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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________
F O R M 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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
For the Transition Period From __________ to _________
Commission File No. 0-22616
NTL INCORPORATED
------------------------------------------------------------
(Exact name of registrant as specified in its charter)
(ON MARCH 26, 1997, THE NAME OF THE REGISTRANT WAS CHANGED FROM INTERNATIONAL
CABLETEL INCORPORATED TO NTL INCORPORATED)
Delaware 52-1822078
- ----------------------------------- -------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
110 East 59th Street, New York, New York 10022
- ---------------------------------------------------- -----------
(Address of principal executive offices) (Zip Code)
(212) 906-8440
-----------------------------------
(Registrant's telephone number, including area code)
_________
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
--------------------------------------
(Title of Classes)
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 whether disclosure by delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.[_]
The aggregate market value of the registrant's voting stock held by non-
affiliates at March 24 , 1997, valued in all cases in accordance with the
NASDAQ/NMS closing sale price for the registrant's Common Stock was
approximately $616,818,000.
Number of shares of Common Stock outstanding as at March 24, 1997: 32,095,167.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Document Part of 10-K in which
-------- ---------------------
Incorporated
------------
Definitive proxy statement for the 1997 Annual Meeting of
the Stockholders of NTL Incorporated: Part III
* * * * * *
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995:
EXCEPT FOR THE HISTORICAL INFORMATION PRESENTED, THE MATTERS DISCUSSED IN THIS
REPORT MAY INCLUDE FORWARD-LOOKING STATEMENTS. THEY REPRESENT THE COMPANY'S
REASONABLE JUDGMENT ON THE FUTURE AND ARE SUBJECT TO RISKS AND UNCERTAINTIES
THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY. SUCH FACTORS INCLUDE: A
CHANGE IN ECONOMIC CONDITIONS IN THE VARIOUS GEOGRAPHIC AREAS SERVED BY THE
COMPANY'S OPERATIONS WHICH WOULD ADVERSELY AFFECT THE LEVEL OF DEMAND FOR ITS
PRODUCT; GREATER-THAN-ANTICIPATED COMPETITIVE ACTIVITY; AND THE IMPACT OF NEW
BUSINESS OPPORTUNITIES. THESE AND OTHER FACTORS RELATED TO THE BUSINESS ARE
DESCRIBED HEREIN.
TABLE OF CONTENTS
Page
----
PART I
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Item 1 Business........................................ 3
Item 2 Properties...................................... 54
Item 3 Legal Proceedings............................... 55
Item 4 Submission of Matters to a Vote of
Stockholders.................................... 56
PART II
- -------
Item 5 Market for the Registrant's Common
Stock and Related Stockholder Matters........... 57
Item 6 Selected Financial Data......................... 58
Item 7 Management's Discussion and Analysis
of Results of Operation and Financial
Condition....................................... 60
Item 8 Financial Statements and Supplementary
Data............................................ 72
Item 9 Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure...................................... 73
PART III
- --------
Items 10, 11, 12, and 13................................... 73
PART IV
- -------
Item 14 Exhibits, Financial Statement Schedules,
and Reports on Form 8-K......................... 74
Exhibit Index............................................. 75
Signatures................................................ 85
Index to Financial Statements............................. F-1
PART I
------
ITEM 1. BUSINESS.
- ------------------
INTRODUCTION
NTL Incorporated, formerly International CableTel Incorporated (the
"Company"), was incorporated in April 1993 under the laws of the State of
Delaware. The Company entered the telephony/cable television and
telecommunications market in the United Kingdom in 1993 and is now the third
largest operator of telephony/cable television systems in the United Kingdom in
terms of the number of homes in the franchise areas operated by the Company. In
the past twelve months, the Company has expanded its local telecoms and
television services business to include a national telecoms network, national
television and radio broadcast transmission services and Internet service
provision as well as other related communications businesses.
In its franchise areas, the Company is constructing an integrated, high
capacity, high speed, full-service network which allows the Company to offer
customers residential telephone, cable television ("CATV") and business
telecommunications services. The Company's local networks provide a two-way
communications pathway which is also capable of delivering new services which
may emerge from the convergence of telecommunications, information services and
entertainment.
In May 1996, the Company purchased NTL Group Limited which provides
broadcast and broadband transmission and communications services on a nationwide
basis in the United Kingdom. NTL Group Limited's core business has been the
transmission of television programming for the Independent Television ("ITV")
(Channel 3) companies and Channel 4 and the Welsh Fourth Channel ("S4C"). NTL
Group Limited has also been awarded the contract for the transmission of the
Channel 5 signal for Channel 5 Broadcasting Limited. Under contracts with those
companies, NTL Group Limited is responsible for operating, monitoring and
maintaining a broadcast transmission service. NTL Group Limited has enhanced its
national infrastructure of over 1,200 owned and shared transmission sites
throughout the United Kingdom to diversify beyond its core business and has
expanded its national network to enter into the telecommunications and radio
sectors. The Company, through NTL Group Limited, now operates a national
broadband microwave communications network which it uses to provide carrier and
trunk services to telecommunications companies, provides independent radio
signal transmission, leases and manages cell sites for wireless telephony
operators, commissions and maintains emergency service radio systems, operates
satellite earth stations that uplink video signals to satellites and designs and
builds studio and broadcast facilities. Management believes that the combination
of the Company's local high capacity full-service networks and NTL Group Limited
national diversified network creates a variety of strategic benefits for the
Company.
In August 1996 the Company entered into a share exchange agreement with
Booth American Company, a Michigan corporation, Columbia Management, Inc., an
Indiana corporation and Robert T. Goad, an Indiana resident (collectively, the
"ECE Selling Stockholders") and B/G Co., an Indiana partnership. The agreement
provides for, among other
1
things, the purchase by the Company of the 30% minority interest in English
Cable Enterprises, Inc., a Delaware corporation ("ECE"), held by B/G Co.
Pursuant to the agreement, the Company issued 1,415,000 shares of Company Common
Stock to the ECE Selling Stockholders in exchange for such interest in ECE. ECE
owns and operates, through subsidiaries, four telecommunications and CATV
franchises to the north of London (Central and East Hertfordshire and South and
North Bedfordshire) which comprise approximately 348,600 homes.
In October 1996, the Company entered into an agreement with South Wales
Electricity plc, a public limited company registered in England and Wales
("SWALEC"), and Swalec Telco Investments Limited, a private limited liability
company registered in England and Wales which is a wholly-owned subsidiary of
SWALEC ("Telco"). Pursuant to the agreement the Company purchased from Telco the
40% minority interest (comprising shares and loan notes) in CableTel Newport
that the Company did not already own in exchange for 780 shares of the Company's
Series A Preferred Stock. The Series A Preferred Stock has an aggregate Stated
Value of $100,000 per share and is convertible into and redeemable for shares of
Company Common Stock pursuant to the terms of the Certificate of Designation
dated October 7, 1996. CableTel Newport owns and operates, through subsidiaries,
telecommunications and CATV franchises in South Wales which together comprise
540,000 homes.
In October 1996, the Company announced a new organizational structure
integrating its local telephone, cable television and Internet businesses, with
NTL Group Limited's national telecommunications and television transmission
businesses. Five business divisions were created: Local Telecoms and Television
Services, National Telecoms Services, Broadcast Services, Internet and
Information Services and National Media Services.
In March 1997, the Company changed its name to NTL Incorporated to reflect
the integration of the services provided by the Company and NTL Group Limited to
create a national telecommunications company in the United Kingdom and to
capitalize on NTL Group Limited's legacy in the United Kingdom as a provider of
reliable communications services in a variety of disciplines.
Prior to October 1993, the Company was a wholly-owned subsidiary of OCOM
Corporation ("OCOM"). On October 4, 1993, the stockholders of OCOM approved and
adopted the Amended and Restated Agreement of Reorganization and Plan of Merger,
dated as of May 28, 1993, as amended, among OCOM, the Company and CableTel
Merger, Inc. (a wholly-owned subsidiary of the Company), pursuant to which on
October 13, 1993, CableTel Merger, Inc. was merged with and into OCOM (the
"Merger"). In the Merger, each outstanding share of common stock of OCOM was
converted into one share of common stock of the Company. As a result of the
Merger, OCOM became a wholly-owned subsidiary of the Company, which succeeded to
the long distance telephone and microwave transmission business of OCOM. OCOM
continues to provide long distance telephone and microwave transmission services
primarily in Ohio.
The Company's principal executive offices are located at 110 East 59th
Street, New York, New York 10022, and its telephone number is (212) 906-8440.
2
BUSINESS DIVISIONS
Local Telecoms and Television Services
The Local Telecoms and Television Services division consists of the
Company's core business of offering residential telephony, residential CATV and
business telephony services in the Company's franchise areas in the United
Kingdom.
The Company has 16 separate franchises clustered into five Regional Areas.
The Regional Areas span a wide geography across the United Kingdom and give the
Company an operating presence not only in England, but in Scotland, Wales and
Northern Ireland. In 1996, the Company acquired the remaining minority interests
in its Suburban London and South Wales Regional Areas and now has 100% ownership
interests in the licenses in all of its franchise areas.
3
Summary information for the franchises in each of the Regional Areas at
December 31, 1996 is set forth below:
Total
Ownership Homes in
Regional Area Franchises Percentage Franchise(1)
- ------------- ---------- ---------- ------------
Central Scotland.............. N.W. Glasgow/Clydebank 100.0% 128,000
Greater Glasgow 100.0 254,000
Bearsden/Milngavie 100.0 14,000
Paisley/Renfrew 100.0 73,000
Inverclyde/Eastwood 100.0 30,000
------------
499,000
------------
South Wales................... Cardiff/Penarth 100.0% 103,000
Newport 100.0 85,000
Swansea/Neath 100.0 122,000
Glamorgan/Gwent(2) 100.0 230,000
------------
540,000
------------
Suburban London................ Surrey/Hampshire 100.0% 136,000
Central Hertfordshire 100.0 102,000
East Hertfordshire 100.0 56,600
North Bedfordshire 100.0 95,000
South Bedfordshire 100.0 95,000
------------
484,600
------------
West Yorkshire................ Huddersfield/Dewsbury 100.0% 138,400
---------------------- ------------
Northern Ireland(3)........... 100.0% 428,000
-----------
Total all Franchises.......... 2,090,000
============
___________________
(1) Total Homes in Franchise represents the Company's regulatory milestones
which were derived from the 1981 census (being the census statistics at the
date each license was granted).
