Liberty Global Ltd (LBTYA) 2004 Q3 法說會逐字稿

Welcome to the Liberty Media International conference call. Today's conference is being recorded. During this presentation we may make certain forward-looking statements about business strategies, market potential, future financial performance, new service and product launches and other matters. These statements involve many risks and uncertainties that could cause actual results to differ materially from such statements including, without limitation, possible changes in market acceptance of new products or services; competitive issues; regulatory issues and continued access to capital on terms accessible to the Liberty Media International.

Please refer to the publicly filed documents of Liberty Media International including the most recent Form 10-Q filed by Liberty Media International for additional information about LMI and about the risks and uncertainties related to LMI's business.

And now I'd like to introduce LMI's Chairman, President and Chief Executive Officer, Mr. John Malone.

Good morning, everybody. I have with me here this morning to answer questions Graham Hollis who's our Chief Financial Officer; I have Bernard Dvorak, our Chief Accounting Officer and Controller; I have Liz Markowski, our General Counsel; I have Dave Leonard who's in charge of our Latin American assets. On the phone we have Mike Fries CEO of UnitedGlobalCom; and Miranda Curtis who's the CEO of our Japanese interests; and we've got Mike who is our Investor Relations guy that you folks all know.

We had another good quarter here for the assets that are under the LMI banner. UGC, which of course reported separately earlier this week, and I'm just going to summarize the results -- I'm sure most of you have already been on that call. With revenues up 38.5 percent from the prior year and EBITDA up 41.5 percent, of course those reflect the acquisition of Noos as well as some improvement in currencies. Mike Fries can get into the details of that somewhat later.

UGC had free cash flow year-to-date of 180 million, so it's a very strong financial condition. Its current cash balances are approximately 1.1 billion. If you look at its net debt -- that is its net net of its cash -- roughly 3.2 billion, it gives you about a 3.3 times leverage based upon third-quarter annualized cash flow.

They have announced a number of the initiatives; the ones that seem to be the most interesting are the broad rollout of VoIP which they contemplate accelerating their prior views and having it available to at least 5 million of their video subscribers by sometime in the first quarter.

They are also focused pretty heavily at this point on developing and/or acquiring content businesses in order to drive their digital strategies in Europe as well as in order to enhance their competitive position as alternate distribution technologies enter the scene. They seem to be doing a fine job of meeting competition head on and prevailing and continuing to grow.

Jupiter, which is our Japanese cable operation, had likewise a strong year; revenue up 17.3 percent with no acquisitions and cash flow up 32.7 percent. Because of the strong performance of Jupiter its leverage is now down to 3.5 times running rate cash flow, which means that it's in a strong position to refinance out the subordinated debt which LMI has in the Company. This is anticipated, as I think we announced or put out in a 10-Q, to generate about 400 million of cash repatriation back to LMI and further strengthen LMI's balance sheet.

Notable in Japan are the rapid rollout of digital set-tops which have high-definition capabilities. It would seem that high-definition in Japan is a very hot item and seems to be the principle motive at this point for our video customers to be taking the digital tier. I believe we've rolled out approximately 200,000 -- Miranda can give detail -- set-tops during a period when we had expected to rollout about 50,000. So the take-up is very fast and we think this is very important not only in securing and increasing the video business for Jupiter, but also in terms of being able to provide a portfolio of services to unaffiliated Japanese cable operators who can benefit from attachment to our backbone. That's I think a very interesting development.

Japan just seems to be systematically adding about 100,000 revenue units per quarter and that seems to be a very steady pace if you look both forward and back. They have modestly up pinned (ph) their guidance for this year but they seem to be in good shape. The things we love about Japan -- it's a high-density primarily aerial plant; ARPUs are high; we have very low borrowing cost in the leverage in the business; the services that are bundled are experiencing very low churn I would say globally record low churn; there's virtually no bad debt, people in Japan are very timely in paying their bills and if they do disconnect we get our converters back. So in that sense, as an old time cable operator where those were major problems, it's wonderful to be in a market where we don't have those problems.

The upside opportunities for Jupiter are rolling up. Jupiter is Snow White and the Seven Dwarfs; there are many mom-and-pop operators who are either available for acquisition potentially or who can and need desperately either some Jupiter equity capital or some Jupiter technology and operating services in order to enable themselves to go to the next tier of services. We think that that is a very large opportunity. The Jupiter backbone network pretty well covers the populated areas of Japan and given our scale it gives us a wonderful opportunity to provide technology services, video on demand, VoIT (ph) switching and other services which it would be very difficult for small cable operators to self provision.

In addition of course, that big footprint and that reach gives us the opportunity to drive our programming ensemble. As you know, we are 50-50 partners with Sumitomo in JPC which is our programming arm in Japan. It currently programs an ensemble of channels; I think we're involved in 14 channels and we have two more under development so that we can go to the marketplace with a pretty complete bouquet of owned, interactive, high-definition and nichey (ph) channels seeking scale for JPC and its programming networks but also providing incremental programming to drive the digital revolution in Japan.

As far as JPC's performance revenues are up 30.6 percent over a year ago, cash flow is only up 15.4 percent reflecting startup costs on some new channels. There's effectively very little debt in JPC so we regard that as a very valuable asset. Its principal cash locomotive at the moment is Shop Channel Japan which is owned 70 percent by JPC and 30 percent by IAC, Mr. Dillard.

Moving on to strategy, the Liberty Media International Board decided to monetize and consolidate nonstrategic assets and so far moving down that path we've announced the sale of our Telewest stock, the sale of our Sky Latin America interests, the refinancing of our subordinated debt in J-COM, the sale of our Argentine cable assets.

Generally speaking, the concept is to leverage operating businesses approximately four times; take that leverage up temporarily for acquisitions and then work down; provide a continuing shelter to those growing cash flow streams; keep the holding company, that is Liberty Media International, debt free; only have those investment assets which provide a path to control of cash flow assets or which materially enhance the operating businesses that we're already in. We want to keep our equity leveraged and we want to plan our tax strategy very carefully so that we can use all of our cash flow or as much of our cash flow as we can to grow the business rather than to service the government.

