INTERVIEW: UPC to use digital TV to ward of competition in CEE

By bne IntelliNews September 13, 2007

Robert Smyth in Budapest -

The news on Tuesday, September 11 that UPC has finally launched its digital cable television service in the Czech Republic after a four-month trial period is part of a strategy that the regional cable operator believes will continue to deliver the aggressive growth rates its wealthy media owner Liberty Global craves.

With competition heating up over the combined provision of television, voice and internet - known as triple-play in the business - the launch of digital TV across Central and Eastern Europe is regarded by Nimrod Kovacs, chairman of UPC Central Europe, as key to his firm growing revenues at 15-20% a year.

"In the last year and a half, competition has intensified in all the countries," Kovacs says. "Our aim is to continue with similar growth amid heavy-duty competition."

With 6m customers and a revenue base of over $1bn, UPC Central Europe accounts for around 25% of parent company Liberty Global's turnover, a company whose share price has jumped from $20 to over $40 a share over the last year.

Kovacs, who has recently celebrated 25 years in the cable business after starting out in the city of Denver working for US cable impresario John Malone, knows competition when he sees it and he readily admits that the CEE market is heating up.

Romanian cable company DigiTV's aggressive expansion in Romania, Czech Republic and Hungary saw UPC lose 51,500, 4,800 and 5,900 customers, respectively, in the second quarter. However, apart from the regionally expanding DigiTV, which is said to be seeking an IPO on a Western stock exchange, UPC is not feeling pressured by other cable operators. Much of the competition UPC is experiencing is in the triple-play arena from powerful and savvy Western telecommunication companies that now own CEE's former incumbents, including France Telecom in Poland, Spain's Telefonica in the Czech Republic, Greece's OTE in Romania, and Deutsche Telekom in both Hungary and Slovakia. Slovenia's former incumbent, meanwhile, remains in state hands, though not for much longer.

"Last year, we had a major rethink of how we best compete and the future is all about building deeper relationships with consumers," he says, further emphasizing the importance of triple play to his company's strategy. "The least amount of churn [disconnects] happens with most loyal customers, ie. triple play customers, rather than those who subscribe to the one service."

Digital TV with its enhanced functionality will help UPC build these deeper relationships, he hopes, and is set to be launched in the first half of 2008 in Poland and Hungary, while it is already being offered Romania and the Czech Republic thanks to the respective acquisitions of Astral and Kardinal. By paying €325m for the number-two Czech digital TV operator Kardinal, UPC had a total of 44,000 digital TV subscribers at the end of June.

"The greatest potential is in digital cable with its additional channels, video on demand, personal video recorder and high definition TV. We have an edge in this, and it's a better way of spending money than becoming the fourth of fifth operator of an almost commoditized service like mobile telephony," asserts Kovacs.

Digital TV will then follow in UPC's other markets of Slovakia and Slovenia, the latter where UPC acquired Telemark, followed a couple of months ago by Ljubljana-based Lublianski cable, which Kovacs describes as "the middle of the [Slovenian] doughnut."

While certain CEE internet service providers (ISPs) are already offering IPTV, which shares some of digital television's functionality, Kovacs is not worried about them. "There are many things in common, but the technology of broadband cable is more reliable and more robust than ADSL, there's not enough bandwidth with ADSL for high definition TV for example," he says. "There are certain things we can do better than they can at a better price value relationship, HDTV requires significantly more juice."

Still shopping

Contrasting sharply with the prior UPC, a Dutch public company that filed for bankruptcy protection in 2000, the new UPC now has a wealthy owner behind it and continues to scour the market for more acquisitions.

"The question is whether there are attractive companies are available or whether we spend on offering extra services to existing customers," he says, noting that Liberty Global is sitting on a $5bn pile of cash and is waiting for the opportunity to spend it. "However, time is on our side because due to the current high rates of interest properties are likely to be cheaper next year."

When prompted on the possible availability of one of its main Hungarian rivals FiberNet, he remarks that venture capital firm Warburg Pincus' investment into Hungary's number-two operator is coming up to flip time. He also notes that Liberty Global Chairman John Malone is mulling over a possible takeover of UK media giant Virgin Media, a potentially massive transaction.

When not wrapped up in cable and eying further acquisition targets, Kovacs, as majority owner of growing wine company Monarchia Matt International, is also doing his bit to put Hungarian wines on the world stage.

Kovacs, who swam his way around the iron curtain from present day Slovenia to Italy before settling in the US, grew frustrated with not being able to find good Hungarian wines in the US. On moving back to Hungary in 2000 to head up UPC across CEE, he set up Monarchia in a bid to do raise the profile of his home country's wine while also making a viable business out of it.

"Our idea was to seek out second-tier Hungarian wine makers who were making high quality wine but lacked the marketing means," he says, mentioning the likes of the now popular Takler, Zoltan Demeter, and Tamas Pok. "We rolled into the US and to our great surprise we found out that nobody cared about Hungarian wines so we decided to go native."

Thus, Monarchia merged with US wine traders Matt Brothers to become Monarchia Matt International (MMI) and has built up consolidated revenue of just over $20m and is now aiming for $30m. Kovacs has invested about $10m and owns about 80% of the MMI group of companies, which includes a winery in Hungary's Eger region and part ownership of a Californian- and an Oregon-based winery.

MMI's sale of Hungarian wine sales abroad, are expected to hit the $2m mark this year with the lion's share sold in the US. To do this, MMI has brought in international help to adjust the taste profile to be more attractive to international palates, something Kovacs argues still preserves the uniqueness of the wine and ultimately helps create new business.

"Most international movie makers who want commercial success make their movies look a certain way that appeals the viewers, as opposed to making an art house feature that hardly anybody watches. It's the same with wine," he says.

However, MMI still backs Hungarian cult winemakers, selling wines that are popular locally that would never appeal to the American market.

Kovacs shrugs when asked if he is hoping to join the league of the Hungary's two entrepreneurial magnates Sandor Demjen and Sandor Csanyi. "Well no, as I get older I get more philosophical and I'm more trying to spend time with people and things I like, and get in touch with the land through my interest in wine."

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INTERVIEW: UPC to use digital TV to ward of competition in CEE

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