(2) The final regulatory milestone for the Gwent and Glamorgan local
delivery operator license ("LDL") is 230,000 homes of the total of 330,000
homes in the LDL.
(3) The final regulatory milestone for the Northern Ireland LDL is 428,000
homes of the total of 530,000 homes in the LDL.
Operating Results
Based on operating results and experience gained by management in the
United States telecommunications market, the Company has developed marketing
strategies that it believes will maximize customer subscription rates, customer
retention and operating profitability. The Company continues to outperform the
cable industry's overall customer penetration averages for the U.K. telephony
and CATV business. As of December 31, 1996, the Company's integrated
4
full-service network had been constructed past 779,100 homes and had
approximately 302,000 revenue generating units ("RGUs"). (An RGU is a telephone
account or a CATV account (a dual customer generates two RGUs) and RGU
penetration is the number of RGUs per 100 homes marketed.) This resulted in
64.6% RGU penetration, 32.0% telephone penetration and 32.6% cable television
penetration of homes marketed. By comparison, based on the latest available
published statistics of the Independent Television Commission ("ITC") dated
January 1, 1997, U.K. cable customer penetration averaged approximately 25.77%
for telephone and approximately 22.4% for cable television. In the fourth
quarter of 1996, the Company added over 60,000 RGUs and increased the overall
RGU penetration of homes marketed by more than 3% from 61.5% to 64.6%.
In 1996, the number of the Company's total new dual network customers and
RGUs both increased nearly 200% to 168,200 and 302,000, respectively. During
this period, the Company believes it has also maintained high levels of customer
satisfaction as indicated by the Company's low rate of churn (subscriber
termination). During the fourth quarter of 1996, the Company's annualized churn
rate on its new dual network was approximately 10.0%, a rate which is
significantly lower than the published churn rates of other UK operators. The
Company's churn rates may, however, increase in the future.
During 1996, the Company also increased the number of homes to which it
marketed its services. At the end of 1995, the Company had marketed to 176,200,
or approximately 38%, of the homes passed by its dual service network. At the
end of 1996, the Company had marketed to 467,300, or approximately 60%, of the
homes passed by its dual service network.
5
The following table illustrates the number of homes passed, the number of
homes marketed and the total number of customers and RGUs for the Company's
newly constructed dual network:
Newly Constructed Dual Network
December 31,
------------
December 31, September 30, June 30, March 31,
1996 1996 1996 1996 1995 1994
------- ------- ------ ------ ------- --------
Homes Passed(1)........ 779,100 694,400 611,300 516,000 463,000 144,000
Homes Marketed......... 467,300 390,800 311,500 249,500 176,200 7,200
Total Customers........ 168,200 135,300 107,100 81,860 57,700 2,280
Dual................... 133,800 105,155 80,100 62,440 44,630 1,680
CATV-Only.............. 18,450 15,600 13,700 9,750 6,620 370
Telephone-Only......... 15,950 14,545 13,300 9,670 6,450 230
Total RGUs(2).......... 302,000 240,455 187,200 144,300 102,330 3,960
RGU Penetration(3)..... 64.6% 61.5% 60.1% 57.8% 58.1% 55.0%
CATV Penetration....... 32.6% 30.9% 30.1% 28.9% 29.1% 28.5%
Telephone Penetration.. 32.0% 30.6% 30.0% 28.9% 29.0% 26.5%
________________
(1) "Homes passed" is the expression in common usage in the cable industry as
the measurement of the size of a cabled area, meaning the total number of
residential premises which have the potential to be connected to the
Company's network. This number does not include CATV-only homes which are
only included in the Company's homes passed for the purposes of its
regulatory milestones.
(2) An RGU (revenue generating unit) is one telephone account or one CATV
account; a dual customer generates two RGUs.
(3) RGU Penetration is the number of RGUs per 100 homes marketed.
Network Construction
As of December 31, 1996, the Company had constructed its dual network past
approximately 779,100 homes and had invested approximately $1.35 billion in the
construction of the network and associated property, plant and equipment.
The Company's licenses require it to roll out its network past a specified
number of premises (or homes) each year. The total requirement for all the
Company's licenses is to pass a minimum of 2,090,000 homes, which is less than
the actual total of homes available to the Company should it wish to construct
its network past them. Under the terms of its current licenses, from September
30, 1996 until the end of 2003, the Company is required to construct cable
television systems passing an aggregate of approximately 1,296,000 additional
premises (residential and business). As of December 31, 1996, the Company had a
total of approximately 898,400 homes passed (or 43% of its total franchise
homes) for the purposes of its regulatory milestones. The Company's regulatory
milestone for 1996 was approximately 779,500 homes. The number of homes passed
which count towards the Company's milestone requirements exceed the homes passed
by the Company's full-service dual network stated above because, among other
things, the licenses permit CATV-only homes inherited by the Company through
prior acquisitions, which are not considered by the Company to be full-service
network passings, to be included in the calculation of "homes passed".
6
The Company believes it will be able to satisfy its milestones in the
future, but there can be no assurance that such milestones will be met or that
any application to modify those milestones would be accepted. If the Company is
unable to meet the construction milestones required by any of its licenses and
is unable to obtain modifications to the milestones, the relevant license or
licenses could be revoked, which would have a material adverse effect on the
Company.
National Telecoms Services
The National Telecoms Services segment includes the Company's national
telecoms, radio communications and satellite services business units.
This division builds and operates digital networks for customers, typically
covering capacities of 2 Mbit/sec. to 155 Mbit/sec., and provides managed
bandwidth for video, audio, voice and data signals to various regions of the
United Kingdom. Access to a national telecoms network represents one of the
primary potential strategic benefits of the NTL Group Limited acquisition for
the Company. The Company intends to connect its local broadband networks in its
five Regional Areas to the national telecoms network in order to become a fully
integrated national telecoms provider. The Company believes that it can maximize
its return on its investment in its integrated full-service network by
successfully combining its strategies for developing, operating and marketing
"last mile" telephony/cable systems with its national transmission network to
provide high-quality voice, data and communications services throughout the
United Kingdom.
The Company expects all seven of its local switches to be connected to the
national telecoms network during 1997 and early 1998. The Company will begin
carrying a portion of its own long distance traffic and will begin offering
switched telecommunications services to other carriers in 1997. The Company has
also implemented a microwave-to-fiber network enhancement program as a result of
increased customer demand.
Management believes that the integration of its local networks with the
national telecoms network creates strategic advantages for the Company's
telephony business. The telecoms network will allow the Company to carry
telecommunications traffic between each of its Regional Areas and throughout the
United Kingdom and, therefore, achieve significant savings on the
interconnection fees it is currently paying other carriers. In addition, using
the national telecoms network gives the Company greater pricing flexibility and,
therefore, will enable the Company to design and offer new telephony service
packages to its customers, which management believes should have a positive
effect on the Company's penetration rates. The network infrastructures are
separate from those of British Telecommunications plc ("BT") and Mercury (a
subsidiary of Cable & Wireless plc), the largest national provider of
telecommunications services in the United Kingdom, and a national public and
telephone operator, respectively. The Company's network will be capable of
delivering national long distance services in the United Kingdom in competition
with BT and Mercury.
7
NTL Group Limited first entered the trunk communications business
in 1993 by building digital networks for Westcountry TV, Yorkshire Tyne Tees
Television, Anglia Television and S4C to link their independent studio
facilities with NTL Group Limited's transmission facilities. In 1994, NTL Group
Limited broadened the scope of this business by expanding into competitive trunk
communications when it commissioned a network to link Vodafone's main cellular
telephone exchanges. This network employed Synchronous Digital Hierarchy ("SDH")
technology and was the first of its kind in the United Kingdom. NTL Group
Limited has since expanded its network's geographic scope and capacity,
increased its share of Vodafone's traffic and added a number of new customers
including Orange, Plc. ("Orange"), the Civil Aviation Authority and Birmingham
Cable.
The Company also offers a range of satellite uplinking services including
uplinks for a variety of entertainment channels to a number of satellites
including ASTRA 1C, Intelsat, Eutelsat and Orion, and an international gateway
service, which is capable of providing long distance and corporate
communications. The Company provides connections to a number of satellites for
clients requiring video, digital audio and data services. Customers include CBS,
United Artists, Turner Broadcasting Systems and Virgin. This division operates
three teleports, in Winchester, Croydon and central London, providing uplink
services to a number of United Kingdom cable television programming suppliers.
In addition, under the terms of its contract with Channel 5 Broadcasting, this
division expects to distribute the Channel 5 program signal to the terrestrial
transmission network via satellite links. This service is traditionally provided
via terrestrial links secured from NTL, BT or another telecommunications
services provider.
The National Telecoms Services division also includes the Company's Radio
Communications group ("RadioComms") which offers the provision of infrastructure
and support services to customers with "mission critical" communication needs.
RadioComms is involved in two main activities - mobile communications
maintenance support and facilities leasing. RadioComms includes the business
operations of DTELS, the emergency services communications business that NTL
Group Limited acquired from the Home Office of the United Kingdom Government in
1994. In addition to network maintenance, the Company provides a range of
installation and commissioning services for new network design and build
projects. The Company has been engaged by Ericsson Telecommunications Ltd. to
assist in the design, planning and procuring of radio sites for the Mercury
One-2-One mobile telephone network in the United Kingdom.
Broadcast Services
The Company's Broadcast Services division includes the original core
transmission services of NTL Group Limited providing television and radio
broadcasters with broadcast services. This division designs, installs, operates
and maintains new transmitter networks and has a spectrum planning service to
plan the coverage of television and radio networks. It operates a national
infrastructure in the United Kingdom of over 1,200 owned and shared transmission
sites which deliver broadcast signals for ITV, Channel 4, S4C, Teletext and many
of the United Kingdom's independent local and national radio broadcasters. In
addition, in 1996 NTL Group
8
Limited entered into a ten-year contract to build the transmission system and
broadcast the signal for Channel 5, the United Kingdom's fifth terrestrial
channel. In addition to transmission services, the Broadcast Services division
markets value added services to its existing television customers including
additional monitoring services, reserve system services and contribution/
distribution services.
Currently, four channels are transmitted to United Kingdom homes via
terrestrial transmission: BBC 1, BBC 2, Channel 3 and Channel 4/S4C. Channel 5
is expected to be launched as the United Kingdom's fifth terrestrial television
channel in March 1997. The Company has contracted to transmit a reliable, high
quality signal to homes throughout the United Kingdom for the ITV (Channel 3)
companies, Channel 4/S4C and, when launched, Channel 5.