Based on the transactions of that nature that are currently being negotiated, we anticipate that LMI will have a cash balance at year end of approximately 2.1 billion with virtually no tax leakage. We will generate a modest amount of deferred tax liability, but we believe we have a plan to even deal with that in the future. The original purpose of the rights offering, which was to purchase Microsoft's J-COM interests which were both equity and subordinated debt, disappeared as Microsoft decided that they like the Japanese asset too much to sell it. However, going forward should they change their mind, the cost of taking them out of their equity of their position has been greatly reduced, due to the refinancing of the subordinated debt. So that it would really only be their equity component in J-COM that we would be dealing with, and we would be sharing that purchase with Sumitomo. We would very much like to buy that interest and so would Sumitomo, but we've had a great deal of difficulty prying it out of Microsoft.

So that said and given the very strong financial conditions of our principal subsidiaries, we find ourselves with a substantial amount of cash on our balance sheet. We regard LMI at this point as substantially undervalued, its market price being substantially undervalued, both in absolute terms as well as relative to UGC, which of course represents about half of LMI's sum of the parts. Therefore, at some point, it will clearly be appropriate for us to consider the repatriation of equity.

We have recently at the last Board meeting authorized the establishment of a put program, such that LMI will be offering to acquire -- or to sell puts to acquire its own equity, and that program will be put in place here over the next few weeks. Unfortunately, because of a number of restrictions in terms of our ability to just go to the market and acquire stock, we're not able to do so at this point in time. However, we are in a position where we could redeem substantial blocks provided that they constituted a, I believe the lawyers call it, material portion; i.e., something north of 25 percent of each individual holder's positions. So those would have to be determined on a case-by-case basis and approved individually by the LMI Board as a redemption of a block, as opposed to open-market purchases. Those restrictions will go away with the passage of time, but that is our current posture with regard to stock repurchase.

With that, I am going to turn it over to questions.

(OPERATOR INSTRUCTIONS) David Gibson, Mackery (ph) Securities.

Mr. Malone, considering your investment in News Corporation, Liberty Media's also investment in News Corporation, I wonder if you could just elaborate on what you think the opportunity is there, given Liberty Media's recent move to adding a higher voting stake versus economic interest? And related to that back in March, you had said you thought there was an opportunity of swapping or investing in each other, or swapping assets between the 2 of you. Does that represent the opportunity still, and does the opportunity also lie with Liberty Media International in some of the assets, or particularly with Liberty Media?

Well, there are a few assets in News Corp. but not material ones; fractional interest in things that might make sense for Liberty Media International. However, the News Corp. stock, the small amount of News Corp. stock which is in Liberty Media International was really put there primarily as capital rather than for strategic reasons. LMI is actually partners, I guess you could call it that, or we share common interests in several businesses where we would like to acquire News Corp.'s share and or sell together, and those kinds of discussions haven't taken place, but they are virtually immaterial with respect to both companies. They would be more in the nature of cleaning out the closet from old remaining investment positions that were not pursued.

I don't want to get more specific than that, but in total they don't amount to a decimal place in anybody's financial statements. So from LMI's point of view, while we could use the News Corp. stock that we have -- I think it is roughly, what, $180 million in market, something like that -- as a currency to buy things from News Corp. We could also use cash. So there is just a view things that in markets where our operating companies operate that we would like to clean up with News Corp., and those discussions are underway, have been underway for quite some time. That is just the normal doing business relationship that we have with News Corp. We have had many partnerships over the years and, hopefully, we will continue to find opportunities where we can help each other.

With respect to LMI's interest in News Corp., I think, if that wasn't on the LMC call, I would just reiterate that our intentions of increasing our voting stake over there are entirely friendly to News Corp. and its management. We think they are the best run, most strategically positioned, vertically integrated media company in the world. We have enormous admiration for Rupert and the job he has done, that our increase in voting was both opportunistic and strategic in the sense that as a very, very large equity holder in News Corp., we thought it was prudent for us to have a larger voting interest reflecting our bigger economic interest, but our intentions are to be and to remain very supportive and very friendly toward the Murdoch family and their operating control of --.

Were you surprised by the poison pill?

You know, I wasn't entirely surprised by it. I think that that is something the Company prudently should do. Unfortunately, because of various securities law issues, we could not discuss our plans with either Murdoch or News Corp. in advance, or we might have formed a group and been precluded from buying the position (ph). So we just had to stay silent on our motives until we actually did it. Unfortunately, that I believe caught them by surprise, and they did the prudent thing which was to just stop everything in its tracks with the pill. But it was a friendly pill rather than an unfriendly pill, in the sense that it allowed us to go ahead and close the transaction that we had announced, and it also limited both Rupert and us to roughly the same incremental increase, and it also reflected that they would reconsider in 30 days any event probably committed to a shareholder vote within a year.

That is about as friendly as you can be in a company where you are making sure that you're protecting all shareholders' interests, and you get surprised by something (indiscernible). So my guess is I wasn't surprised, I wasn't shocked, wasn't upset. We could have done a private agreement. I certainly understand their Board's sense that they needed to freeze everything until they had a chance to analyze it.

Are you expecting the pill to be still in effect after the Board reviews the maintenance of that for the year?

It really depends -- you mean after a year?

Well, no. After a month's time I think they're having a review like you just said.

Well, I think that entirely depends on what happens in discussions that would take place between the Companies.

Okay, thank you.

Ted Henderson, Stifel Nicolaus.

During the quarter you guys took an indirect ownership interest in Telenet. Given the substantial cash you've got on the balance sheet, understanding it's a complex structure over there, are you interested in more there and eventually do you see that asset residing alongside UCOMA's Belgium assets? And a second question, just on the VTR/Metropolis merger that passed regulatory scrutiny during the quarter, were there any conditions that you view as onerous or barriers to actually merging those assets and anything with regard to timing? Thank you.

