direction of the Director General, be required to ensure that telephone
services are available to anyone in the licensed area who reasonably requests
them. The Group has not received any such direction from the Director General.
Under a telecommunications license, the cable operator is subject to and
has the benefit of the Telecommunications Code promulgated under the
Telecommunications Act. The Telecommunications Code
- 27 -
28
provides certain rights and obligations with respect to installing and
maintaining equipment such as ducts, cables and cabinets on public or private
land (including the installation of equipment on public highways). The
activities of cable operators under the Telecommunications Code are also subject
to planning legislation.
Cable operators have the benefit of, and must comply with, the Street
Works Act, which provides them with the same rights and responsibilities with
respect to construction on public highways as other public utilities. The
Street Works Act standardizes fees for inspections of construction works by
local governmental authorities and standardizes specifications for
reinstatement of property following excavation. As a result, construction
delays previously experienced by cable operators because of separate and often
lengthy negotiations with local governmental entities have been reduced.
Cable operators are required to post bonds for local authorities in
respect of their obligation to ensure reinstatement of roads and streets in the
event the operators become insolvent, cease to carry on business or have their
telecommunications license terminated. In order to install equipment on private
property cable operators must obtain legal permission from occupiers, property
owners and others.
Term, Renewal and Revocation of Telecommunications Licenses
To date, telecommunications licenses have generally been granted for
periods of 15 or 23 years. Seven of Diamond's telecommunications licenses were
granted for an initial period of 23 years, and one was granted for an initial
period of 15 years, both periods commencing on the date specified by the
Secretary of State (which, in practice, is the date on which the cable system
first becomes operative). The 15-year telecommunications license was
subsequently amended to a 23-year license. The Company expects that the Group's
anticipated national telecommunications license will be for a 23-year term.
Upon expiration, a telecommunications license cannot be extended and
application must be made for a new license.
A telecommunications license may be revoked if the licensee fails to pay
the license fees when due, fails to comply with an enforcement order, upon the
occurrence of certain insolvency-related events or if the cable television
license relating to the licensee's system is revoked. A telecommunications
license may also be revoked if, among other things, the licensee fails to give
the required notification to the DTI of changes in shareholdings and changes in
control and agreements affecting control of the licensee, or if the DTI
concludes that any such change would be against the interests of national
security or the U.K. Government's international relations.
Duopoly Review
In 1991, the U.K. Government concluded in its Duopoly Review that the
termination of the duopoly policy (which permitted only BT and Mercury to
operate local, national or international fixed-link networks in the U.K. to
provide public telephone services) might increase competition and benefit
consumers in the U.K. telecommunications market. As a result, the U.K.
Government revised its policy and determined that application for licenses
would be considered from any person seeking to operate new telecommunications
networks over fixed links within the U.K. Such licenses normally would be
granted subject to the general statutory duties of the DTI and the Director
General to ensure the provision of telecommunications services, to satisfy all
reasonable demands for them and the ability of a person providing the services
to finance their operations.
The Duopoly Review also recommended specific amendments to license
conditions that are particularly important to cable operators. Until the Duopoly
Review, for a cable operator to provide telephone services it had to enter an
agreement with BT or Mercury with respect to the terms and conditions (including
price) under which the operator would provide telephone services, obtain a
determination from the Director General that services could be provided and
operate its network as agent for either BT or Mercury. Since the Duopoly Review,
cable operators have been permitted to provide all forms of wired
telecommunications
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services in their own right, including the ability to switch their own
traffic. The Duopoly Review also recommended changes to and further study of
arrangements relating to interconnection, number portability and equal access
(discussed below).
As a result of the Duopoly Review, the Group applied for and received
modified telecommunications licenses to enable the Group to provide wired
telecommunications services in its own right.
Interconnect Arrangements
The ability of cable operators to provide viable voice and other
telecommunications services is dependent on their ability to interconnect
cost-effectively with other PTO's telecommunications networks in order to
complete calls that originate from a customer on their cable network but that
terminate off their network or that originate from a customer off their cable
network and terminate on their network. Since the Duopoly Review, cable
operators with contiguous franchises have been able to connect their networks
without regard to whether they are under common ownership without using the
services of BT or Mercury.
The DTI is able to consider applications by cable operators to join more
distant franchises, and Diamond has a license to link two of its franchises
which are not adjacent to one another. Once DCL has ob