OFTEL regulates the price which the Company can charge for transmission of
ITV and Channel 4/S4C. Channel 5 is not currently subject to this regulation. On
December 24, 1996 the Director General of OFTEL issued the formal modification
to NTL Group Limited's Telecommunications Act License to deal with the new
price control for the television transmission services provided by the Broadcast
Services Division to the ITV companies, Channel 4 and S4C. Under the new
arrangements, the total revenues receivable by the Company for such services
(excluding certain insignificant items) may not exceed (Pounds) 53.15
million in 1997 and, thereafter through 2002, will be reduced annually by the
Retail Prices Index (RPI) minus 4. There is no assurance that these price
controls will not be reviewed again by OFTEL prior to 2002 or that price
controls for the years following December 31, 2002 will not have a material
adverse effect on the revenues receivable from the ITV Companies, and Channel
4/S4C. See "REGULATION-Broadcast and National Telecoms Services-Price Cap
Review."
The projected total value of the Company's currently contracted revenues
for national telecoms and broadcast services from January 1, 1997 through
December 31, 2002, based on 1997 prices is approximately (Pounds) 608
million. In some cases, the actual revenues may increase or decrease in line
with changes in the RPI.
The foregoing projection of the expected approximate revenues receivable
pursuant to existing contracts, which includes Channel 3, Channel 4 and S4C
transmission contracts, is based on various factors and was derived utilizing
several assumptions. Important assumptions and other important factors that
could cause actual revenues to differ include, among other things, general
economic conditions, the regulatory regime prevailing from time to time,
adherence to the construction, service and other obligations of such contracts,
absence of labor or weather difficulties, absence of defaults, particularly
payment defaults, by the counter-parties to such contracts or the termination or
non-renewal of such contracts. The Company assumes no obligation to update this
projection to reflect actual revenues received by the Company, changes in
assumptions or changes in other factors affecting the information presented. The
contracts with the ITV and companies Channel 4/S4C terminate on December 31,
2002. Although historically the ITV companies and Channel 4/S4C have renewed
their contracts there can be no assurance that they will do so upon expiration
of the current contracts, that they will not seek to
9
obtain more favorable terms and or that they would not seek to obtain from third
parties all or a portion of the transmission services currently provided by the
Company. See "COMPETITON -Broadcast Services-Television Transmission" and
"EMERGING NATIONAL OPPORTUNITES- Broadcast Services". The loss of any one of
these contracts could have a material adverse effect on the business of the
Company.
The Broadcast Services division also offers a range of services to local
and national radio broadcasting licensees in the United Kingdom including:
target service area planning; site location, installation and construction; and
equipment selection, procurement, operation, monitoring and maintenance. This
division offers total broadcast contract services ("TBCs"), where it designs,
builds, owns and maintains the operator's transmission facilities, and facility
management contract services ("FMCs"), where it maintains customer-owned
equipment and administers the operation of the transmission service. It
maintains over 50 TBCs and 40 FMCs. Classic FM is one of two national
independent radio networks served by the Company. In 1994, NTL Group Limited was
successful in winning eight-year transmission contracts with all of the five new
independent regional radio licensees that commenced service in 1994. NTL Group
Limited also renewed, for periods of up to ten years, all but one of the 24
expiring contracts of its existing customers.
The Company also provides services associated with the design and
construction of radio and television studio centers and technical facilities.
These services include installation, commissioning, equipment procurement,
training and consultancy for projects ranging from production and post
production studio facilities to full turnkey systems involving transmitter
network planning and installation. NTL International (formerly, Nexus) was
responsible for designing and constructing the international broadcast facility
for NBC at the Barcelona Olympic Games. NTL International also designed and
built a 60 channel digital audio play-out center for Music-Choice-Europe, a
digital music supplier which is uplinked by the National Telecoms division and
distributed throughout Europe by satellite.
Internet and Information Services
In 1995, the Company launched its Internet access service, Cable Online, as
a national service throughout the United Kingdom. This service provides access
to the World Wide Web, via the Company's telephone switches, to customers in and
outside its Regional Areas. Cable Online provides Internet service on a
wholesale basis to other Internet service providers as well as on a retail
basis. In 1996, the Company established the Virgin Net joint venture with Virgin
Communications Limited ("Virgin"), which began offering service in November 1996
under the name Virgin.net. The joint venture is owned 49% by a subsidiary of the
Company and 51% by Virgin and is intended to offer Internet access and
interactive services to United Kingdom consumers and small office/home users. In
addition, Virgin Net has contracted Cable Online to provide the dial-up national
network and back office structure necessary for access to Virgin Net and the
Internet.
10
During the third quarter and early fourth quarter of 1996, Cable Online
launched residential Internet access service under the Cable Online brand name
in all of its local franchises and launched business Internet access service
nationally under the Enablis brand name. Cable Online has signed agreements to
provide wholesale Internet network services to Virgin, Diamond Cable and
Telecential. Internet network services cover a range of services which allow the
customer to act as an Internet service provider.
As with the Company's telephony business, access to the national telecoms
network is expected to have strategic benefits for Cable Online and the
Company's Internet services businesses. Utilizing the Company's national
telecoms network is expected to reduce the operating costs, increase flexibility
and national reach and improve the overall marketing and product opportunities
of Cable Online.
National Media Services
The most developmental of the Company's new divisions, National Media
Services, combines Company-wide efforts in programming, content, digital
technology and interactive services. For example, this division oversees the
weekly television listing guides inserted in local newspapers in the Company's
franchise areas. This division also coordinates the Company's efforts in the
areas of digital terrestrial television, local cable channels, digital cable and
alternative interactive service opportunities for the United Kingdom.
MARKETING STRATEGIES
The Company increases its customer base and improves market penetration for
its services by implementing separate marketing strategies tailored to its
residential and business customers. The Company believes that separately
marketing to residential and business customers based on the specific benefits
they receive from the Company's services is the most effective means of
maximizing the Company's customer base.
Residential Marketing
The Company markets its local telecoms and television service under the
brand name CableTel and promotes its brand image as an integral part of the
emerging information super-highway. The Company is constructing its integrated
full-service fiber optic networks in order to bring a wide variety of services
to the consumer. This branding strategy includes the following concepts in the
Company's advertising, literature and other materials:
~ introducing alternative telephone service, multichannel television
and, recently, Internet access as the first of an expanding array of
services which will be carried on the network in the future;
~ emphasizing that the Company is bringing "more choice" in television
viewing, "better value" in telephone service and "state of the art"
communications technology in providing
11
access to the Internet; and
~ demonstrating the Company's commitment to quality, value and service in its
offerings as evidenced by its Code of Practice approved by OFTEL.
~ stressing the benefits of its networks and associated services to consumers
in each particular Regional Area;
~ building interest, awareness, and credibility for the Company's services;
In addition to its branding strategy, the Company employs an extensive
direct marketing and selling approach to gain customers. The Company begins to
build a relationship with customers before construction commences in a given
area by closely coordinating its upcoming activities with local government
authorities and community groups and eliciting feedback on ways to minimize
disruptions and inconvenience. Information packages and construction notices are
delivered to each household prior to construction. The Company's consumer
affairs advisors personally visit affected neighborhoods and households in order
to meet the special needs of the residents. All written and telephonic inquiries
from residents are input by name into a lead-tracking database, so that when
areas are released to marketing, the Company's sales personnel have complete
customer profiles of the residents in their selling area. The sales release
process is preceded by the hand delivery of a videotape to every household
describing the Company and its services and is followed by a personal
appointment with a Company sales advisor.
All information regarding both current and future sales opportunities is
input into the data base, with current sales information updating the Company's
provisioning, billing and subscriber management system. Unsold household data is
maintained for future telemarketing, direct mail, and remarketing by the
salesforce.
Bundled Product Offerings
The Company's product and pricing strategies emphasize choice, value, and
quality and are designed to encourage subscription to multiple services and
maximize long-term customer retention. With its integrated dual service network,
the Company has the opportunity to offer bundled telephony and CATV services.
Following the success of a trial in certain of the Company's franchises, in
November 1996, for example, the Company announced the introduction of a new
promotional pricing and packaging structure called "First Choice" for its
telephony and CATV service. In this new structure, the Company is offering a
First Choice package which includes residential telephone service, all the
terrestrial channels and three popular CATV channels for a monthly access charge
of approximately (Pounds) 8, which is less than the price of monthly telephone
line rental from BT and is the same as the Company's charge for telephone line
rental alone. In addition to First Choice, the customer is encouraged to choose
from several genre-based tiers of mini packages called Choice Collections
which each include a number of additional cable channels. The customer can also
select from several premium channels,
12
each of which can be purchased for an additional charge. The Company believes
that this type of bundled and flexible service package is responsive to the
desires and tastes of its customers.
Management believes that the bundling and tiering of its services should
increase penetration in its franchises and decrease customer churn. One supplier
of cable programming has commenced a proceeding against the Company as a result
of the Company's new First Choice package that is described in "Item 3 - Legal
Proceedings."
In addition, the Company encourages subscription to multiple services by
offering a "two for one" discount on installation charges.
The Company also emphasizes the "value" of its residential telephone
service in three ways. First, the Company's line rental charges are, at present,
less than BT's, so the customer saves money immediately. Second, the Company's
usage pricing is designed to provide a savings versus BT's calling rates. Third,
at night and on weekends, the Company's customers can call each other in the
same local area for a low flat rate per call.
In addition to these savings incentives, using the national telecoms
network should give the Company greater pricing flexibility and therefore
would enable the Company to design and offer new telephony service packages to
its customers. The Company believes that its existing telecoms network can be
expanded in the United Kingdom at a relatively low unit cost to provide the
Company with substantial savings on its customers' long distance telephone
interconnect costs. By integrating its national telecoms network with its local
networks, the Company will be able to bypass the wholesale long distance fees
charged by BT and other carriers for carrying calls to and from the Company's
local telephone networks. This increased flexibility may lead to the
introduction of more volume-oriented and/or geographically based calling plans
designed to give the customer even greater choice and value. Management believes
that increased ability to design attractive marketing plans and to better
package services versus its competitors should have a positive effect on the
Company's penetration rates.
Customer Retention. The Company employs a variety of strategies to maximize
customer retention. First, the Company demonstrates its commitment to quality
through extensive and stringent customer service and support. In addition, the
Company usually charges an installation fee, adopts a one-year service agreement
and encourages direct debit payment as the "standard." The installation fee and
one-year contract provide qualifying mechanisms to insure that the customer
understands and recognizes the value of the services, while the encouragement of
direct debit payment may avoid non-payment cancellation.