With respect to Telenet, we think Telenet is a fabulous asset, very well-run, great management team, well financed, very valuable. We're delighted that we have the position we have and that we got into it on a favorable basis. In the long run we would love to own Telenet outright or consolidate it and I'm sure so would UGC. So sure, we would look at that, but given the fact that the Telenet position has a number of basically call options related to increasing the stay, and given the fact that the Belgium management team loves their autonomy, we think patience is called for here. And whether the asset ultimately is sitting in Europe parallel to UGC or in UGC remains to be determined over time. We would prefer, as we've stated historically, to pursue European opportunities through UGC.

With respect to VTR, there has been an appeal to the Chilean supreme court by some interested parties. These are the same parties apparently that filed with the regulatory authority to try and stop the transaction or get leverage over the transaction. It could delay any closing of the merger until January of next year if ultimately the supreme court finds in favor of their regulatory body. Our attorneys are very hopeful; they give it a very high probability that the decision of the regulatory authority will be upheld by the supreme court. The supreme court is merely reviewing process, not fact, as is our understanding and we believe that the process was entirely appropriate in accordance with Chilean law.

So, from my lips to God's ears, but hopefully this transaction will be able to close by the end of January. The details of the transaction between UGC, between VTR and Metro I believe have not been disclosed.

That's correct.

And are still being worked out and fine-tuned based upon the final outcome of the regulatory rulings to see whether or not the synergies are in any way adversely affected by the ultimate outcome of the regulatory rulings.

Thank you. Just one last thing, the E! Entertainment and International transaction kind of brought back the L shares, but the LBTYA shares still were with Comcast. Are you guys in discussions with them. You've mentioned opportunistically you'd looked at bringing blocks, but is that --?

That is one block that we certainly would like to redeem. Keep in mind that Comcast did a foreword sale on their Liberty stock -- of about half their Liberty stock before LMI was spun out and therefore about half of Comcast's LMI stock is sitting in the "ether world" tied up (multiple speakers) tied up in a derivative transaction that basically can't be unwound for 10 years. So roughly half of the Comcast position is effectively not dealable and not saleable for 10 years is our understanding.

The other half of the position or roughly half of the position has no tax basis for Comcast. I believe Comcast, if they decide to divest in the position -- and keep in mind, they're a big cable company so they may have a continuing interest in keeping their nose, as it were, in international cable -- but should they decide to divest of it, it would be my guess that they would seek some tax efficient divestiture. Since they're fully taxable on a current basis to just sell the position straight up for cash would be pretty in efficient. And not consistent with (indiscernible) prior history.

So my guess is that -- and to answer the third part of the question is, yes, we have had discussions with them. We would love to buy the block back, but it's not entirely clear that they would turn it loose.

Thank you very much.

(OPERATOR INSTRUCTIONS) Matthew Harrigan, Janco Partners.

A couple questions. Firstly, on Latin America there's no control path on the DirectTV assets and I can certainly understand your action there. Given that Argentina was a pretty good cable market before the devaluation of the economy there, has come back somewhat and you're a big success in Chile, can you comment why you didn't move in a different direction there? And then secondly, probably for Miranda, are you still seeing the big gap in churn rates between cable modem and the fiber to the premise and fiber to the curb data products weigh in favor of cable modem that you were seeing a quarter were so ago?

I'll start off with the first question -- Latin America. Why bale on Argentina is really the question. From our perspective, first of all we had no clear path to control. The most, if we stayed in the restructuring process, we would end up with was 40 percent of the equity with Hicks Muse owning 40 percent and the other 20 percent in the hands of various former bondholders as part of the restructuring. So that was number one.

Number two is the fact that Argentina passed a cultural law in which they defined cable TV systems as a cultural asset. Under Argentine law a cultural asset can't be owned more than 30 percent by non Argentineans. So you were essentially going to have an asset that if you ever wanted to sell it you had a very restricted market with whom to sell.

Number three, the system is substantially overbuilt by Clarin. Clarin is a cable operator that also is a dominant newspaper publisher and broadcaster. Number four, the franchise in Argentina is expiring in 15 months. And to go forward in Argentina we would have had to write a check for approximately $160 million new money going in in order to clean up the controversial bond situation and then we would have essentially been a bondholder in Argentina but still a 40 percent equity holder.

We prefer to take money out. The transaction that we've repatriated, we repatriate about -- for LMI we've repatriated about $57 million and we also get off of bond guarantees that had some substantial risk associated with them. So that's the reason we made the decision. We really don't trust the Argentine political system not to play an exbrokriatory (ph) game against an asset which is principally owned by Americans. And if we were in it with Hicks Muse it would be an All-American investment again. All the debt would still be denominated in dollars which is a disaster when you have a peso cash flow stream and you're financing it with a dollar liability.

So, for all those reasons -- and because so many people have lost so much money in these kinds of businesses in Latin America -- we decided that Chile was great, it's got a stable system, you can borrow local currency, the peso -- the Chilean peso has been appreciating against the dollar and we feel very comfortable in Chile. We didn't feel the least bit comfortable in Argentina and that's the reason why we made that decision.

Thanks for the education.

With respect to Miranda Curtis -- Miranda, do you want to answer that one?

Yes, sure. If I can give you a broad answer to your question, Matt, I think one of the highlights of this quarter's results is that we're very positively encouraged by what J-COM is delivering in terms of the rollout of new products and services. So, on the digital video side, as John mentioned in his opening comments, we're seeing the take-up of digital boxes running over twice what we had originally estimated for this initial rollout. And that's despite the fact that there's really no new premium for (indiscernible) services in the tier yet, they're just looking at some high definition retransmission of broadcast terrestrial services. So that's one very positive.

On the other side we're looking at the take-up of the 30 Mb high-speed data product running already north of 20 percent of the high-speed data subscriber base is already taking the 30 Mb product. And we're seeing churn decreasing right across the board in every individual line of service as well as in the bundles. So we're seeing J-COM maintaining a very, very strong position against the competition both from digital terrestrial and the fiber to the home operators.

We're also very encouraged by the fact that we're being able to see consumer surveys reporting on actual delivery speeds on the high-speed data side and J-COM is coming out very well in terms of actually delivering speeds very close to the 30 Mb advertised. Whereas the fiber to the home operator that generally complete we see didn't deliver anything like that speed and are often delivering speeds lower than cable. So we think J-COM has done a very good job and it's very well positioned now to build momentum in the rollout of these advanced and high revenue generating new services. And as we begin to rollout new products such as the (indiscernible) and demand in the first quarter of next year, I'm hoping to start to see some impact also on the revenue side.

