Liberty Global Ltd (LBTYB) 2004 Q4 法說會逐字稿

Good day, everyone and welcome to the Liberty Media International conference call. Today's conference is being recorded but will not be replayed.

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 acceptable to the LMI. Please refer to the publicly filed documents of LMI, including the most recent form 10-K filed by LMI.

For additional information about LMI and of the risks and uncertainties related to LMI 's business, and now I would like to introduce LMI's Chairman, President and Chief Executive Officer, Mr. John Malone. Please go ahead, sir.

Thank you and good morning. Or it's afternoon in New York, I guess. In the room here we have Liz Markowski, our Senior VP and General Counsel, Bernie Dvorak, our Senior VP and Controller, Graham Hollis, Senior VP and Treasurer, Dave Leonard, Senior VP and President of Latin America. Leo Stigma, who does our financial reporting. On the phone we have Miranda Curtis, who runs Asia for us, and Mike Fries of course, who many of you heard this morning, and is the CEO of UGC, And in addition, Mike Erickson is here as our borrowed Investor Relations executive. And that really is the vast majority of the LMI staff.

It's been a very busy eight months for LMI. As you know, we were spun off from Liberty in an effort to disaggregate in order to consolidate. And I'll get into that in a little bit more, but just in the last eight months, we did of course, the spinoff. These are -- many of these are very intensive documentation driven transactions. The spinoff, a rights offering, a refinancing of the Japanese debt structure, we've monotized many nonstrategic assets, Telewest. Sky Latin America, Cable Vision in Argentina, we've rationalized by moving our Irish and Belgium investments into UGC. We've negotiated in are close now finally, to being able to merge our Chilean operation with UGC's. We've got a Japanese IPO that is going very well and is near completion, and of course we had a long negotiation of a merger agreement with UGC which of course, has been filed and is pending and we would hope would go to shareholder vote sometime mid-May to June timeframe.

So our small staff has been extremely busy, and I want to take this opportunity to thank everybody for their hard work since this is probably the last time I'll be able to address this group as the CEO, since the merger contemplates that Mike Fries will take over as CEO of the combined company to be named Liberty Global, when the merger is approved by the shareholders. And of course, UGC, as you've heard from Mike has been equally busy.

I can attest having said in the board meetings that Sarbanes-Oxley compliance alone was a huge undertaking which preoccupied many of the people at UGC for the better part of this year. Despite that, they were able to get a lot of things accomplished which I think you've -- you heard Mike describe. Clearly when we spun off LMI, the goal was to create the leading international broadband and programming company, with a strong balance sheet and good growth prospects. I think so far, the activities we've undertaken have put us in pretty good shape in that regard.

On a consolidated basis we're now the clear leader in the international field in terms of any measure that you want to apply. RGU's, cash flow, market cap, whatever. Before I get any deeper into this, I have to say that I'm very constrained on what I can say today, since we're in sort of double registration. Japan is of course, in the midst of finalizing an IPO, and we're in a merger filing with UGC, and therefore, disclosure has got to be extremely curtailed, with respect to anything that would require disclosure in those filings. That said, when we created LMI, we had the following goals.

We want to be the largest international MSO in the broadband arena. We want a goal of 20 percent plus operating cash flow growth on a sustainable basis in the business. We thought that optimum equity leverage would be somewhere around 5 times total and 4 times at the senior level. We wanted the strongest balance sheet we could have, in order to support a growth agenda going forward, both organic growth through the introduction of new services and products, and also acquisition growth. We wanted to be able to broaden out our growth into content to support our distribution assets, and win the platform battle with competitors. And of course, we wanted the best-of-class services, wherever we go. We want to make sure that whether it's video, data, telephony or interactivity, or content, that we would provide to our customers best-of-class service.

Those were our goals when we initiated this business. Clearly in terms of size, we've achieved that. We will now be consolidating as a result of the IPO and our arrangements, we'll be consolidating our financial results, both UGC and J-COM, whether we succeed in merging the companies or not. Every operation in the company is now fully funded and cash flow positive, and able to support internally a fairly aggressive growth strategy with its own internally generated funds.

Our overall leverage on a gross basis is now less than 4 times running rate cash flow, or operating income. They've got me calling it now. And from a strength of our -- of our credit ratings, our average debt cost across the consolidated company is now less than 3.7 percent per annum. And the only reason it's that high is because we've engaged in fairly substantial floating to fixed hedging activities to protect our interest costs for several years into the future.