Internet Access and Other Interactive Services. As part of the Company's
multiple services product strategy, Cable Online offers Internet access at
speeds of up to 28.8 Kbits/sec. Particular emphasis is being placed on jargon-
free customer service and support. The Cable Online service is currently being
offered for an initial fee of (pounds) 20.00 and a monthly charge of (pounds)
9.95. Cable Online is testing the provision of Internet access at substantially
higher speed
13
through either ethernet access (10 Mbits/sec.), cable modems (4 Mbits/sec.) or
ISDN access (128 Kbits/sec.). Ethernet access and cable modems for networks like
the Company's are still in the early stages of testing, and there is no
assurance that they will be commercially practicable.
Business Marketing
The Company is extending the CableTel brand image it is developing for the
residential marketplace into the business community. The emphasis is on CableTel
as a new provider of state-of-the-art communications services, with broadband
capabilities that enable new potential applications for businesses, institutions
and government.
The Company researched the business telecommunications market within its
franchises and adopted a segmentation strategy which targets specific and
appropriate resources on small, medium, large, and major customers. Emphasis is
placed on businesses, institutions and organizations that share natural
geographic boundaries with the Company's operations. The Company believes that
the success of this segmentation strategy has already been demonstrated by,
among other things, securing business with local authorities in the Regional
Areas, such as the five-year contract that CableTel South Wales Limited (a
Company subsidiary) signed in July 1995 with a consortium of seven higher
education establishments in South Wales. The communications network that has
been installed by CableTel South Wales Limited is believed to be among the first
in the United Kingdom to use high speed fiber optic technology to link colleges
over a wide geographical area-two of the colleges being more than 50 miles
apart. Other examples of target organizations include professionals, financial
institutions, local government, schools, hospitals, universities, emergency
services and community organizations.
The Company's sales strategy for the business market will employ a
consultative direct marketing and sales technique. It begins with detailed
market surveys designed to quantify the current and future needs of each
business in the franchise by name. The Company's sales advisors call on
potential customers armed with pertinent information regarding the customer and
with all products in the Company's portfolio at their disposal.
Regional customer service centers have been set up to ensure that the needs
of business customers post-sale can be met effectively. Service quality is
demonstrated by the Company's commitment to service guarantees and standards
which meet or exceed the best competitive practices, and is ensured through the
reliability of the Company's new, state-of-the-art network.
The Company based its initial entry into the market on its core business
telephony products. It has since introduced the first managed data service,
FibreLink2, Central Exchange ("CENTREX") services and its ISDN Basic Rate Access
("BRA") service.
The Company's short-term focus is to broaden its portfolio of products by
developing services with high customer demand which will improve overall returns
to the business. In conjunction with this activity, the Company is developing
customized products for large customers which the Company believes may lead to
further product developments in the future.
14
The Company is also the pursuing market opportunities for Closed Circuit
Television/Surveillance Systems ("CCTV"). This is currently a growth area in the
United Kingdom for local and public authorities, private developments and multi-
occupancy situations.
Business Telephony Services. The Company offers a choice of telephony
services to its business customers: Business Exchange Lines ("BELs"), typically
single or multiple lines delivered via twisted copper pair, or Enhanced
Telephony Services. The latter is delivered via a high quality digital
connection to a customer's PBX based on a minimum connection of 15 lines.
Enhanced features and facilities such as Caller Line Identification, are
available on both services. Additional features, such as Direct Dialing Inward
("DDI"), are available only on the Enhanced Telephony Service. Two usage rates
are currently available, offering customers a choice based on their calling
patterns. Both usage and rental charges are competitively priced, and automatic
volume discounts give further savings to customers.
Future developments may include the implementation of services such as
Caller Return, which are intended to address specific needs of identified
customer groupings and stimulate additional call revenues. Additionally, the
Company intends to offer number portability, which is expected to aid the
acquisition of business customers.
CENTREX services give customers the equivalent of their own telephone
system (PBX or key system) without the expense of having to purchase, operate
and maintain one. The Company believes that the CENTREX market in the United
Kingdom is currently underserved, especially among small and medium businesses,
where the concept is new to most customers. The pricing of CENTREX services is
based on value provided to the customer rather than pricing lower than
competitors. The Company has implemented its CENTREX Service in all of its
Regional Areas. The services include CENTREX Select, a single site service, and
CENTREX Network, a multi-site service giving transparency of voice
communications between multiple locations.
Managed Data Services. Pricing for narrowband and broadband private line
services is higher in the United Kingdom than in the United States. High
bandwidth (broadband) services, although available, can be subject to long lead
times for installation in many areas of the United Kingdom, are expensive and
are subject to variances in service quality. The Company's offerings in this
area emphasize the immediate availability of large, flexible bandwidth circuits
to meet the growing needs of the market, while meeting the demands of existing
and emerging standards. The Company's first managed data service, FibreLink2,
was introduced in January 1996. This service is aimed at large businesses which
need data or voice communications between different locations and provides a
bandwidth of 2 Mbits/sec. Higher bandwidth services (34-155 Mbits/sec.) are
available on request, as are lower bandwidth (64 Kbits/sec.) services. Broadband
services will be offered to address emerging multi-media and data-intensive
applications, with rates designed to reflect the value provided to the customer.
Other Data Services. The market for ISDN BRA services has not developed in
the United Kingdom as fast as in other European Union member states, primarily
because of prohibitive
15
pricing policies employed by the major telephone companies to protect private
line revenues. The Company recognizes the importance of this potentially high-
growth market, both within its own franchise areas and the synergies presented
with NTL Group Limited and Cable Online.
The Company has introduced its ISDN BRA services to small and medium-sized
businesses, the growing work-from-home market and larger businesses. The service
enables, among other things, effective Local Area Network ("LAN") to LAN
connections, fast data transfer to fixed or multiple locations, higher speed
Internet access, and videoconferencing.
EMERGING NATIONAL OPPORTUNITIES
The Company believes that it is well placed to take advantage of emerging
opportunities in communications throughout the United Kingdom.
National Telecom Services
The planned expansion of the Company's national digital network should
allow the Company to offer state-of-the-art network alternatives for large
carriers of data, including cable/telephony companies, as well as managed
network facilities ensuring high levels of availability and service. To date,
the Company has established contractual arrangements with Vodafone and Orange by
extending its network and expanding capacity with the installation of fiber. The
Company anticipates that it will be well-positioned to participate in the
competition for the provision of bandwidth as United Kingdom telecommunications
usage continues to expand as carriers take advantage of new voice and data
opportunities.
The Company plans to integrate its national telecoms network with its local
networks by expanding its telecoms network to Scotland, Northern Ireland and
Wales. This will serve both the anticipated needs of its existing customer base
as well as its desire to enter a third phase of operation, as a nation-wide
wholesale telecommunications carrier. The Company believes the integrated
network will offer other potential customers a viable alternative to BT, Mercury
and Energis Communications Limited ("Energis") (a subsidiary of the National
Grid Company plc) in the provision of long distance services throughout the
United Kingdom.
In addition, the Company has been awarded a license to operate radio fixed
access services at 10 GHz. Under the proposed terms of its 10 GHz license, the
Company would be required to provide service coverage to 68% of the population
of the United Kingdom by 2003. The Company believes that, if developed, this
type of service would facilitate the development of its local access strategy
for its transmission business.
The Company also currently plans to continue to expand its presence in the
market for satellite services, and to use its international facilities licenses,
which will give it the ability to carry international voice and data using its
existing teleports. See "REGULATION-International Facilities License."
16
The major growth in the radio communications market over the next five
years is expected to arise from the outsourcing of maintenance services by
public and private network operators. The Company intends to obtain maintenance
service customers by targeting those with a national or wide area
infrastructure.
The facilities leasing market is expected to continue to grow with the
expanding market for the provision of mobile and fixed wireless telephony
services. The Company currently intends to continue to maximize the use of NTL
Group Limited's sites through effective marketing, provision of end-to-end
services and its continued responsiveness to customer needs.
The Company also plans to participate in the competitive tender for the
provision of the new Public Safety Radio Communications Project ("PSRCP") which
plans to provide a new state of the art network for essential services through
the United Kingdom. It is likely that PSRCP will be financed under the United
Kingdom Government Private Finance Initiative.
Broadcast Services
NTL Group Limited has been involved in broadcast television since the
1950's when it designed and built the television transmission system for the
United Kingdom's first independent commercial television network. Since its
beginnings, NTL Group Limited has stayed at the forefront of technology. Its
record of innovations include:
~ pioneering UHF color television transmission in 1969;
~ Europe's first mobile satellite uplink in 1978;
~ transmission of the United Kingdom's second national independent television
signal, Channel 4, in 1982; and
~ direct broadcasting via satellite in 1990.
In addition, in 1996, NTL Group Limited was awarded contracts by Channel 5
Broadcasting to provide transmission and satellite distribution services.
Broadcast services for Channel 5 are expected to be launched on March 30, 1997.
In accordance with the transmission contract for Channel 5, the Broadcast
Services division constructed 33 transmission sites in 1996 and a further nine
will be constructed in 1997. NTL Group Limited has also agreed to distribute
Channel 5's programming signal from Channel 5's London television studio to the
various transmitters. This is intended to be facilitated through a satellite
distribution network, uplinked from one of the Company's earth stations.
The Company believes that it has positioned itself to be one of the leading
suppliers of Digital Audio Broadcasting ("DAB") services. In November 1995, NTL
demonstrated the United Kingdom's first commercial radio DAB multiplex.
Currently, the Company is engaged in an extended DAB marketing trial in London
with the support of key radio customers. The
17
Broadcasting Act 1996 created a licensing regime for digital terrestrial sound
broadcasting and raises the prospect of full-time commercial DAB service, which
will offer CD-quality radio for the first time.
Two developments are likely to alter the structure and scope of the United
Kingdom's terrestrial transmission market during the next few years: the
introduction of Digital Terrestrial Television ("DTT") broadcasting and the
privatization of the British Broadcasting Corporations's (the "BBC")
transmission business.
The Company believes that, as it is currently the only provider of
terrestrial broadcast television services to the ITV companies, it is likely to
be well placed to take advantage of DTT. Although the development and
implementation of DTT is subject to significant uncertainties, the Company
anticipates that DTT will be a major over-the-air broadcast service. The
Company's tower facilities, national maintenance force and management team
favorably position it as a provider of DTT broadcast services. In addition, NTL
Group Limited has an agreement with DigiMedia Vision Limited, a subsidiary of
News International, to develop the new digital decoder which would be required
if NTL Group Limited commenced DTT transmission. Furthermore, expected synergy
with NTL Group Limited's analog transmission business also makes the Company a
likely low cost provider of DTT transmission services.