Thank you.

David Goldsmith, DSG Capital.

Any comment at all on the New York Times article this morning?

I didn't read it. What did it say?

It's saying you guys were preparing to make a bid for UGC?

Well, first of all, as I said in my opening remarks, we regard LMI as substantially undervalued relative to UGC. Therefore it would be imprudent for me to go pay a premium for UGC when we regard our relative values to still be substantially out of whack. Would we like to consolidate with UGC eventually? Sure. Are the stars in alignment at this point in time? No. We would be better off shrinking LMI equity just on an absolute valuation basis than we would be acquiring additional UGC stock given the current relationship between the two stocks.

Thanks.

James Ratcliffe, Citigroup.

Hi, it's Niraj Gupta from Citigroup. John, I just wanted to talk a little bit about JPC. I know you guys always highlight it on the call, but it just seems like the Japanese broadcasters haven't really been that aggressive in terms of pushing into cable content development. And it just seems like the longer we go out over time as more and more pay TV evolves in the country; there should be an opportunity to create a much bigger asset than exists today. Could we just get a little color from you and Miranda about some of the less developed cable content services that you have above and beyond JPC Shop and where you think those things are going?

I couldn't agree with you more. And if you look at our experience even in the U.S., we started off with a few services that were primarily designed to help sell cable service and then all of a sudden scale showed up and advertising revenues developed and the cable network businesses took off. We are well positioned in JPC thanks in no small part to Miranda's efforts with a broad array in the primary categories of sports, movies, documentaries. Miranda, why don't you run down the list and then talk a little bit about the new channels we're contemplating?

Again, I agree absolutely with your comments. It would be interesting to see how the Japanese broadcasters have really focused their more recent development efforts partly driven actually by government mandate on retransmission of their existing digital entertainment services either on the digital satellite platforms or more recently in high definition in digital terrestrial. And you're seeing very little innovation from the Japanese broadcasters in terms of direct investment in premium or subscription revenues.

Fuji Television has a couple of quite good channels on Sky Perfect (ph) and cable, but they're about the only ones who are really playing in any serious fashion. And no one has really locked up the exclusive premium services in the way that Murdoch did in the UK back in the '80s. Now that's not to say that that's necessarily an easy opportunity to pursue, going in as a Western company with a very aggressive position. To try and acquire exclusive access to such content I think would probably be received pretty poorly in the market. But that does mean that JPC's leadership in the market in terms of actually being able to cost effectively and efficiently deliver multiple services from a single administrative and operating base and our capacity now to provide service to cable, satellite, broadband means we're very well positioned for the next round.

The next round, as far as I'm concerned, will primarily be led by rollout of high definition versions of some of our current operations, multiplexing some of our current operations, beginning to build demographics and, as John mentioned, we're leading in the basic movie genre. We're leading in the documentary genre with Discovery Japan and Animal Planet Japan. LaLa, our women's channel together with Shop Channel move us very nicely into the women's market. We have some investment in children's content but I think we'd love to see us still to become more activity in that area. The J-Sports premium movie -- three channel movie service is doing nicely, but we think that it could expand its operations even further.

We have seen a number of -- we're now looking at video on demand right across the board, not just the obvious categories, but video on demand versions of some of our existing -- I'm sorry, highlights of some of our existing channels. And we're at the very early stages of looking at participation and interactive programming which is a really completely undeveloped genre in Japan. So there's a lot of upside, a lot of development activity going on. Some of that will drive directly after the JPC platform. Other areas I think will develop -- I hope in partnership with Japanese broadcasters and they're beginning to understand that we have, as a group, skills and expertise to bring which could be very helpful to them as they seek to develop new areas of revenue for themselves.

And then you always have the underlying topic of the desire to build advertising revenues. Look at Golf Network -- a fantastically successful channel now delivering 28 percent of its income from advertising. That shows that it can be done and it also generates phenomenal viewing rates among adult men between 40 and 60 not surprisingly. That's an area which is ripe for expansion. And so the -- we agree that JPC has currently built a very strong base but is now ready for a series of really substantial leaps forward to create additional value -- significant additional value to its shareholders.

I might say on top of that, when we talk about providing service to the mom-and-pops, if we can gain scale economics for our distribution of content of course, it then feeds our ability to be able to launch services and joint venture content distribution arrangements with other program owners. So it's very much the model we had in TCI where we frequently would own 20 percent of another cable operator and deliver all of their programming services at our scale economic values.

And if I can add to that, John. And we're really seeing in Japan that the mom-and-pops are struggling now. They see significant threat from digital operations. They know they need to get into voice over IP and high speed data. They don't have the financial or the technological or the management resources. And we're beginning to see I think what I hope will be a very strong movement towards consolidation incorporation.

I think we announced this week our first transaction with Mediatti which, as you know, LMI also has a direct interest in, who will be providing digital service and voice over IP to Mediatti's cable systems thus saving them the expense of investment in digital head end, but of course expanding our own base of relationships and our economies of scale and provision of set-top boxes, switch capacity and access to our digital head end. And I think that will be the first of a number of potential transactions which will rapidly increase J-COM's footprint without necessarily the need for capital investment. And that would be led both by digital video and also the very high demand for voice over IP services.

Thank you.

Adam Schwartz (ph), First Manhattan.

My question is regarding the recent announcement by UGC in Netherlands to employ an offnet strategy with regards to selling DSL. And what I'm curious about is how you view this change in strategy in terms of how it will effect how the business is run and if this could lead to regulatory environment where you're forced to open up your cable systems?

With respect to the first question, the ideal outcome here for us is that it doesn't affect substantially how or cable systems are run and we would view and do view an off net strategy as being simply an extension of our footprint. If you want to look at it from an operational point of view, if we were to buildout another municipality or another 100,000 homes we're trying to make this as seamless as possible to the consumer so that our brands and our products and our messages and our advertising and communication can be essentially leveraged across the entire footprint.