In terms of fire power, consolidated cash plus liquid securities plus reinvolvers, we're approaching $6 billion of incremental fire power of which more than half pro forma will be cash -- is already cash. We have a pipeline of accretive acquisitions identified and our corporate development people are working on them. And of course, in the development of content to compliment distribution, at -- at JPC, which is our Japanese programming unit, we have a number of channels which we operate and are expanding. and we're launching, I believe 3 new channels this year.

UGC has acquired Zone vision which is a horizontal cut at global content distribution, as well as having under contract but not yet closed the [Canal Plus] acquisition, and in addition, they have their investment interest in SBS and are developing jointly developed new channels for their base distribution in Europe.

So overall, a very successful year. I might say with respect to growth targets or growth goals, the overall growth of -- of consolidated cash flow, operating cash flow from '03 to '04 was about 40 percent and pretty uniformly distributed across the company's major business units. Now, that was a combination of organic growth, currency movement, and acquisition. We don't believe that 40 percent is sustainable. If it was, the stock should be a lot higher than it is today.

However, we think a target in the 20 percent plus range is realistic on an extended basis, and would make this enterprise superior in terms of its growth posture to any of the domestic broadband operators. So I think it's kind of an interesting business proposition. And that's kind of where we sit.

We have everybody on the phone, but I'm going to remind questioners that the ability to answer forward looking questions or give guidance is extremely constrained, by virtue of the fact that we're in this double registration situation.

And with that I'll turn it over to the operator to take questions.

Thank you. The question and answer session will be conducted electronically. [OPERATOR INSTRUCTIONS] And our first question today will come from Tuna Amobi , Standard & Poor's

Mr. Malone, not knowing you as someone who's very dormant, and I know that you're very active, given the fact that you may soon relinquish your role in LMI, I was wondering if you could tell us what you see yourself increasingly involved in? Are you going to take a more active role at Liberty Media? And secondly, I wanted to get a sense, you talk about the fire power, which is obviously you know, now that you have positive free cash flow across the board for the first time if I'm not mistaken this is the first year, can you enlighten us, you know, on how you see your investments and where you see the -- the highest growth, you know coming from across -- you know, the three key businesses, you know, that you have and what you -- what your longer range targets are? You talk about 20 percent sustainable growth but it seems to me, that that's also implying that JPC will continue to remain at levels that seem like they're relatively, you know, low, so can you put some color on that? Thanks very much.

Sure. Well, I thought -- once I get relieved of my job I would go to Disneyland. Thank you, Michael. And -- no, I think I'll -- I'm certainly available to -- to be a little more active back on some of the Liberty assets -- once this job as CEO is completed.

Of course, I'm going to remain as Chairman of Liberty Global, and I expect to be quite active in that regard, but yes, I -- I would expect that I will be focused a little bit more back on some of the Liberty assets, and Liberty's having their call tomorrow, and that might be an appropriate time to raise that question.

With respect to where I see the best growth opportunities, I'm very bullish on -- on the bundling of VOIP with data and of course, also with digital video. I think that that theme has not been anywhere nearly driven to the extent that it will be. I think Mike gave some indication of the fact that they were quite surprised by how strong the initial offering has been, and I think as we get it more broadly available as -- as we fine tune the marketing approaches of -- of that combination and -- and as we particularly focus on its very high profit margins, we're going to want to put a lot of our energy into aggressively marketing the -- the voice telephony product, bundled with our various data offerings.

As we continue to try to be the product leader in data, by moving our data rates up in speed, and perhaps other supportive services, and so I think thematically, in terms of product offerings that has the most promise for the next few years of driving, the whole triple play composite really across our whole base. Everywhere -- from eastern Europe to Japan, VOIP because it introduces a very high profit margin incremental product, gives the companies a lot of pricing flexibility in the bundles. I think it also represents a lot of glue and reduction of churn, which will also be a -- a strong net positive for growth. So I think in terms of prior -- looking at -- taking that slice, in terms of acquisitions, I think that there are some very accretive small acquisitions that could be done in large number in the Japanese market, which would greatly support and enhance, what is already a pretty strong organic growth rate in Japan.