In February 1997, the United Kingdom Government sold the BBC's transmission
business to a consortium led by Castle Tower Corporation called Castle Tower
Transmission ("Castle Tower"). The Company may face significant competition
from Castle Tower for future transmission business.
BUSINESS STRATEGIES
The Company's overall goal is to maximize operating profits by increasing
service offerings and by seeking opportunities to grow its customer base
throughout its Regional Areas and the United Kingdom as a whole. The Company
through its Local Telecom and Television Services division is currently
employing several strategies to achieve this:
Installing Flexible Integrated Full-service Networks. This strategy allows
the Company to pursue four revenue streams-residential cable television,
residential telephony, business telecommunications services and Internet access
services-without significant incremental cost in fixed investment. The
integrated full-service networks provide a high speed, high-capacity, two-way
communications pathway to the consumer that, potentially, is capable of
delivering new services which may emerge from the convergence of
telecommunications, information and entertainment. One such service is Cable
Online which was launched in November 1995.
Focusing on Distinct Geographic Regional Areas. This strategy allows the
Company to offer services which appeal to natural geographic, political, and
social factors in each Regional Area. The Company believes that tailoring its
services to the Regional Areas will increase the penetration of those services.
Examples of tailored services include the development of local
18
television programming and advertising, the development of regional telephone
calling plans, and the construction of private telecommunications networks
specifically tailored to "captive" local organizations such as governmental and
educational institutions.
Maximizing Revenue Contribution on a Total Franchise Basis. The Company
gains significant operating and financial leverage from incremental revenue
contribution since much of the Company's network investment and general expenses
are fixed. The Company's strategy is to maximize total franchise revenue
contribution rather than revenue contribution derived from each customer.
Examples of this strategy are the development of multiple television pricing
plans that appeal to differing and distinct market segments and price points,
bundled product offerings that encourage subscriptions to multiple services and
more "a la carte" and transaction-oriented services which increase network
utilization.
Gaining Cost Efficiencies. The Company gains cost efficiencies by
centralizing certain services provided to the Regional Areas in the Company's
head office in Farnborough. Examples include network planning, marketing,
information systems, legal affairs and overnight network monitoring and customer
service. Alternatively, those cost centers which are critical to penetration,
customer service, and retention are located as close to the customer as
possible. Examples include construction management, sales, customer service, and
network maintenance, which are all located in each of the Regional Areas.
Participating in Strategic Alliances. The Company has existing strategic
alliances and expects to develop new alliances to further the attainment of its
goals. An example is the Virgin Net joint venture. The Company wholesales its
Cable Online Internet access services to other cable operators such as Diamond
Cable, Telecental and other organizations. These cable operators will house
Internet "Points of Presence" in their own franchise areas and market, sell and
bill their own customers within their franchise areas. Cable Online is currently
negotiating further ventures with a number of cable operators and other
organizations. The Company also expects to enter into interconnection alliances
with telephony/cable operators in contiguous franchise areas. Interconnection
alliances are expected effectively to extend the benefits the Company achieves
through its regional strategy by providing: (i) cost savings for telephone calls
that can be routed between interconnect partners instead of through BT; (ii)
additional revenues from telephone calls and private circuits terminating on the
Company's networks and originating in the interconnect partners' networks; (iii)
increasing advertising sales reach; and (iv) potential cost sharing in any joint
development of regional programming.
The Regional Areas
The Company, through and its Local Telecoms and Television Services
division , operates 16 separate franchises as five Regional Areas. Each Regional
Area is managed and operated by a local management team led by a local managing
director. The headends, telephone switches and technical and customer services
facilities in the Regional Areas are connected by a wide-area fiber optic
network to the Company's Network Operations national Network Management Center.
19
Central Scotland. The Central Scotland Regional Area covers nearly 500,000
homes and includes Glasgow, the fourth largest metropolitan area in the United
Kingdom and the largest City in Scotland. It is generally considered the
commercial and industrial center of Scotland and has a higher density of
households per kilometer of cable communications network than the United Kingdom
as a whole. The Company offers locally orientated and originated programming and
advertising.
South Wales. South Wales is the commercial and industrial center of Wales
and one of the United Kingdom's major contiguous urban areas. Cardiff, the
capital of Wales, Swansea (in West Glamorgan) and Newport (in Gwent) are the
region's major cities. The Company's licenses in South Wales cover approximately
540,000 homes and a substantial portion of the Welsh business community. Between
1980 and 1990, employment in the Welsh information technology and electronics
industries grew substantially compared to the rest of the United Kingdom, as
there has been a concerted effort to attract high technology and service
oriented businesses to replace heavy industries such as steel, mining and
shipping which were, historically, the mainstay of South Wales' economy.
Suburban London. The Suburban London Regional Area comprises the Surrey and
East Hampshire license area to the southwest of London and the Central and East
Hertfordshire and North and South Bedfordshire license areas to the north of
London totalling approximately 485,000 homes. The Company believes that the
licenses in these commuting residential communities offer an attractive blend of
household density and demographic characteristics and above average levels of
disposable income. Located between Heathrow and Gatwick international airports,
the borough of Guildford and surroundings in Surrey have become the headquarters
for many multinational high technology companies (including the cable/telephone
operators TeleWest and Comcast, as well as British Airways, General Motors and
the General Electric Company). To the north of London, Luton is a commercial and
industrial center hosting such manufacturers as British Aerospace and Vauxhall
(General Motor's United Kingdom division) and is the home of the fourth largest
international airport in the South of England.
West Yorkshire. Covering over 138,000 homes, Kirklees is one of the five
districts that constitute the West Yorkshire region in north central England and
is comprised of the towns of Huddersfield, Batley, Clackheaton and Dewsbury. A
manufacturing area known for textiles and engineering products, Kirklees has
recently begun to develop an active service sector which has helped to create a
stronger economy. Kirklees is geographically located between three major cities
in the United Kingdom, Leeds, Sheffield and Manchester. Each of these cities
already has an established cable network.
Northern Ireland. The Northern Ireland franchise, covering approximately
530,000 homes, was the largest remaining cable television, telephone and
telecommunications franchise to be awarded by the ITC. The franchise covers the
entire socio-economic area of Northern Ireland, with approximately 40% of the
population located in the Greater Belfast area in the east and another major
population area centered on Londonderry in the west. Although the economy
20
of Northern Ireland has traditionally been oriented more towards primary
industries such as agriculture, forestry and fishing than the United Kingdom as
a whole, service industries now employ over 70% of the population. The Company
believes that the overall economic growth profile of the region is strong and
that the prospect of inward investment will lead to a more dynamic business
sector and, therefore, increased demand for telecommunications services in the
future. The Company believes that because the birth rate in the area is higher
than the United Kingdom as a whole, the population is younger and household
sizes are larger than the United Kingdom average. The Company's experience and
market research has shown that the presence of children in a household
significantly increases the propensity to subscribe to CATV.
The Local Networks
The Company believes that its advanced network design is sufficiently
flexible to permit it to deliver a wide variety of existing entertainment,
telecommunications and information services and will enable it to offer
anticipated new services in the future without incurring significant additional
construction costs to adapt its existing underground network. However, the cost
of implementation of emerging and future technologies could be significant and
the Company's ability to fund such implementation will depend on its ability to
obtain additional financing. See "Management's Discussion and Analysis of
Results of Operations and Financial Condition."
Network Design and Functionality
The Company is installing its cable/telephone and telecommunications
network using established state-of-the-art technology, deploying fiber optics
directly to business concentrations and residential nodes averaging 600
telephone lines or 500 homes respectively, and employing spare duct and
transmission capacity in excess of anticipated needs. In this manner, the
Company achieves the cost efficiencies and rapid deployment that using
standardized equipment entails, while retaining the flexibility to expand and
adapt its network over time with little or no additional underground or
construction investment.
The design and construction of a new network varies depending upon factors
including the number of route miles to be installed, density of homes and
businesses, type of surface, and the architecture of the network backbone. Each
system has been designed with at least one headend and at least one telephone
switching office. Each system's headend and telephone switching office is
directly connected to each node by fiber optic cable. Each node is then
connected to a subscriber's premises. Construction of each system has been
planned on a neighborhood by neighborhood basis to allow revenue generating
operations to commence in a neighborhood as construction of the portion of the
system serving such neighborhood is completed.
21
Fiber Optics
The evolution of fiber optic technology over the past decade, including
increases in the capacity of laser transmitters and decreases in the price of
optical receivers, has enabled the economic deployment of fiber optic cable much
closer to the customer than in traditional coaxial cable CATV and twisted copper
pair telephone networks, thereby improving the quality and capacity of the CATV
and telephone service. The main advantages of deploying fiber in place of both
coaxial cable or copper wire are its smaller size, greater capacity, freedom
from electrical interference, and significant reduction of the requirement for
periodic maintenance. The Company is deploying fiber to nodes serving 500 homes
which are no more than several hundred meters from the furthest home.
Network Architecture
The Company's cable network is being built with an initial capacity of 750
MHz, which is sufficient to carry over 60 analog channels of television. With
digital compression of the television signal, many more channels can be
transmitted. The system is upgradeable to 1 GHz. Generally, a maximum of one
amplifier is required between the headend optical receivers and a home.
Traditional cable systems often employ "cascades" of more than 5 amplifiers
which degrade signal quality and increase the chances of system failure.
The telecommunications network uses a SDH redundant-ring based
architecture, which improves the Company's ability to flexibly deploy capacity
and further enhances system resilience. Telephone signals are carried from the
node to the home over traditional copper pair, albeit over a shorter distance
than in traditional telephone networks, improving signal quality and allowing
higher bandwidth services such as ISDN to be more easily deployed. To connect
its residential customers, the Company uses a "dual drop" consisting of coaxial
cable capable of transmitting 1 GHz of bandwidth and two copper twisted pairs
capable of providing two telephone connections. Large business customers are
expected to be connected to the telephone network directly through fiber optic
cable.