One of the things we suffer from, even though we have 40 percent of the market in Holland, is that many of our competitors, in particular on the data front and most obviously KPN, have a broader and in some instances nationwide footprint. So, we are outspent mightily on just dollar for dollar when you look at advertising and TV spend, radio, print, whatever it might be. So clearly for us to be able to roll out across the balance of the marketplace with a common product, a common message, a common communication scheme, a common bundling and pricing package is a major positive. We will look to manage it operationally and organizationally in the simplest -- and as again as I said most seamless way so that our Dutch management group, our billing systems our provisioning systems are Dutch IP backbone.

All of that will be connected in as much possible seamless to the customer so that won't really know what technology hopefully they are using ultimately. From a regulatory point of view in terms of what this might mean and what is happening there, it is our view that KPN's request for access to cable networks is nothing more than a political move. There is certainly no legal basis that we are aware of for that sort of request from a dominant telecom company which let's make no make no mistake about it; they are still dominant in every respect. They have also more recently, as you may have noticed, decided to bundle their telecom products with a digital terrestrial television or DTT provider, who has been struggling over the last year. From our point of view that is fine.

This provider suffers from a few things -- one, it doesn't have a national footprint; and two, it's limited to 25 channels; and three, based on our own personal experience because you can bet we've installed a few, it doesn't look very good. Having said that, the Dutch regulatory environment is active and it's a lot of press and it's certainly something we focus a fair amount of time and attention on. But we don't see that this particular move by us will have any real impact on that dialogue and is something we, as are other resellers in that market entitled to do, we're requesting as we sit here today DSLAM activation sites, we're getting them, we're installing them. We actually hooked our first DLS customer up yesterday to (indiscernible) data customer. The economics are sound and we're pretty encouraged. And at this stage I think the debate about access and other matters is going to continue one way or the other, but this shouldn't have that large an impact.

And just a follow up. Do you expect to roll this offnet strategy out in other countries? Have you looked at it yet?

Looked at it, as you can imagine, in almost every country and the key variables, quite frankly, are twofold. One, let me say it this way, one of the benefits of rolling it out in Holland is that there is a well oiled process for both the interconnect and payments and mechanical scheme, if you will, behind the infrastructure. And secondly, it's a relatively favorable economic opportunity in Holland given the pricing that's been established by the government for the incumbents and those looking for access.

It's going to differ market to market based upon the extent to which the incumbents open up their network historically, how well that's gone, what sort of pricing and tariff schemes have been established by local regulatory agencies, etc. So, what I'll tell you is we're looking at it everywhere, as you can imagine, and we will most certainly take advantage of it where it makes sense. Just to give you a data point, I think our estimate is that to roll out the balance of the Dutch market that we really want to be able to have access to will be somewhere in the order of EUR25 to EUR30 million. That's a pretty low number and something that we believe just supports the economic opportunity as much as anything.

And the margins won't be greatly negatively affected compared to what you're making on a broadband customer today?

Well, at some point clearly it's not going to be the same margins, but it's all going to be incremental gross margins. So the way we'll look at it is both from in terms of improving our business opportunity on net, and by that I mean having -- spending more, having a greater awareness of our brands on net and then seeking additional margin off net. But I don't think in the scheme of things when you aggregate our cash flow -- our 240 million in cash flow in this last quarter per se that you're going to see meaningful change in the margins.

Thank you.

Morris Mark, Mark Asset Management.

I have a conceptual question for you, but it's a serious question. You obviously have a very significant commitment to cable with Liberty Media International. At the same time, through liberty you have a strategic investment in News Corp. who's probably the leading distributor of DBS and satellite based video entertainment. I'm just curious in that at the same point there's evidence that the phone companies are finally starting to make an incipient move into fiber. Taking these things into account, I'm just curious, how do you see these three areas playing out? And how do you see your own in affect almost conflicting commitment to one area versus the other with significant investments in each?

I guess a good example would be the UK where we decided not to try and have cable under the Death Star. So I think it comes down to an assessment of each market and to the degree to which a given technology has been able to go vertical. i.e., the reason why Rupert is so deadly in the UK is because he owns all of the meaningful video programming. So a cable operator is essentially denied any margin contribution in video if he chooses to compete with the Death Star, so the cable systems in the UK are basically telephone systems offering data and telephony. And their video component doesn't make much of a component. Not a good place to be.

I wouldn't want to go debuilding cable TV right now in Italy, for instance. Under a vertically unified satellite guy, which News Corp. is, now that they've settled the competition there and given the fact that Burl Lesconi (ph) and Rupert are such good friends and Burl Lesconi has so much of the content with broadcast -- not a good market to go. A place like Holland where it's a relatively small Dutch speaking market to justify a massive satellite play. It seems relatively safe from video competition from satellite.

And you get 90 percent penetration.

And you start life with very high penetration, very big scale and of course the challenge is to use that video scale to go vertical into content and niche content so that you're protected with respect to competition when it finally comes over broadband, if it ever comes over broadband in Holland. The other thing you look at is the ability of the telco's DSL structure to do video programming effectively against cable. If in fact you're in a place where DSL -- like Korea -- where DSL can deliver very high data rates and cable isn't established you have to really worry that the telephone company with DSL is going to do video over DSL faster than the cable guy can build and collect enough scale to be able to implement his technology.

I really believe that you have to analyze each situation. If you're buying a cable system in the U.S. and it happens to be in a Qwest marketplace, you can feel pretty comfortable because there DSL is pretty wimpy, they probably can't get into video in any meaningful way and you can kill them in VoIP and so on. But if you're in Tampa and it happens to be where Sidenberg (ph) decides to go build fiber to the home, it's going to be a tough bare bones market fight because his technology and cost structure, once he's built, will look roughly like a modern cable system's cost structure and now you have excess capacity, price competition, a lousy economic return for Sidenberg, but it's cherry rated economic return for new house.

So that's the traditional overbuild, Morris. And it looks to me like the question is whether or not a telco fiber overbuild turns out to be an economic thing for a telephone company against a well financed cable guy incumbent. Because the cable guy is going to be able to match him. If you look at Japan as an example our service, high speed data, video and so on, is as good at or better than what the phone companies are providing in the places where they have built fiber. So it looks to me like it's a bad investment on the margin for a telco and they'd be better off focusing on wireless than putting a lot of long-term capital assets into the ground.

