The IP Development Network Blog

"He's leaving for family and personal reasons" - really? With immediate effect?

I suppose it is just possible that a close family relative has suddenly been taken very ill and needs the now former Virgin Media CEO Steve Burch at their bedside for a prolonged period of recovery. I suppose that it is just possible, but surely that would be preceded by some form of compassionate leave before it was clear that this was the only sensible solution.

What a Load of Tosh
No, I don't buy it and neither does anyone else. We all know that these words are often trotted out when face needs to be saved. In reality there are one of two possible scenarios:

Scenario 1: The board have decided to sell Virgin Media and Burch disagrees with that decision because he thinks that he can still turn the company around. The company needs him out of the way to go ahead so Burch's contract was bought out.

Scenario 2: The board have decided not to sell Virgin Media because of the volatile debt markets and Burch disagrees because that was his exit strategy. Plan B was to throw his toys out of the pram until a compromise agreement was the only option.

It could be because of poor results, but even when that happens there is normally a gradual easing out of day to day duties, staying on as a Strategic Advisor of sorts while someone else is sought. Not this time - Burch is gone with immediate effect - which can only mean a pretty sizeable bust up has occurred, probably between Chairman and CEO. I wonder if there was shouting and even whether objects were thrown?

Either way, it is unlikely that we will ever told - they have obviously agreed some form of exit plan, almost certainly containing a gagging clause on both sides. It's a shame in some ways but all we will know is that there's a cover up going on. [UPDATE: Burch left with a £3.5m payoff. The Times has an inside line on the events that led to his departure]

Steve Burch RIP (2006-07)
Putting Burch's time in context, he joined in January 2006 and is leaving in August 2007. In that time the company spluttered through its NTL/Telewest integration, acquired Virgin Mobile, rebranded as Virgin Media and then Lost all of the relaunch's goodwill practically overnight. [UPDATE: This may not have been Burch's doing]. Oh yes, and they also lost their position as the UK's number one broadband provider.

Burch's major initiative was four-play. Since he joined the company they have done loads with the proposition. 4 for £40 makes for some great marketing. The imagery is attractive as you would expect from Virgin. There is nothing wrong with the presentation.

Furthermore, he reached out to the other 53% not on cable with a hybrid Freeview box making it clear that they were serious about addressing off-net. But they also made clear were not going to roll out any more access network of their own any time soon when they did their LLU deal with C&W.

The sales and marketing department will have been happy as it allows them to sell to the people they already reach with their message but aren't on cable. But commercially does it make sense to spread your resources still further and to compete where you have no advantage?

A Questionable Strategy
Some wondered whether four-play was what the market wanted. Personally, I thought that buying Virgin Mobile was a great move because loose bundles had already been working well for NTL locking in triple play spend and making customers less price sensitive.

My concern was that four-play meant of a round of price cuts and that NTL was shifting to focus on growth because my research showed that NTL's customer simply were not price sensitive. For NTL, cutting prices did not lead to growth and putting them up did not cost market share. It seemed that cable customers wanted something different from TalkTalk and yet the company misjudged this and tried to compete on price.

The end result was a lot of customer who did not need a price cut, got one anyway - taking chunks off the company's bottom line at a time when investors were sweating on a return. Yes, they increased the dividend by 50% earlier this year and last week by a further 33%, but this was to a paltry 4 cents - an annualised ROI of 0.7% on today's share price. They have been trying too hard to grow while their investors have wanted something different.

Virgin's Problems
The problem for Virgin is the basics. Service provision, customer care and billing (all the boring stuff that's so easy to ignore). They need to start being nice to customers - although they are not alone with this problem. BT, Orange, TalkTalk and Tiscali all join Virgin with less than half of their customers satisfied with the service.

What is under the hood at Virgin is probably a mess of diverse networks and systems from countless acquisitions and partially completed integration projects. When this happens in a Telco, random things break, causing customer outages and making staff look stupid because they don't have good information on what is actually wrong. The core network service delivery capability is there; Virgin's problem is making it work.

The Virgin brand was supposed to solve this perception problem, but this was a sticking plaster to deal with the result of a train wreck. The result was that the reverse has happened: "Virgin" now has the same negative vibes as "NTL" once did.

It was not always this way... NTL, if you recall, started as an attractive, cool brand too, with its football shirt sponsorship deals and the rest. Over time, the coolness turned to coldness as NTL became synonymous with poor customer service. NTL + Telewest = Virgin = Chaos.

Virgin Media hasn't helped itself. Its opening gambit, a PR move that was a victim's plea against the dominance of Sky, crippled the company. It might have worked for Virgin Atlantic against BA in the airline industry, but it is worth noting that Virgin Atlantic didn't tell passengers mid-flight that they might get Lost.