I think in eastern Europe the opportunity for accretive acquisitions and the development of a broader set of services is very attractive, and I think Mike spoke to that this morning. In western Europe which is -- you know, varies market to market quite a bit, but represents large acquisition opportunities that -- that will not be nearly as accretive because the owners have a much stronger sense of -- of value.

On the other hand still represent good bulk -- good scale and potentially, a good place to invest some of the capital that -- that we've amassed here, and so that's going to be a matter of opportunism.

And clearly in the content arena, unfortunately there aren't a lot of content businesses one can just buy. So in that arena it's going to be more, either buy or start small things and then try and grow them. And -- and that basically is not going to move the dial very much, in terms of the size of these numbers, but will turn out to be very important, and could be a very big long-term value creation proposition, as clearly was the case in the creation of Liberty in the U.S. so I guess that's my take on -- on long-term growth.

That's very helpful. Again, just a quick follow up if I may, and not too plan the Liberty call tomorrow is there anything whatsoever Mr. Malone, that you could comment on your talks with -- you know, News Core and their objectives, and how that --

I really don't want to get into Liberty matters today. That's for tomorrow.

Thanks very much.

You're welcome.

We'll move on to Paul [Kagan], Kagan Capital Management.

Hi, John.

Hi, Paul.

While we can't talk much about Japan, I understand that, are there other continents that you think there are opportunities in?

Let me start by saying that I can't talk about Japan, but the Japanese can talk about Japan, and for anybody who wants to know what's going on on the IPO, I think if they look at Bloomberg or REUTERS they'll get a pretty good update from the Japanese point of view. Other continents, we're pretty much on all continents, except North America, and there aren't too many penguins that are available for service, but we're in Australia, we're in Japan of course which is Asia, and -- and of course Europe heavily, and we're in Latin America, primarily Chile with some programming interests remaining in Argentina or pan-Latin America.

You know, right now I would say there are probably expansion opportunities in Asia. You know, obvious -- everybody talks about China being a great potential market. I think it's still too early, both from a content point of view and certainly from a capital investment point of view, to get too carried away in mainland China.

Taiwan has always seemed interesting and there may ultimately be some opportunity there. Thailand, ditto. You know, but right now I think our boat's pretty full with what's right in front of our nose, and usually the things that are right in front of your nose are easier to -- to do -- and much more predictable, paying less risk, so I would say until we exhaust you know, what I think are very interesting growth opportunities in Japan and Europe, we won't get too carried away turning troops loose elsewhere.

Why not North America?

Well, the problem in North America in -- in the U.S., the market's very consolidated, i.e. pricy, and it would be very difficult to get enough scale in the U.S. market, to think that in the long run you could generate good internal returns competing with people who have achieved much bigger scale, than you could start with. So I just have never been able to see sufficient scale opportunity to come back and try and be a long-term player in the U.S. market.

Canada of course has ownership restrictions that preclude foreign ownership, and I think one of the disciplines that we're going to have in this Company is we don't want to own things we don't -- we don't manage. So we really want to be able to control and consolidate the assets that we're in, -- and that precludes us from participation in certain markets where that's just not in the cards, like Russia perhaps -- or China. Or Canada. Or some of the other communistic or ex-communist states.

But at the same time the U.S. cable market is not at peak prices like it used to be.

It's pretty pricy as I look at it. I now -- you know, everything's relative, Paul, but when you look at growth rates, sustainable growth rates in the U.S., in the high single digits, you know, what multiple do you want to pay for that? That's A. B, can you own it in a form that you're after tax cash flow is -- is going to be attractive?

Keep in mind, one of the -- one of the issues here, one of the benefits is in LMI Liberty Global UGC, is we have pretty good tax posture relative to the typical U.S. cable operation that is getting into heavy taxes. So you got to look at after-tax free cash flow as your goal, and you've got to say, you know, what kind of a stream of after-tax cash flow can I generate and right at the moment, these markets in Japan and Europe just look more attractive to me personally in that respect, -- than markets in the U.S.

Okay. Thanks.

Yep.

And we'll move on to Robert Routh with Jefferies.