So my view of it is satellite where it's dominant is going to remain dominant in video. Satellite in the U.S. has a big enough marketplace to continue to be very profitable even if cable and/or telcos start to fight their way back in video to some degree. Because satellite will have a balance sheet where they basically expense their connection charges and equipment and so on. So they're in a pretty good shape to hold their market share where they are on a pricing basis. They can add PVRs while cable can add video on demand.

I mean I would say that as long as you don't get too many competitors in the space you're going to have oligopoly pricing and that means a pretty decent profitability for say two players, maybe three. Right now in the cable world you're looking at most two players. You're looking at the phone company upgrading to their DSL and you look at the cable guy with cable modems. And the high-speed data service being the prince of terrestrial services, i.e. if you get high market share with a high speed data service, all the other communications services fold into that.

So defensively it's very important that Mike in Europe retains a high market share of high-speed connectivity so that he's not vulnerable to video over DSL or the equivalent. And then in this world you can never count out new technologies -- WiMAX, Power Line (ph), other things that could enter the scene and change the dynamics. One of the things that you'll note in UGC's business plan is they have picked up the frequencies to be able to go into wireless WiMAX in many of their markets. They recently got one in Austria; they have one in Switzerland and so on. So part of the program here is to try and anticipate where technology is going and position yourself so that it's on your side or at least neutral to you as opposed to being regarded as a pure threat, a pure dark cloud hanging over you.

So I guess that's a long answer but I think that I love Murdoch's strategy because he's primarily a content player who owns enough control of distribution to ensure that his content gets aggressively marketed and deployed. So I don't think it's an accident that basically Rupert doesn't own 100 percent of Direct, he doesn't own 100 percent of Sky. At this stage he's brought enough to satisfy his strategic purposes. He probably has a path to 100 percent ownership if he determines in the long-term that that's in his economic interest, but he gets all the benefits in the meanwhile. And he shares the risk, the technological risk with a bunch of public shareholders. A very prudent strategy.

Just two quick follow ups. In Japan what percentage -- because I know that it keeps changing -- what percentage of J-COM and JPC do you own now? And, as you start to do these rollups, that would imply that your share of ownership is likely to decline over time. Is that correct?

In Japan we own 44 percent right now -- 45 percent, okay -- of Japanese footprints. The Company has -- if you look at the incremental economics most acquisitions could be done with cash and they'd still be accretive to cash flow and they wouldn't distort the multiple. So if we go on an acquisition tear (ph) of mom-and-pop's, they're accretive because we have so much of the infrastructure already in place. So it's not necessarily that we would take equity dilutions to do rollups, although we might if owning a Japanese equity was important to Japanese mom-and-pop's.

It's a unique thing, Morris, in Japan that we can't talk about taking Japan public because if we talk about taking Japan public then we can't take it public. So, we can't say anything about whether or not Japan will have a public equity security or not. We think ultimately we'll be about to buy Microsoft out and take our ownership interest back up and that's at least our hope. And I think that's Sumitomo's hope as well. So we're kind of comfortable where we sit. We would hate to get diluted very much and we'll make every effort not to get diluted very much in Japan. What was the other --?

You asked a question about JPC. I think the other point to add to that is that what we've achieved at J-COM now is to become the senior shareholder and that's been a very big change. So we'll now have significant influence on the operating and financial strategy of the business. JPC you asked about is a straight 50-50 partnership with Sumitomo.

Okay, great.

I think -- what does Sumitomo own of Jupiter? 38 percent -- 32 percent. So we are, as you would see, the senior partner. We still regard ourselves as 50-50 partners with Sumitomo in Japan. In other words, for all kinds of reasons it's very important to us that we retain a strong Japanese identity in Japan.

That's great. Thanks a lot, John.

David Joyce, JB Hanower (ph).

Just quickly, what would the ultimate end game be in Chile for UCOMA? Is that something that you will buy them out from or would they get LMI equity or something like that? Just wondering how that could be structured going forward? And Miranda already touched on the mom-and-pop's, that you don't need any capital investment to grow. But is that something that's going to be material within the next year or so?

I can speak to trying to grow the footprint in Japan which is Japan is a country that it takes a long while on any transaction to arrive at the relationship necessary. Japan is very relationship oriented and we need to continue to develop the relationships with the help of Sumitomo with the other cable owners in Japan. It's not at all like the U.S. where people will sell something to somebody they don't know. It's a marketplace where continuing and historical relationships are very, very important. And so this is why Miranda and Graham have been working in Japan for how many years? Over 10 years to put together the momentum that they currently have.

MediaDia (ph) is a vehicle that we invested in to kind of accelerate our ability to expand footprint and this is not something that will happen overnight. It's unfortunate in the sense that we can't sit here and forecast that next year we can be twice as big as we are in Japan. On the other hand, it's almost an insufferable (ph) barrier to anybody else doing it. So the fact that it takes longer to do things in Japan is both a benefit but it's also a barrier to competitive entry.

With respect to VTR, VTR is the larger of the cable systems down there. We would expect that it would ultimately be the vehicle that would operate and be in there and I guess at the present time LMI has no particular need to try and acquire VTR from UGC. So my guess is VTR will end up the surviving entity and it will be continued to be owned by UGC.

Alright, thank you.

Stan Entis (ph), CSFB.

John, you addressed the New York Times article and then you further talked that right now the stars aren't aligned to pursue requiring UCOMA. But if the valuations changed, can you comment as to what type of currency you would use -- cash, stock, accommodation -- what would make sense most from a tax perspective? If you could shed any color on that that would be helpful.

That's a double hypothetical. But assuming we could get the stars aligned, which we would much prefer by having LMI go up than UGC go down, assuming we could achieve that or that the market sought to put us in that relationship we would probably use a mixture of -- it's not entirely clear, by the way, whether it's UGC acquires LMI or LMI acquires UBC. Let's put that third hypothetical on the table. The currency would be predominantly equity, but for those shareholders who wanted to exit we probably could have a cash component to it since we're pretty heavy with cash and so are they. So I sure don't want to sell any of mine, so I would not want to be forced into any cash in any transaction, but perhaps a cash option might be appropriate if we actually were to get the stars aligned, reach an agreement between the two special committees and negotiate some kind of a transaction. My guess is it would be primarily equity with a substantial cash option for those who wanted to cash out.