Switches and Headends
The Company's GPT System X telephone switches are centrally located in each
of its systems and are currently interconnected with BT and Mercury and, in the
near future, are intended to be connected with other PTOs public telephone
operators ("PTOs") and/or other cable/telephone operators in order to complete
telephone calls placed to subscribers of competing or distant networks and to
receive such calls. The Company expects all seven of its local switches to be
connected to the national telecoms network during 1997 and early 1998. The
Company will begin carrying a portion of its own traffic and offering switched
telecommunications services to other carriers in 1997. Under their respective
licenses, BT, Mercury and all other PTOs are required to enter into
interconnection agreements with cable/telephony system operators. See
"REGULATION." The Company currently routes calls made by or to its customers
through its interconnections with BT and Mercury. The Company pays an
22
interconnection fee to complete such calls and collects a similar fee for
receiving such calls.
Network Construction Costs
In building its local telecoms and television network, the Company is
generally required by its licenses to use underground construction, which is
more expensive and time consuming than aerial construction. Mechanized
construction methods often cannot be used to install network infrastructure in
the Company's franchise areas due to existing underground utility
infrastructure. In addition, the Company is responsible for restoring the
surface area after its underground construction is completed. Although the
Company has recently been able to negotiate construction contracts at rates
which it believes are competitive relative to the cable industry as a whole,
construction costs could increase significantly over the next few years as
existing contracts expire. The Company is considering how it may reduce the
costs of underground construction by utilizing the microwave radio links
installed between its mast sites and supplementing those links with fiber-optic
cable particularly in Regional Areas, such as South Wales and West Yorkshire,
where hill and valley topography involves significant underground construction
costs.
The Company estimates that the capital required to build the local networks
and connect residential and business subscribers will be approximately (Pounds)
640 to (Pounds) 670 per home in its franchise areas. Certain locations may
require more or less capital depending upon household density, business density,
and penetration rates. In addition, certain costs such as the establishment of
telephone switches, cable headends, and facilities are incurred during the
initial phases of network construction, leading to average capital expenditures
per home which are higher in the initial years. The construction and development
of the systems will depend on, among other things, the Company's ability to
design network routes, install facilities, obtain and maintain any required
Governmental licenses or approvals and finance construction and development, all
in a timely manner, at reasonable costs and on satisfactory terms and
conditions. The exact amounts and timing of all of these expenditures are
subject to a variety of factors which may vary greatly by market and be beyond
the control of the Company. Accordingly, there can be no assurance that the
actual costs of network construction will not exceed the cost of network
construction estimated above.
Capital expenditures related to the installation of new residential
telephone and cable subscribers range from (Pounds) 115 to (Pounds) 175 of
capital expenditure per subscriber or line, though actual costs vary from this
range based on the specific type of circuit installed, the location of the
customer and whether or not the customer subscribes for multiple services. The
potential number of subscribers or lines will exceed the number of homes passed
because the homes and businesses passed have the potential for multiple cable
subscribers or telephone lines. Capital expenditures associated with passing
other businesses and connecting business telephone subscribers vary
significantly depending on the type and size of business and the amount of
capacity required and other factors which vary greatly by market and are beyond
the control of the Company. The Company has passed, and expects to continue to
pass, a significant number of small businesses in the course of its residential
build.
23
The Company also incurs capital expenditures for the establishment of its
business facilities and fixtures, office and computer equipment, its billing and
subscriber management systems, and vehicles. These costs also vary by location
and size of franchise, but are substantially less than the capital costs of the
network itself.
National Telecoms Services
The Company's national telecoms network was designed specifically for the
high-volume telecommunications market in the United Kingdom and, as such, it
incorporates many customer sites directly onto its main network. Expertise in
designing and installing this network was gained through nearly 40 years of
managing the division's television transmission network. The network is an SDH
digital microwave network controlled from a national network control center. The
network is configured in fault tolerant rings which allow one segment to fail
and still keep the network in service. The Company uses Nera SDH Radio Link
Digital Microwave radio systems on the network. Nera radios are installed on a
combination of existing structures and customer sites. The Company believes that
its extensive experience in frequency planning and coordination ensures that all
systems placed into service will be of the highest reliability.
Broadcast Services
The television transmission network consists of over 600 transmission
sites, with towers ranging from fifteen feet to nearly twelve hundred feet . The
division's transmission tower at Emley Moor in Yorkshire is the United Kingdom's
tallest free-standing structure at over 1,000 feet. These towers are
complemented by other transmission sites and relay stations situated throughout
the United Kingdom.
In addition to the transmission sites owned by this division, this
division also shares sites formerly held by the BBC (now held by Castle Tower),
allowing it to complete its nation-wide coverage. In all, the Company maintains
over 2,000 transmitters, currently monitored from four regional centers and
maintained by 22 strategically positioned service centers.
The transmitters of the Broadcast Services division range in size from a 2
watt repeater which serves a small village to 500 kilowatt main stations that
cover large metropolitan areas. All of the transmitters are analog and can be
divided into two categories, solid state circuitry and klystron tube. The
klystron tube transmitters have been manufactured by Pye and Marconi, while the
solid state units were manufactured by Harris, all reputable manufacturers of
transmission equipment. Klystron tube-type television transmitters have a useful
life of 20 to 25 years, while the solid state transmitters can last well beyond
this time frame. Solid state transmitters require less maintenance than klystron
transmitters but are not available in the high power capacity that is needed to
cover the major metropolitan areas.
The ITV UHF transmitters were first brought on line in 1969 as the earlier
VHF transmitter system was being phased out. Nearly all of these transmitters
have been subsequently
24
replaced with newer models. The Company is completing the final stage of
modernization of the ITV network and upgrading certain of the Channel 4
transmitters which are approaching 20 years in service.
Historically, NTL Group Limited 's capital expenditures have been dominated
by the replacement of aging transmitters, bringing new low power solid state re-
transmission stations on line, and general maintenance activities. Some
additional capital has been expended on upgrading systems to stereo sound,
modernizing security with video cameras and installing new remote monitoring
equipment which allows the Company to monitor the principal transmitters from
one control center.
In addition, this division has built and currently operates and maintains
radio transmission facilities for a number of independent local radio operators.
These facilities share components of the Company's national television network
infrastructure.
COMPETITION
Local Telecoms and Television Services
Historical Overview
Historically, the use of telephony or cable networks to provide a full
range of telecommunications services was restricted by the telecommunications
policy of the United Kingdom Government. From 1912 through the early 1980's, the
United Kingdom General Post Office ("GPO") was the monopoly supplier of
telephone services throughout the United Kingdom, with the exception of a few
municipalities. In 1981, BT assumed the responsibilities of monopoly telephone
supplier from the GPO. The process of privatizing BT commenced in 1984 and was
completed in July 1993.
In 1984, Mercury was granted a license to compete with BT. At that time,
the United Kingdom Government established a policy (the "Duopoly Policy") that
it would not license operators other than BT and Mercury to provide fixed-link
national and international public telecommunications services before November
1990, when it would commence a review of the Duopoly Policy (the "Duopoly
Review") and competition in the United Kingdom telecommunications market
generally.
The Duopoly Review was completed in 1991, and, with its enabling
regulations, represented a fundamental turning point in the telecommunications
industry in the United Kingdom. In effect, cable licensees and others were
granted the authority to provide all forms of wired telecommunications services
other than international telephony. Since the Duopoly Review, the terms on which
cable operators may require BT, Mercury or other PTOs to interconnect with them
have been significantly improved.
Since the Duopoly Review, BT has remained the dominant provider of fixed
link
25
telephony services for businesses and residences in the United Kingdom, and
Mercury has continued to offer long distance and international services and has
attempted to gain market share in the business telecommunications market. During
this period, cable/telephony services providers found increasing levels of
subscriber interest in their telephone services.
Historically, regulation had been an impediment to the development of cable
television in the United Kingdom. Importantly, non-European Union ("EU")
entities were reluctant to invest in cable operations in the United Kingdom
since they were barred by regulation from acquiring majority interests in CATV
licenses. Regulations also gave longer licenses to cable operations choosing a
"switched star" architecture (primarily utilized in the United Kingdom) over the
more traditional "tree and bush" architecture utilized in other markets. In
addition, the United Kingdom investment community was reluctant to invest in
CATV operations as a result of the high capital expenditure required to fund the
early stages of cable system construction combined with a high corporation tax
rate and the abolition in 1986 of a tax credit for certain capital investments.
The broadband cable television industry began in the United Kingdom in 1983
when the government began awarding pilot cable television licenses. However,
industry expectations that an adequate supply of programming would become
available to cable operators in the mid-1980's were overly optimistic. In
addition, many of the pilot systems were built with unproven technology and had
serious difficulties in providing high quality and reliable signals. The
management of these early systems had little cable experience and had minimal
resources to tap. The result was a very poor experience by the British
investment community. Non-British investors have taken the lead in developing
the cable/telephony industry in the United Kingdom over the past five years.
These investors had significant experience in developing, constructing and
operating cable television, telephone and telecommunications systems.
Cable Television Services
In each cable license area within the United Kingdom, it is currently the
ITC's policy that only one license to provide cable television services be
granted.
The Company's television systems currently compete with the four United
Kingdom terrestrial channels, being BBC 1, BBC 2, Channel 3 and Channel 4/S4C.
BBC 1 and BBC 2 are "public" channels regulated by government charter, are
funded by a license fee levied on all United Kingdom homes with a television and
receiver and do not sell advertising. The commercial television services of
Channel 3 and Channel 4/S4C operate under licenses granted in accordance with
the Broadcasting Act 1990. Except in the case of Channel 4/S4C which is provided
by a statutory corporation, the Channel 3 licenses are awarded by the ITC by
competitive tender. Channel 3 and Channel 4/S4C are regulated by the ITC.
Channel 4 and the breakfast time service on Channel 3 is provided on a national
basis. Otherwise, Channel 3 licensees are appointed specifically to serve
regions, namely the 15 licensees which provide services to 14 regions in the
United Kingdom, the Isle of Man and the Channel Islands, with two of these
licensees serving London for different periods of the week. Both Channel 3 and
Channel
26
4/S4C derive their revenues principally from advertising sales and the sale of
programming to other broadcasters.
In addition to these four existing terrestrial channels, in October 1995
the ITC announced the award to Channel 5 Broadcasting Limited of the only
national Channel 5 license under the Broadcasting Act 1990, which will open the
way for a fifth television channel broadcasting in the UHF band and serving
approximately 75% of United Kingdom households. The Channel 5 licensee will be
permitted to choose whether to make the service available using cable and
satellite distribution.