Yeah. Just a few quick questions. First, given the -- I know you can't speak too much about the J-COM situation, but given that Microsoft sold stock in that offering, and is willing to sell more stock, I'm just curious as to why LMI didn't try to buy out that block, or wasn't successful in acquiring that block, given that they're obviously interested in lowering their position there, and secondly, I'd wondering if you'd comment at all what you plan to do with your interest in Scandinavian Broadcasting, given that through [UCOMA], the 20 percent's been there for a while, and it hasn't really been talked about. Is that a strategic asset? Is that something that you'd look to ultimately acquire or divest at some point, or is it just going to sit there as a noncash flow generating --

Well, with respect to Microsoft, you know, we have tried on numerous occasions over the last year to acquire their stock in J-COM. I believe that their sale of a small amount of stock in the IPO was tactical. It was designed to get them under a certain percentage so that they didn't have to report it under the equity method and made it an investment. I will let -- if anybody on the call -- if Graham, perhaps can answer the motivation behind Microsoft, hope springs eternal and we hope that at some point, they'll be willing to sell the block to us. We've expressed our interest frequently.

When I called [Baumer] on the subject a few months ago. His comment was that they had -- they already had 40 billion of cash, what did they need cash for, they liked Japan. So you know, I certainly don't see them as an overhang on the stock. Let me put it that way.

With respect to SBS, Mike's on the call, so Mike why don't you take that one?

Sure. I think as everybody knows, our interest in SBS has its genesis in the hope for strategic relationships we might be able to develop with them, across the programming landscape. There is a fair amount of overlap in terms of their broadcasting assets both in Hungary, Romania, Scandinavia, and Holland most importantly.

I would say that over the last three to four months the interest has probably become more strategic and tactical than perhaps it was 6 months or 12 months ago for a number of reasons. One, SBS has made their own moves into the paid TV landscape both with respect to their acquisition of Canal Plus in Scandinavia, as well as their announcement that they intend to create channels of paid TV and digital channels in Holland, so I think we can take some credit for getting them engaged in that type of opportunity, and making them aware of the upside that exists for broadcasters in the paid TV environment.

So from that point of view it's perhaps a little more strategic and tactical for us than it might have been three or six months ago. I think in the end our options remain the same and there's three of them. We could either sell the stake and we think shelter pretty much all the tax associated with that. We can hold on to the stake and continue to pursue the strategic alliances and relationships that we're currently pursuing with them in Holland in particular, and hope that the stock continue to appreciate and perform or three, something else. And that something else would most likely have to be precipitated by others, and involve third parties and lots of moving pieces, and so I couldn't even speculate today on what they might be.

I think the bottom line is we will remain opportunistic. Opportunistic in the sense that we'll do what we think make it is most sense for us financially and strategically. Probably just see what happens and see how things unfold. The stock has had a nice run up in the mid-40s. It's still fairly valued, perhaps maybe a little undervalued, relative to broadcasters in Europe, but they seem to do all the right things, so we're pleased with the interest as we sit here today.

Great. Thank you very much.

And next we'll move on to Adam Schwartz, First Manhattan.

This question is for Dr. Malone. I was wondering how you in your role look at value or measure a value creation year over year throughout the different parts of the Company, and specifically, you know, relative to this year, how you look at the long-term and do you think in the long-term, the value creation opportunities are likely to be as plentiful or is it a harvest as they have been in the past for the Company?

Well, as I said, I don't think we're going to see a lot of 40 percent, you know now that we're getting fairly sizable, I don't think we're going to see a lot of 40 percent year-over-year operating cash flow years, but I think we're going to see a bunch of 20s and if we're -- if we're lucky, and do a good job in terms of acquisitions, we can see upper 20s in some of these businesses. So that's pretty darn good value creation in a world where you're borrowing your money at 3.7 percent. I mean, if the world was truly mathematical, our leverage should be about 8 to 1. And -- and then our equity should trade at about 15 times from a value creation point of view.

So I think this particular set of businesses, because of its capital intensity, its ability to launch new services, the inherent tax shelter nature of the short life of particularly of its customer premise equipment which is the big part of it's CapEx and the fact that it expenses its marketing costs, you know, to a large degree, has very attractive growth characteristics. It's not an accident that in the U.S. an awful lot of rich guys got there building cable companies, and I think this is a very similar parallel path. Now, the world has changed a lot, but on the other hand, the margins in cable, which when I started were around 50 percent in the video business, and came down, the margins in VOIP and data are -- you know, pick a number, 90 percent.