Understood. Thank you very much.

Genna Amabi (ph), Standard & Poor's Equities.

My question -- a couple of questions. First of all, John, I wanted to get a sense on your evaluation of the taxation friendliness in Japan and how that factors into your long-term strategy. And if you can also comment a little bit on your net operating loss situation at J-COM? That's my first question. Secondly, do you have a path to controlling Interactive's 30 percent stake in the Shop Channel and would that presumably put you over the 50 percent stake if you did -- went ahead and controlled that for JPC? And finally, just some comment on the availability of HD programming in Japan. Thank you.

The first question which is tax friendliness in Japan, it's roughly like the U.S. with the exception that you need to own 100 percent in order to tax consolidate. So very important, while we were generating a lot of depreciation shelter so far, we've been managing the non 100 (ph) percent ownership issues as cleverly as we can. However, it becomes increasingly difficult given the increasing profitability of the Japanese business. So very important for us to end up consolidating. One very good reason why having a security to use in Japan would be very useful from a tax point of view, would be the ability to consolidate minority stakes so that from a tax point of view we can be much more efficient.

Also another very good reason to start acquiring mom-and-pop's, buying the assets 100 percent and being able to renew the depreciation structure. We kept TCI (ph) for 24 years I believe from paying any taxes with that strategy. And that opportunity exists in Japan as well, but it requires us to essentially go to 100 percent of things we buy. With respect to path to control of Shop Channel in Japan, we have no absolute right to take IAC out; however, we have a very close working relationship with IAC and they understand tax issues as well as we do and we believe that some kind of an arrangement is feasible.

Between that stake and the Microsoft stake which one would you say is of more priority if you had to choose between them?

It's apples and oranges. My answer would be both. I mean, changing the relationship with IAC may not require us to buy IAC out. It may require just some structural change. Microsoft basically would be an equity buyout and I would put a fairly high priority on doing both frankly. But Microsoft would be purely a function of price. At the J-COM level buying out Microsoft does not help or hurt the tax posture of J-COM. Whereas restructuring the relationship with IAC does help the JPC tax position and makes life much simpler within JPC. So you can look forward to us working on both. But you need a willing seller.

Okay, understood.

And when I tried to buy it from Bomber (ph), his comment was I've already got 65 billion of cash, why do I need another billion. That's on Japan. On HDTV I'll let Miranda respond.

I think one of the interesting developments about -- or the interesting factors about the development of digital in Japan is that it's driven almost entirely by the availability of high definition versions of broadcast singles. There's very, very little original production or original development in high-definition. You're just beginning to see some investment in high-definition sports. Very few of the multi-channel operators are actively investing at the moment in high-definition product and content. And that's why the (indiscernible) at the JPC level that that's something that's a priority right across the board. So we've asked every channel to come up with proposals, which may not get rolled out for another year or two but to be ready to start thinking about investment or coinvestment in high definition versions -- there's no current budget (indiscernible).

Of course (multiple speakers) already has fabulous high-definition content (multiple speakers).

Exactly.

So, you get Discovery's beautiful stuff on there, it's going to really be an eye opener in Japan.

But I think -- think about the debt -- the statistic that I brought back from my last trip 2 weeks ago which I think is fascinating is -- if you look at J-COM's subscriber base today, 30 percent of their subscriber base has high-definition television sets. Only 10 percent of the subscriber base has digital. So you've got a market that's absolutely ripe and ready and if you're not in high-definition then I don't see how you're going to succeed in Japan going forward. So you have to be starting to make plans now to the maximizing the opportunities provided by that technological base.

Thank you very much.

John Redden, Epoch Investment Partners.

I have two questions. First, if LMI is substantially undervalued relative to UGC and you just said the transaction could go either way, then why doesn't it make sense for UGC to buy LMI now?

You've got to ask Mike Fries that question.

I think we're both undervalued, let's start with that point.

Yes, I think we are both undervalued, but on the other hand --.

You said relative.

That's a rational question to ask and there may be a point in time when that occurs to the UGC special committee.

Well, if it makes sense to put them together and there's a relative valuation difference I would think, all things being equal, it should happen. I guess my -- could I take a bigger picture question? Could you help me out with how to think about the data business? Because one of the things with the data business in general is that content and conduit are separate. And so an application for (indiscernible) is free to ride over the data pipe and that's kind of different from the way cable is with content and conduit packaged together.

And then if I look in Japan with half the subs of 30 Mb or UGC doubling or quadrupling the bin with no price increase and both of these are flat rate prices. And I realize that there's a near-term advantage that your network competitors can provide this kind of bandwidth, but longer-term aren't you -- with all that bandwidth at a flat rate and the ability of a content or an application provider to ride over that bandwidth, aren't you relegating yourself to a low multiple dumb (ph) pipe type of business?

Well, unless you are also the principal aggregator of content. It's very important that these businesses develop the content side, the aggregator side at the same time that they expand their market share and data rates. Very important. So yes, I mean if you basically ignore the aggregator roll of content and services then you could very well be evolving into I Dumb Pipe. I think that's a very (indiscernible) question.

It's clear that while cable operators have the dominant video role they should be also developing the dominant aggregator role in terms of content in their footprint. So that whichever way the technology evolves they're in a position to deliver the content over whatever the technology is hopefully with the majority of it being over there Dumb Pipe instead of somebody else's Dumb Pipe.

That's right. I think what John says is exactly right. But what I'd point out is as we sit here today we are in a race for market share and you've got to remember that our business -- the Dumb Pipe, as you refer to it, in our case anyway were generating $45 a month ARPU's, 98 percent gross margins and over a quarter of a billion of cash flow this year. So that Dumb Pipe is a highly profitable pipe and (indiscernible) as they see, your ability to be an aggregate, control both the technology component and the content component as well as -- and maybe even more importantly use that pipe for other services like VoIP for example and the bundling of your other products is really the game. You can't look at data in my opinion on a stand-alone basis nor can you look at it in isolation of where you are in the curve.