What Next?
So now they are back at square 1. They might even be at square -1 after the price cuts, but the rump of the business certainly has a future no matter who owns it. If it can survive bankruptcy, it can survive losing a CEO or two and even another change of ownership.

If they can fix the service issues and rebuild customer confidence, Virgin will need to go through a period of consolidation, much like BT has done since its rights issue in 2001. Virgin need to show that they can operate a cash cow for a few years, rebalancing their finances and rebuilding investor confidence.

Whichever way you look at it, it smells of anger ruling over reason. The value of the company has been diminished by Burch's departure - the share price fell by 1.5% following the announcement on a NASDAQ market which climbed by 0.5%.

Losing their CEO so suddenly is only going to increase the attractiveness of a buyout bid to shareholders, even if the bidders may now feel like reducing the price because of the commotion. If Burch was ousted to oil the mechanics of a sale, it will have been a very poorly calculated move for that reason.

Alternatively, if Burch left because the company wanted to remain independent and he wanted it sold, even now, he may still get his way. Losing another CEO may well be the last straw for some shareholders who may want to bail out now at whatever price they can get.

The problem with digging in is that bringing in a new boss is a long term project. Whoever they bring in will want to bring in their own people and conduct their own strategic review - all of which would burn another 6 months or more. The problem is that I just can't see the shareholders waiting that much longer for an ROI.

Fibre on Hold
Whatever happened over the last few months and whatever happens in the next chapter, the big loser has been the UK market which needs a strong competitor to BT if the market is going to deliver fibre to UK homes. Lets face it, no one else is going to fibre up the UK at any point in the near future. It is BT or Virgin because they are the only ones with anything like the capacity to execute the build.

Clearly, BT aren't going to do so at the moment because there is no competitive pressure. They can fight LLU with 21CN, the only reason to do FTTH would be if someone else was heading in that direction but they are not - certainly now that Virgin is in further turmoil.

For BT, this means that there is nothing to be gained (or losses to stem) from the possible £10bn of incremental investment (to cover 90% of the population) because BTs existing network is good enough to give them control of over 60% of the market. Why spend £10bn when you get the rewards regardless?

The Market Needs a Strong Virgin
Virgin Media are the only other company in the UK competing with BT infrastructure in the last mile, but they are light years behind BT in their preparedness to upgrade their existing facilities. Virgin are not going to do FTTH until they have been through the same rebalancing that BT has been doing this decade. Would you lend Virgin money to do FTTH right now given their history? No, I didn't think so.

In order to rebuild the confidence of investors, they need to return some value to long suffering shareholders for a consistent period before embarking on a further wave of investment. Whether this return comes from ongoing operations or from a buyout doesn't actually matter. If the company is bought out, the new owners will need to get their ROI before embarking on another investment wave.

Hard Work Needed
One way or the other, Virgin needs to spend some time on a get-well plan.

Delivering the ROI from ongoing operations will take a massive effort to properly integrate NTL, Telewest and Virgin Mobile from the bottom up - not just on the company's brochures. Funnily enough, delivering an ROI from a buyout is going to mean the new owners have to do the same. Either way, there is a long term project ahead.

Investment will have to be inward during that time because it will take a huge amount of focus and a ruthless instinct to drive up margins by cutting waste. No-one is going to like working there while this is going on.

A Lost Opportunity
Perhaps it would have been OK had Burch not Lost his way and tried to take on Sky. [UPDATE: The Times suggests that this was not actually Burch's decision, that in fact it was taken by Bill Huff and Jim Mooney]

I think though that there were and still are much deeper issues that have been brushed under the carpet. There has been too much marketing and not enough integration going on in my view.

They cannot hide from the need to do the hard work. Buying companies sounds easy, but combining them effectively is one of the hardest jobs in the telco world. But it needs to happen because sooner or later, cracks will start appearing through the marketing - destroying the perception you are trying to create. If this means that innovation goes on hold until the work is done, then that is a cost of the acquisition.

If Virgin can do the hard work, they will be able to improve returns to shareholders meaning that eventually, there will be another window to invest. This may be five years away or more whichever ownership route they take, although they need not worry too much about their competitive position as no-one else is likely to take the step to fibre before them. BT will just be milking the profits of their broadband and 21CN investments in that time. They don't have to move until Virgin do.

Which is why we should all be sorry at Burch's departure. More specifically, we should be sorry at Burch's failure, because in it we have lost yet another period of at least 18 months and probably a lot more in our race to fibre up the country.

Labels: BT, FTTH, next generation networks, Vigin Media

# posted by Jeremy Penston @ 8/22/2007 12:14:00 PM

Wednesday, 22 August 2007

Did Burch Jump?