So you're dealing with much higher margin incremental businesses here with -- with what seems to be insatiable consumer demand. I know in Japan they're playing around with 100 megabit as their new flagship data service, and they're kind of existing flagship is 30 megabit , and there seems to be no end to the public's appetite -- for these kinds of new digital services.

Of course, in Japan we haven't talked about Japan much, but one of the things that's driving Japan right now, is the very rapid adoption of high definition television, which is driving the J-COM interest. So you know, I think J-COM is poised for very strong sustainable internal organic growth with some very attractive acquisition possibilities as it rolls up the industry in Japan.

And -- and you know, it's a little different in Europe because of the language differences from market to market, so you don't have sort of the clear runway ahead that you do in Japan, but on the other hand, -- then an opportunity since you know, whoever owns these businesses, you know, can't take advantage of Japan, European strategies, that Mike voiced earlier.

So how do I look at value creation? I think A, personally, most of my assets are U.S. dollar denominated, having a play in euros and yen is quite attractive to me personally, as a hedge on currency, and then I think that the growth prospects in this markets -- are very attractive and the fact that we have debt costs that are so cheap, means the leverage on the equity should be very attractive long-term. So you know, I do believe this is one of the better potential equity builders for me personally.

Thank you very much.

You're welcome.

As a reminder, please press star followed by the digit one to ask a question. Next we'll move on to Andrew [Dunlatch with Artemis] Advisors.

Good afternoon. A couple of quick questions. First, Dr. Malone is this then going to be your last Liberty call where we can ask you questions?

Last Liberty call?

Sorry, Liberty International.

No, it probably -- well it depends on Mike. He may invite me to come to these calls and if he's smart he won't.

You're definitely invited, John.

I'd like to know your view on the quadruple play, even though it's early to discuss it on how the cable either in Japan or in Europe might partner with wireless.

The second question is on Jupiter Broadcasting and what do you see happening there and lastly, if you could give us your view on, as you see in every continent now the telecom versus cable platform wars there seems to be two approaches to -- to who wins and who loses. One is everybody loses even though cable's got the low cost delivery, and the other is that cable wins and gets -- and gets the lion's share of the profits. So if you could comment on those three I'd be interested.

I've got them

Okay. Go ahead, Mike.

Okay. Well, the first one is reviews on the quadruple play

Well, I think wireless, you know and there's all kinds of wireless. If you mean cellular that's kind of a bundling strategy for most people and I think it's well worth exploring because the public has demonstrated they like the simplicity of -- of buying their communications services from one provider and I think that's something that our companies are exploring the opportunities. Probably not in an acquisition sense but more in -- in a bundling and joint marketing sense.

The other part of wireless, of course, is the kind of wireless that permits portability of your data and telephone service of your VOIP service, as well as your data service and you know, in that regard, UGC has moved ahead to get WiMax frequencies in a number of their markets, and is exploring business plans that would permit the deployment of WiMax as an enhancement of -- I would call it portability. Not necessarily mobility, but portability of data services which I think the consumers will really like. So that's an element there. What was the second question?

You said Jupiter broadcasting I think you meant Jupiter programming.

Yes. Japanese programming.

No, the strategy for JPC and Miranda is better to speak about -- I really want Miranda to talk about this.

Our goal up till now and our capability up till now has been to be in niche services that didn't break the bank because they didn't pay huge sums for their content and to try and build as -- as the business scales up, as -- as the multichannel distribution scales up, and to move up the food chain getting more -- in the more important sports programming, and more important movies, and stronger niche identification and perhaps into news, as time goes on and meanwhile, the big driver in JPC has been the home shopping business, which has been very robust and profitable and growing rapidly.

And so to a large degree, we've tried to get a broad set of services that we're involved in in the anticipation that -- that just as in the U.S., they start out having to get subsidized by affiliate fees fairly heavily, but ultimately will tap into advertising revenue streams, then merchandising revenue streams as -- as scale of growth. Miranda you want to speak to that?

Sure. Absolutely. We're very, very pleased with what JPC has established. They've established a strong basic platform. Most of the originals channels are profitable.

It is now the largest supplier of content not only to cable but to satellite and to broadband in Japan. And now it's the interesting inflection point of where we take it next, and I think the landscape has being transformed by the success of J-COM in rolling out digital through 2004, which is matched very much by the other larger cable operators in the market, just to give you an indication, J-COM went to effectively naught to 16 percent in 8 months. It took the U.S. 3 years to roll out digital that quickly. And churn in digital is extremely low. Less than 10 percent a year, and that's very much a function of the Japanese consumer appetite for high definition television, so high definition versions of the existing channels is obviously a major priority for this year.

