Better connections pay off for cable networks: Mary Fagan looks at a surge of investment in the hot industry of 1993

TWO years ago Richard Woollam, the director general of the Cable Television Association, was to be found knocking in vain on the doors of City institutions in abortive attempts to raise interest in the fledgeling industry.

Now the tables have turned. These days Mr Woollam is inundated with invitations to boardroom lunches. Not that his new- found popularity is likely to result in an expanded waistline - he is usually so bombarded with questions on these occasions that he barely has a chance to eat.

The cable industry is the hot topic of 1993. More than pounds 1bn has been invested in the industry over the last two years and about pounds 6bn more is expected to be poured in over a decade.

Funding deals have come thick and fast in recent months. One notable achievement was the pounds 152m debt and equity financing for the Jones Cable franchise in Leeds.

The financing, arranged by NatWest Markets, marked the first time a franchise had been fully funded before the building of the network began.

Another cable company, Telewest, has announced a fully underwritten pounds 190m loan for franchises in South London and Avon. And Nynex of the US is embarked on a pounds 1bn two-year debt financing programme to help to fund its pounds 1.5bn cable investment in the UK.

The driving force behind all this feverish activity is the interest being show in the industry by the large overseas companies that have been snapping up franchises throughout the UK.

North American telecommunications and media companies dominate the scene. But there are others, such as Singapore Telecom and Generale des Eaux, that are also keen to participate.

British companies are, with a few exceptions such as Cable and Wireless, notable for their absence. If the pundits are right, it is their loss. The Cable Television Association, which predicts that cable networks will cover three-quarters of the population of the UK within 10 years, believes that buying into franchises will become increasingly expensive from the end of 1993.

The enthusiasm of foreign companies for the British market is fuelled by the ability of UK cable companies to offer both television and telephone services within their franchise areas.

Cable companies are now regarded as BT's main competitor in local telephone services. Analysts estimate that cable companies will have telephony revenues of up to pounds 1.6bn by the end of the decade.

Research to be published this week by Barclays de Zoete Wedd shows that by the year 2000 BT's lost revenues as a result of cable could be pounds 1bn a year.

BT will no doubt recoup some of that lost revenue in charges for linking cable networks into its trunk network, but it will be competing for that business with Mercury and new long-distance telephone companies, including Energis.

Many people have in the past been sceptical about the ability of the cable sector to fulfil its promise. But there have been some key changes in the environment in which the companies operate in recent months.

BT and Mercury, which used to take three-quarters of call revenues for linking calls with cable networks, have agreed to a 50/50 split with the networks.

Cable companies are also surprised by their own success in attracting telephone customers. They expected that perhaps 5 per cent of homes in areas where cable telephony is available would take up the offer, but many are realising 20 to 30 per cent.

The companies are marketing aggressively. They undercut BT on call charges by up to 20 per cent and have lower connection charges as well. Fully itemised bills are provided on a monthly basis and call charges are usually based on seconds rather than on units based on minutes.

There is more to come. The trend in the industry is to install independent telephone exchanges rather than relying on calls being switched by Mercury or BT.

This means more control over the service and better revenues. It also allows calls to be made from one cable telephone to another within the same network, bypassing Mercury and BT.

Already some companies are capitalising on the freedom this provides to lure local customers away from BT.

In its Watford franchise, Jones Cable offers unlimited calls at evenings and weekends for a flat rate of 3.5p, as long as the calls are entirely within the cable system. Diamond Cable in Nottingham goes one better with free off-peak calls within its system.

Eugene Connell, president of Nynex CableComms, said: 'Once you have your own switch you can consider all kinds of marketing and pricing. We can talk about serious discounting'.

His company, part of Nynex, the US telecoms giant, is one of the most ambitious in the UK cable sector. After a series of acquisitions, it now has franchises covering 2.7 million homes. Nynex's most ambitious project is linking eight contiguous franchises in the North-west, which will be served by a single fibre-optic 'loop' network, with spurs off into local areas.

It plans to introduce a regional telephone and television service in the North-west, devoting the bulk of its planned pounds 1.5bn UK investment to the scheme.

While Nynex's network is likely to be the largest run by a single cable company, other operators are forging alliances to pool the cost of installing switches and to link adjacent networks.

London Interconnect, a joint venture between five companies with neighbouring franchises around Greater London - Videotron, Telewest, Encom, Nynex and Cable London - aims to provide London-wide television and telephone services.

BT is fighting back, promoting itself as the most experienced and credible provider of telephony and emphasising much-improved quality of service over the past few years.

It also intends to deliver video- on-demand over the telephone wires - something the Independent Television Commission says is possible despite an earlier government ban on BT providing entertainment services over the network until 1998.

Some observers believe that BT's video plan stems from a desire to destabilise the cable industry and investor confidence in it. So far it has done little to dampen the City's interest in cable, but Richard Woollam is angry at the apparent confusion. 'Foreign public telephone operators are looking at this industry and BT is putting hurdles in their way,' he said.

(Photograph omitted)