Although the current terrestrial channels are perceived by the public as
providing high quality programming, due to the limited amount of air time
available to them and the commitment required from them to provide a wide
diversity of programs, they are unable to dedicate a significant amount of air
time to films, sports or other thematic programming. As of January 1996,
approximately one-third of all viewing in homes with cable television or
satellite services was of cable or satellite channels which the Company believes
shows a willingness of many consumers in the United Kingdom to pay for such
additional programming.
The Broadcasting Act 1996 established the structures for the provision of
DTT broadcasting which is expected to provide an additional 18 or more new
terrestrial channels serving between 60% to 90% of the United Kingdom's
population. There will initially be six frequencies (or multiplexes) available
for DTT multiplex services. Use of each of these multiplexes (with the exception
of the first multiplex which has been allocated by the Government to the BBC)
will require a license from the ITC. One of the other multiplexes has been
reserved for Channel 3/Channel 4 and an invitation to apply for this license was
issued on November 15, 1996. Only an entity controlled by the Channel 3
companies (all holders of national or regional Channel 3 licenses) and Channel 4
taken together were permitted to apply for this license. The ITC issued an
invitation to apply (the "Invitation") for the remaining four multiplex licenses
(capacity on one of which is reserved for Channel 4/S4C) on October 31, 1996.
The deadline for submission of applications in response to the Invitation was
January 31, 1997. The Company, through a subsidiary, responded to the
Invitation. The only other applicant was a consortium known as British Digital
Broadcasting, which is comprised of British Sky Broadcasting Limited ("BSKyB")
the largest provider of multichannel programming in the United Kingdom, Carlton
Communications and Granada Group. Licensees of these multiplexes will be
required to commence providing service by the later of July 1, 1998 or the first
anniversary of the grant of the license. The Company expects that a decision
will be announced sometime in May 1997.
The Company's cable television systems also compete with other methods of
delivering television signals to the home for a fee, such as direct to home
("DTH") satellite or satellite master antenna systems ("SMATV"), which is
generally limited to 1,000 homes served by a single headend on a single (or two
adjoining) building(s). The extent of such competition depends upon the number
and quality of the signals available by direct antenna reception as compared to
the number and quality of signals distributed by the cable television system.
Pay-
27
television and pay-per-view ("PPV") services will compete to varying degrees
with other communications and entertainment media, including DTH services, home
video, movies and live theater. In particular, the availability of recently
released theatrical movies on videocassettes may affect the degree to which the
Company is able to sell pay television and PPV services to subscribers.
As an alternative to CATV, DTH satellite receivers, together with
appropriate descrambling equipment, are used by individuals and commercial
establishments to receive various programming services from DTH systems. There
are an aggregate of approximately 3.8 million DTH subscribers compared to
approximately 1.9 million broadband cable subscribers throughout the United
Kingdom. BSkyB offers DTH television to its subscribers who must purchase or
rent a satellite receiver and satellite dish. The dishes receive signals from
the SES-Astra satellites, which carry the BSkyB channels and other popular
programming services. BSkyB is proposing to launch a digital satellite service
in 1997 either by itself or in conjunction with partners. In order to receive
digital satellite services customers will be required to purchase a digital
"set-top" converter to receive the signals. Customers of cable operators will be
able to receive digital satellite programming from their cable operator using
their existing equipment (subject to capacity restrictions).
The Company's ability to make a competitive offering of cable television
services is dependent on the Company's ability to contract for and obtain access
to programming at a reasonable cost. While various sources of programming are
available to cable system operators in the United Kingdom, BSkyB is currently
the most important supplier of cable programming and the exclusive supplier of
certain programming. BSkyB also competes with the Company by operating a DTH
satellite service that provides programming, including programming that is also
offered by the Company, to approximately 3.5 million subscribers in the United
Kingdom. BSkyB's programming is important in attracting and retaining CATV
subscribers and, 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 or regulatory intervention.
In February 1997, BSkyB brought a new ratecard into effect. The Company
estimates that, since the introduction of the revised ratecard in March 1995
through February 16, 1997, the overall aggregate increase in BSkyB's wholesale
prices will have been between approximately 23% and 26% (although BSkyB has
provided additional basic and bonus premium channels during this period). The
Office of Fair Trading ("OFT") reviewed and approved the structure of the
ratecard and made only minor amendments in response to the submission made by
the Cable Communications Association on behalf of the Cable Industry. See
"REGULATION-Others Regulatory Issues". However, notwithstanding the OFT's
approval of the ratecard structure, changes to the ratecard may occur as a
result of commercial negotiations between BSkyB and the cable operators
regarding the pricing levels within the ratecard structure or following further
regulatory developments.
In addition, the OFT found in its review that there was no evidence that
the linkage between the DTH retail price and its wholesale price charged to
cable operators was anti-
28
competitive and that no action was required on this issue. Additionally, the OFT
said that it had reviewed BSkyB's accounts and will continue to do so every six
months, to ensure that BSkyB is not cross-subsidizing its retail DTH business
from revenues of its wholesale cable supply business to the detriment of
competition.
The OFT also found that BSkyB's requirement that cable operators carry its
basic channels to 100% of their subscribers inhibited cable operators in their
ability to offer tailored packages and inhibited the growth of the cable
industry. BSkyB has accepted an undertaking not to require carriage in excess of
80% in the future, although BSkyB will be permitted to increase the prices of
its basic channels by 1.25% for each percentage point by which carriage of the
channels falls short of 100%. BSkyB also accepted an undertaking not to bundle
bonus programs (such as occurred in respect of the Disney Channel) with premium
channels in the future (the ITC is currently investigating a complaint
concerning the terms of supply of the Disney Channel).
No assurance can be given, therefore, that, notwithstanding BSkyB's
undertakings to the OFT and the OFT's regulatory role, BSkyB will not exploit
its dominant market position in a manner which may have a material adverse
affect on the Company's operating results.
In addition, BSkyB announced in 1995 programming supply agreements with the
two largest cable operators in the United Kingdom. Under these agreements, these
two cable operators accepted significantly restrictive provisions in return for
more favorable rates than those contained in the new BSkyB ratecard. BSkyB has,
however, undertaken to suspend operation of certain anti-competitive
restrictions contained in these agreements, while the DGFT considers further
whether the agreements warrant investigation by the Restrictive Practices Court.
The Company anticipates that, as these two cable operators together control
approximately 40% of homes under franchise in the United Kingdom, the
consequences of these agreements will make substantially less viable the
development of new sources of programming through cooperative ventures among
cable operators, such as PPV services, sports or movie channels and cable-
exclusive programming.
The Company, like many other cable operators, obtains most of its
programming through arrangements with BSkyB and other programming suppliers
which are not reflected in signed written agreements. To date, the Company has
not had a formal contract with BSkyB, although it has been in discussions with
BSkyB for some time. There can be no assurance that the Company will be able to
enter into a definitive agreement with BSkyB, that the terms of such definitive
agreement will not be less favorable to the Company than the current
arrangement, or that BSkyB will continue to supply programming to the Company on
reasonable commercial terms or at all. Moreover, the Company has not, to date,
entered into written contracts with many of its other program suppliers. The
loss of BSkyB or other programming, a deterioration in the perceived quality of
BSkyB or other programming, or a material increase in the price that the Company
is required to pay for BSkyB or other programming could have a material adverse
effect on the Company.
29
PTOs may apply in a public competitive bid process for cable licenses in
respect of areas of the United Kingdom that have not already been licensed by
the ITC. Certain companies associated with BT and Mercury hold licenses to
provide telephony/cable television service, which, under current ITC policy, are
not in any of the Company's franchises. This position may be changed by further
regulations according to changes in policy of relevant United Kingdom Government
authorities. Any change in policy could have a material adverse effect on the
Company.
Following the Duopoly Review, the United Kingdom Government
stated that its policy was not to allow national PTOs to convey national
broadcast entertainment services over existing telephone until March 2001 for
delivery to residential subscribers. However, the Government indicated that this
restriction may be reviewed by the Director General of Telecommunications with a
view to lifting this restriction as early as March 1998. In February 1994, in a
letter to the Cable Communications Association, and again in a Command Paper
issued in November 1994, the Government reaffirmed its policy on this matter.
The United Kingdom Government opposition party, the Labour Party, however, has
stated its intention to review these restrictions if it is elected to Government
at the next general election (which is to be held in May 1997) by permitting a
gradual program of entry of national PTOs into cable franchise areas from 1998
with full and open competition in all franchise areas in 2002. This would
effectively give all cable operators at least six years to complete the
construction of their networks and coincides with the United Kingdom
Parliamentary Select Committee's recommendations.
On September 29, 1993, the ITC issued a statement pursuant to which it
(supported by OFTEL and the Department of Trade and Industry ("DTI" ) took the
position that BT and other national PTOs were not prevented from providing video
on demand services to residential customers under their existing
telecommunications licenses. While BT and other PTOs are prohibited from
providing residential CATV service, they are not precluded from providing such
services to businesses and educational institutions. Video on demand services
involve the transmission of an individual entertainment program to a single
household in response to such a request. BT has tested a pilot video on demand
service-BT Interactive TV-that offers movies, TV, music, education and home
shopping and banking to 2,500 residents in Colchester. BT is also testing video
on demand on a smaller scale in its Westminster franchise. The Company believes
that in order for BT to offer video on demand services on a national or large
regional basis, BT may be required to make substantial investment to upgrade its
existing telecommunications switches and to install video distribution
facilities and subscriber decoder boxes and that it is unlikely that BT will
offer video-on-demand on a national basis for the next several years. In
addition, BT still has to establish what services it will offer commercially and
the prices for the services. However, since the Company cannot assess the
commercial feasibility of BT offering video on demand services, no assurance can
be given that video on demand will not provide substantial competition to the
Company within its markets in the United Kingdom in the future.
30
The full extent to which other developing media will compete with CATV
systems may not be known for several years. There can be no assurance, however,
that existing, proposed or as yet undeveloped technologies will not become
dominant in the future and render CATV systems less profitable or even obsolete.
The Company endeavors, however, to monitor closely all relevant technological
developments and to position itself to remain competitive.
Residential Telephone Services
BT is the Company's principal competitor in providing local residential
telephone service. Since it is the only end-to-end provider of
telecommunications service in the United Kingdom, BT is a formidable competitor
to the Company in providing both business and residential telephone service.
