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The American cable industry is about to get a taste of some progressive French business models. And that’s a good thing.

May 21st, 2015 |  Published in Digital and Mobile Technology, Telecom and broadband

Man with the plan

Patrick Drahi, the man with a plan

 

21 May 2015 – We are based in Paris so we take full advantage of France’s highly developed telecommunication system. France is served by an extensive system of automatic telephone exchanges connected by modern networks of fiber-optic cable, coaxial cable, microwave radio relay, and a domestic satellite system; cellular telephone service is widely available, expanding rapidly, and includes roaming service to foreign countries.

And it’s a fun industry to follow with its dynamic characters.  Like Patrick Drahi. You’ll recall that when French billionaire Xavier Niel tried to bid for T-Mobile US, he was quickly sent packing. It will be harder to get rid of Patrick Drahi, another French billionaire who is entering the U.S. market with a $9.1 billion deal to take control of a relatively small cable company, Suddenlink Communications. One way or another, the U.S. will get a taste of the progressive business models that are being tested in France.

Drahi, who holds dual French and Israeli citizenship, is the third richest man in France and the richest in Israel, with a fortune of $19.4 billion, according to the Bloomberg Billionaires Index. The basis of his fortune is Altice, a telecom company that has acquired 70 percent of Suddenlink. This year, it completed the takeover of SFR, France’s second mobile operator. Drahi had fought a pitched battle for SFR, which belonged to the Vivendi conglomerate. A fellow billionaire, Martin Bouygues, who also owns a mobile operator, and who at one point had the French government’s support, had tried to outbid him.

Drahi won on the strength of his vision: His offer was based on a lower valuation of SFR than Bouygues’s, but he offered Vivendi a higher stake in the company he was going to form with the merger of SFR and cable operator Numericable. Vivendi’s bet proved correct: In February 2015, it sold its remaining SFR stake to Altice at 40 euros per share, a markup from the 33.3 euros per share it received for the rest of the company a year ago. Drahi gained even more: Numericable shares trade at 55 euros.

The vision of Drahi and Vivendi is fixed-mobile convergence, which ideally provides seamless connectivity wherever a customer is, on all kinds of devices — and seamless availability, no matter what communication channel people use to reach you. This system is also known as quadruple-play networks, which transmit voice, data and video on fixed and wireless connections. In the U.S., these packages have been the province of telecom operators such as AT&T and Verizon. In Europe, cable companies have recently started competing in this market. In Germany, U.K.-based wireless operator Vodafone bought cable company Kabel Deutschland in 2013; more recently it acquired the Spanish cable operator Ono, and has been looking for similar opportunities in Portugal and Italy. Altice, too, tried to acquire a mobile operator in Portugal, where it already owns cable assets (Drahi’s rule is, “Always start with cable.”)

Cable operators are better positioned than traditional telephone companies to make fixed-wireless convergence work. Their networks are typically faster. Although TV audiences are shrinking, cable companies have access to a lot of content to transmit over their networks, a distinct advantage over telephone companies. Besides, cable companies see consumers shifting away from pay TV, so they need a way forward. Extending their business to quadruple play is an obvious path, even if a merger with a mobile operator is not possible. Big German cable provider Telecolumbus has just announced a quadruple-play partnership with Drillisch, a company that sets up virtual mobile operators using other companies’ networks.

Expect Drahi to try something of that kind with Suddenlink, a company with 1.5 million clients in the U.S. South and Southwest. Altice could experiment with bundling its services with those of virtual operators, creating locally popular products and studying demand and price sensitivity for different options. Then Drahi is almost certain to make a big play. Bloomberg News is reporting that he intends to bid for Time Warner Cable, a nationwide operator with 10 million customers.

As with Niel’s abortive bid for T-Mobile, Drahi risks overextending. He borrowed heavily for the SFR deal: Altice’s debt soared to 22 billion euros ($24.5 billion) at the end of last year, from 3.8 billion euros in 2013. So a major cost-cutting drive was needed to enable Altice to service the debt, and Numericable posted a net loss of 175 million euros last year. Drahi has twisted suppliers’ arms, eliminated paper from corporate offices, renegotiated utility contracts and shaken up staff. He’s going to act in a similar fashion in the U.S.

It isn’t certain, however, that he can afford Time Warner Cable, which has a market cap that is about 25 percent larger than Altice’s. That shouldn’t deter Time Warner Cable shareholders if he does make an offer. As with SFR, he at least has a clear idea of where the cable industry should be going: to serve as a base for universal connectivity. When the second U.S. cable operator considered a merger with Comcast, the vision was a lot less clear. All that deal could offer was size — something that regulators, and customers, quire rightly feared.

Last year, when Bouygues bid for SFR, he wanted to cut the number of mobile operators in France from four to three. That was also a play for size. Drahi offered a more intelligent prospect, and that is what he would bring to the U.S. As he starts with just Suddenlink, other cable companies need to watch his actions closely because, with or without Drahi, this may be their future.

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