I'd absolutely agree with that in the sense that what we're seeing in Japan is the real success of the rollout of high speed data is in the bundling and the customer service support that none of our competitors are in a position to provide. (multiple speakers) the content that's following behind that.

I don't disagree, I just think it's a near-term advantage and those 98 or 90 percent gross margins are going to attract people in. And then as far as aggregating content, okay, that would be good if there was some way to regulate the pipe. But (indiscernible), they can just ride over that -- these game guys, they'll be able to ride over it. So even if you have your package there may be something else out there that rides over (multiple speakers).

Nothing you can do about that. Those particular services are always going to suffer in comparison to what you can provide on your own in terms of quality of service for example in voice. But -- you have to look at it the other way. As that content becomes more robust and more appealing and as the applications become more interesting to consumers the requirement for bandwidth increases, the value that people place on bandwidth increases precisely because of what Miranda said, because content really isn't driving to a large degree a lot of subscription today. Though it might be in some cases, not in most. People are -- why do I need all this bandwidth?

The other thing, keep in mind that the aggregator has an end consumer relationship. Consumers would much prefer to buy a bundle of subscription services than to constantly then to buy 30, 40, 50 individual subscription services or in fact pay by the usage which every time we've ever tested it the public far prefers buying it in a package and the best guide to aggregate a package, i.e., buy these services wholesale and make them available retail, is the guy who's already the dominant aggregator.

So what you really want to do is you want to make deals with people who have something unique, a Sky (indiscernible) don't have anything unique. The cable guy incrementally can offer VoIP much more efficiently in a bundle than those guys can with quality of service and with customer service. As these services expand, the ones that are of a subscription nature, the cable operator should make a real effort. If you can't own them or own part of them you ought to be a wholesaler. Buy them wholesale, sell them retail. Be a marketer, be a distributor, be a bundler, be a packager. That's really the right answer. I mean, otherwise -- you're right -- but otherwise you have chaos in terms of content. And somebody has to be an aggregator.

So the question is who's the most likely guy to be that aggregator? Is it going to be some collection of content providers? If that was the case then there would never be an HBO or a Starz. There would be a consortium of Hollywood guys and you'd buy all your movies from them. So really it's a race condition. The reason there is an HBO is because HBO got started first, developed a customer base, and then had economic power to prevent the Hollywood guys from being able to go around them.

So you've got the same situation I think with respect to the development of broadband services and the cable operators should be very aggressive in seeking to become an aggregator and a wholesale purchaser retail provider and promoter of these services. So you could say the same thing about search engines. Why isn't Google with Dumb Pipe? It has to do with scale and their aggregation capabilities. Why isn't eBay just a -- Dumb Pipe? It's viral, it's scale efficient and they can aggregate.

So I don't think the answer to this is -- has by any means been determined. I mean, it's entirely possible that somebody can spend a lot of money and be an aggregator ahead in broadband -- ahead of the cable operator for instance. Our own company -- Liberty might have ambitions to do that in the IP space with let's say if Starz and HBO got together and offered an IT subscription service over the other people's Dumb Pipes. You'd pretty much have to go there if you wanted to subscribe to movies electronically because that's where the rights are. The question is that what's going to happen or is Brian Roberts going to have enough muscle to disintermediate those content providers and then provide that -- buy it wholesale and sell it retail on broadband to his customers.

That is really to a large degree how businesses form and structures change. Right at the moment in the markets that UGC's in and the market that J-COM is in I believe we have the best position to be the aggregator relative to other players. I can't get into detail because there's things probably that haven't been disclosed, but my belief is -- and keep in mind, and I think we understand this, that becomes a key factor going forward, scale and becoming the dominant aggregator. One of the reasons why Mike has gone off network is if he's stuck with a 40 percent footprint in Holland he can't be the dominant aggregator in Dutch speaking Europe. But if he can work together with the Telenet guys and if they both go off network they can basically dominate Dutch speaking Europe and be the most logical aggregator of content in their respective footprints.

So that's one reason why Telenet is that an attractive thing for us to have a stake in. Is to coordinate those kinds of efforts and a try and achieve that kind of scale. The benefit of achieving that scale is very large profitability on something with relatively low capital investment. If you don't achieve that of course you run the risk that somebody else does it and that erodes your marketplace leverage. The reason you don't want to be in the UK is because Rupert has been the most successful content aggregator and it's very difficult for anybody to aggregate content and go around Rupert if you're talking about video content. So it's one of those.

And I think the jury in the United States is very much out as to how will video over IP had into the marketplace and who will dominate that space. The good news for U.S. cable operators is by and large American DSL, the telco DSL does not have the bandwidth on a consistent basis in the near-term to be able to provide a competitive IP video service and therefore it's the cable company's Dumb Pipe as it were that is the best vehicle right now for anything that has a lot of bit rate in it. And therefore the cable guys have been asleep at the switch, and the major ones aren't, should be in the best position to create tiers of subscription services that are video rich or bit rate rich and be a more effective way of generating revenue.

The problem on the Internet is nobody has really figured out how to charge Internet customers for information or services. Nobody has made a big business of that. So far the charge hasn't been to the customer; the charge has been to the retailer or to the intermediary if you look at Expedia, who's paying the bills there? The airlines and the hotels. It's not the customer for using the service. So the Internet has been frankly very, very poor and ineffective at creating a subscription business for providing specific services to end customers.

So that model of how do you make a business, yes, it's wonderful, you can do it, but the model of how do you make money has not really been very successful on the Internet. It's been much more successful in the aggregators and in the subscription providers. And my bet is that that success will continue in that space and there will be a lot of neat things on the Internet which will not ultimately become businesses. That's I guess my view of it.

Okay, great. I appreciate it. Thank you.

You're welcome. Thank you, I think that wraps up today's call and we thank you all for your attention.

That does conclude today's teleconference. We'd like to thank everyone for their participation and wish everyone a good day. And now at this time you may disconnect.