According to OFTEL, at February 1997, nearly 92% of all United Kingdom
residential telephone exchange line customers were customers of BT. The
Company's growth in telecommunications services depends, therefore, upon its
ability to convince BT's customers to switch to the Company's telecommunications
services. The Company believes that price is an important factor influencing the
decision of United Kingdom customers to switch to a cable telecommunications
service. BT has introduced price reductions in certain categories of calls and
due to regulatory price controls BT is expected to make further reductions in
its telecommunications prices. Accordingly, although the Company intends to
remain competitive, in the future it may be unable to offer residential
telecommunications services at rates lower than those offered by BT. In such
case, the Company may experience a decline in its average per line residential
telecommunications revenues and may not achieve desired penetration rates. There
can be no assurance that any such decline in revenues or penetration rates will
not adversely affect the financial condition and results of operations of the
Company.
In addition to BT, other telecommunications competitors which may have
substantially greater resources than those of the Company could prevent the
Company from increasing its share of the residential telecommunications market.
AT&T Communications ((U.K.) Ltd. ("AT&T U.K.") was awarded a national PTO
license in December 1994 and has announced an intention to enter both the
business and residential markets. Cable & Wireless Communications (a consortium
comprised of Mercury, Nynex, Videotron and Bell Cable Media) ("C&WC"), could
also offer its services in both such markets. In addition, IONICA L3 Limited
("IONICA") began to offer telecommunications services via a fixed radio network
in 1996. IONICA announced in November 1995 an arrangement with Scottish Power
Telecommunications Limited ("Scottish Telecom"), a subsidiary of Scottish Power
PLC, whereby Scottish Telecom will provide IONICA's service in Scotland. Liberty
Communications Limited, the United Kingdom's other licensed wireless local loop
operator, is expected to launch its residential telephone service during 1997.
In addition, on February 8, 1996, the DTI announced the award of two licenses to
operate radio fixed access services in the 2 GHz band. These new licenses enable
the two licensees BT and RadioTEL Systems, to provide telecommunications
services to customers living in defined remote rural areas mainly in Scotland,
Wales and Northern Ireland and create potential additional competition for the
Company's residential telephony services in certain remote rural areas of the
Company's Northern Ireland franchise. The Company also competes with mobile
networks such as those provided by Telecom Securicor Cellular Radio Limited
31
(marketed under the name "Cellnet") (in which BT has a 60% interest) and
Vodafone Group Plc, and with personal communications networks such as those
provided by a joint venture between Cable & Wireless PLC and US WEST, Inc.
(marketed under the name "Mercury One-2-One") and Orange. Mobile technology
could grow to become a competitive threat to the Company's networks,
particularly if call charges are reduced further on the mobile networks. OFTEL
has proposed new rules for BT's network services which would give BT increased
freedom to reduce prices for resellers as well as value-added service providers.
This could encourage the provision of simple resale services in competition with
the Company. There can be no assurance that the Company will be able to compete
successfully with BT or such other telecommunications operators.
The Company believes that it has a competitive advantage in the residential
market because of its ability to offer integrated cable telephone, television
and telecommunications services and dual product packages designed to encourage
customers to subscribe to both services. Giving low income households the
ability to better manage their telephony expenditure has given such customers
the confidence to use a telephony service. The Company achieves this by offering
value added services such as call barring to international services, premium
rate or national calls, itemized billing, a low monthly rental and significantly
cheaper average calls. The Company's research indicates that the ability to
manage telephony expenditure more effectively, combined with low call charges,
will also increase confidence among those who already use a telephone, and will
encourage them to make more and better use of the Company's telephone services.
However, there can be no assurance that this competitive advantage will
continue. Indeed, BT, Mercury and other national PTOs will be entitled to convey
CATV services from 2001 and, subject to a view by the Director General, possibly
from as early as 1998. Moreover, C&WC proposes to offer integrated telephone,
CATV, telecommunications and multimedia services.
It is reported from time to time that BT and BSkyB are discussing the
formation of cooperative arrangements. For example, press reports have indicated
that the two companies are in advanced discussions regarding the formation of a
joint venture to promote digital satellite television and interactive services
in the United Kingdom. Given the respective market positions of BT and BSkyB,
the Company believes that, if the two companies successfully combine their
respective marketing strengths, the resulting combination may provide
significant competition to cable operators including the Company. At present,
however, it remains to be seen whether cooperative arrangements, such as the
proposed joint venture, can be resolved between the parties. The Company cannot
currently predict the effect that competition from joint BT/BSkyB ventures would
have on its business until further details are available as to how it is
proposed that these and other issues are to be resolved.
Business Telecommunications Services
BT is also the Company's principal competitor in providing business
telecommunications services. In addition to BT, the Company competes with
Mercury (which is part of C&WC), Energis, Scottish Telecom and Atlantic Telecom
in Scotland and with other companies that have
32
recently been granted telecommunications licenses such as MFS Communications
Limited. In the future, the Company may compete with additional entrants to the
business telecommunications market, such as AT&T U.K. On February 9, 1996, the
DTI announced the award of three licenses to NTL Group Limited , Mercury and
IONICA and Scottish Telecom to operate radio fixed access services in the 10 GHz
band throughout the United Kingdom (each, an "RFA license"). The RFA licenses
permit the licensees to provide advanced digital business telecommunications
services, such as ISDN, to small and medium sized businesses more quickly and at
a lower cost than those services provided by other cable operators which must
rely on networks constructed underground. Competition is based on price range
and quality of services and the Company expects price competition to intensify
if C&WC, Energis and other new market entrants compete aggressively. In
addition, OFTEL's proposed changes to BT's pricing arrangements for service
providers may increase competition from simple resellers.
The Company believes that it will be able to compete effectively against
BT, Mercury, C&WC and the others by emphasizing local customer service, local
account management, higher quality technical service, additional calling
features and lower prices. Examples of the Company's planned competitive
strategies include:
- - exploiting the Company's information, management, operational and control
systems to gather detailed knowledge of local market trends and preferences
and to provide improved localized customer service;
- - developing product portfolios and prices tailored to meet local market
needs and developments as they arise;
- - utilizing modern network infrastructure, employing modern digital switches
and substantial fiber optic plant which provides customers added value
services, for example, in the form of a remotely managed network which can
identify and isolate switching problems;
- - providing business customers with special services and facilities including
high capacity, private circuit digital lines (2 megabits and above),
Internet access, CENTREX services, Virtual Private Networks and freephone
services (0800 service);
- - taking full advantage of number portability which is expected to aid the
migration of telephone subscribers, particularly business customers, to
cable operators and away from BT; and
- - fully exploring the commercial feasibility of deploying advanced digital
telecommunications services to small and medium sized businesses throughout
the United Kingdom by means of radio fixed access pursuant to the Company's
RFA License.
As many of the Company's competitors in the business telecommunications
market have resources substantially greater than that of the Company, there can
be no assurance that the
33
Company will be able to continue to compete successfully with such competitors.
National Telecoms Services
Telecommunications Services
The Company competes with BT, Mercury and Energis for a portion of the
United Kingdom's national telecommunications market. The Company's national
telecoms networks can deliver capacity to customers with requirements from 2
Mbit/sec. to 155 Mbit/sec. providing managed bandwidth for data and voice
signals. The Company's infrastructure is separate from other network providers
which, when coupled with its expertise gained in delivering quality broadcast
services nationwide, allows the Company to offer some of the highest levels of
link performance in the United Kingdom.
Satellite Services
The satellite transmission market involves the provision of services
whereby video or audio, voice and/or data signals are "beamed up" from an "earth
station" or dish to one or more satellite transponders and returned to a
customer's receiving dish. The market for satellite services is competitive and
expanding in scope and potential value. The Company estimates that video traffic
currently comprises approximately 75% of the total market. Intra-European
traffic in video uplinks is estimated by the Company to be approximately
(Pounds) 39 million with (Pounds) 10 million originating in the United Kingdom.
The Company offers satellite services primarily in the broadcast and video
distribution sector with customers including CBS, United Artists and Turner
Broadcasting Systems. The Company does not typically build or expand its
satellite facilities until its customers are subject to long-term contracts,
which typically are five year service agreements. Currently, the Company covers
seven major satellites.
Radio Communications
The Company estimates that the total United Kingdom market for radio
communications maintenance services is currently approximately (Pounds) 75
million annually of which the Company serves approximately 16%. In addition,
this division provides services in the facilities leasing sector and installs
and commissions radio-based systems for third parties.
Broadcast Services
Television Transmission
Television transmission involves the conversion of audio and video signals
created in television studios into UHF signals which are transmitted over-the-
air to the receiving public. The United Kingdom terrestrial broadcast market is
composed of two networks, one operated by Castle Tower Transmission and one
operated by the Company. The Company currently transmits Channel 3, Channel
4/S4C and has a contract to transmit the Channel 5 signal when Channel 5 begins
34
broadcasting. Castle Tower transmits BBC 1 and BBC 2. Because the Company and
Castle Tower control the tower sites and the transmission equipment for each of
the television transmission networks respectively, the introduction of
competition to these two transmission networks would depend on limitations such
as availability of radio frequency spectrum, appropriate sites, environmental
approach, financing and other similar factors. Subject to any relevant
application of competition law, the Company does not anticipate that other
operators would undertake the application of an analog terrestrial network in
the existing terrestrial television market in the United Kingdom. The Company
and Castle Tower are interdependent upon one another, as they share sites and
facilities throughout the United Kingdom. This interdependence requires
elaborate commercial arrangements that provide for site sharing.
Under the present arrangements, one of the parties (the "Station Owner") is
the owner, lessee or licensee of each site and the other party (the "Sharer") is
entitled to request a license to use certain facilities at that site. Each site
license granted pursuant to the site sharing agreement is for an initial period
expiring on December 31, 2005 (subject to title and to the continuation in force
of the site sharing agreement) and provides that, if requested by the Sharer, it
will be extended for further periods. The site sharing agreement and each site
license provide for the Station Owner to be paid a commercial license fee and
for the Sharer to be responsible, in normal circumstances, for the costs of
accommodation and equipment used exclusively by it. These arrangements continue
between Castle Tower (as the BBC's successor) and the Company (as NTL Group
Limited's successor). Either party may terminate the agreement by 5 years notice
in writing to the other expiring on December 31, 2005 or at any date which is a
date 10 years or a multiple of 10 years after December 31, 2005. Although the
Company does not anticipate that the site sharing agreement or the site licenses
will be terminated, there can be no assurance that such a termination will not
occur. Termination of the site sharing agreements would have a material adverse
effect on the Company's business and would also result in an event of default
under the NTLIH bank facilities (see "Management Discussion and Analysis of
Results of Operations and Financial Condition ") and the acceleration of the
indebtedness outstanding thereunder. Each such event could have a material
adverse effect on the Company. In particular, an acceleration of the
indebtedne