We're seeing the success of shop channel, very stable, continuing to grow despite quite aggressive competition, so we're now exploring the -- you know, other transactional based services. We'll be launching a channel later in the year which is based on viewer participation, games, auctions, transactional services. This month we're rolling out commercial video on demand into a market that's not had pay per view.

Digital leisure that allows us to look at multiplexing some of our existing brands, so, as well as the building the core business, riding the growth of multichannel and, as John said, developing advertising, so I think we're pretty optimistic that there are significant additional avenues for growth, as well as some remaining opportunities for channel acquisition, and I think increasingly looking at partnering with domestic Japanese broadcasters for core production, and original production, and actually therefore inserting ourselves more into the terrestrial forecast establishment. So lots of work to do on JPC, but I think lots of upside for the future.

And your final question which was on platform wars between telecos and cable, I think it largely depends on -- on the individual situations. My guess is that -- that DSL based competition will -- will not ultimately be successful in diminishing cable's patina, that for the phone companies to be able to really duke it out, they're going to have to put fiber much closer to the home. And that's a very expensive proposition in some locations and not in others, so it will be very spotty in terms of where telecos can -- can get fiber. I think the right way to think about it is -- is telecos can overbuild cable, okay? But so could power companies, so could sort of anybody and in the U.S., we've had 20 years of people overbuilding cable.

And basically, it's never really been successful for the overbuilder, simply because they drive up costs, split revenues, and sometimes even split diminished revenues, and the experience has been most overbuilders have given up and sold out at deep discounts, before they've gotten very deep into it, and I'm sure Paul Kagan or somebody who's got a good history of the U.S. can go down a list of at least 20 overbuild attempts by various industries of the cable industry over the years. None of them have turned out to be successful.

I guess in the U.S., which I'm more familiar with really broadly speaking is that the U.S. phone companies will get tired of the P&L drag that a major overbuild would represent, and will go back to focusing more on their cellular businesses, which are profitable, and going to become more profitable as they consolidate.

But there will be places where -- where individual cable companies will feel the -- the stress of an overbuild, but I do believe that the cable technology is fully flexible, and can meet technologically, the challenge of even a full fiber overbuild.

If I might add a comment about the situation in Japan.

Sure.

I think that we're fairly comfortable now that J-COM has seen off the threat from the DSL operators. We thought we were going to take significant price reductions. We've been able to maintain our price, growth penetration, reduce churn and roll out our 30 megabit product very successfully.

There's a lot of noise in the Japanese market from the fiber to the home guys, who is are indeed acquiring a certain amount of market share, but not currently attempting to compete with us in any way in our markets, but we think the advantage of having the J-COM and the JPC positions, and having senior management in the Japanese companies who understand this side of the business, means that cable is very strongly positioned to resist the threat on the content side, and also to compete and withstand serious competition on the broadband and voice-over-IPs, so it's a very active market but one we think we're well positioned to do well in.

I think your comment, John, about things being situational is very, very appropriate. Because the U.S. market, the Japanese markets and European market, were all experiencing this sort of collision of industrial strategies, which I've talked about on my call with respect to platforms, but it does differ in each instance, and perhaps in Europe, the competition is in some respects a step or two ahead, because the DSL attackers or resellers or incumbents have slightly better copper networks to deal with, but what I can tell you is having seen the face of the enemy, I'm as bullish or as supportive of the cable story as I've ever been, primarily because when you look at the cost of fiber to the home, or upgrading to VDSL or ADSL two plus, compared to our ability to attack their voice business with a VOIP product that has a 15-month payback, is pretty compelling, and our ability to discount and bundle with an incumbent video base is pretty compelling.

One thing we've all learned at least in my 20 years in this business, the video business is not that easy to crack into, to John's point, and whether it's the RBOCs, or the IP TV, you know attackers in Europe, are going to find that the video business is difficult, you know, from a number of perspectives of both getting the consumers' attention, and providing a product that's compelling and packaging services, and things of that nature, so I'm not sure it's a zero sum game, in the sense that there's one winner and one loser.

I think the good news is, as we've experienced in Europe, is that competition grows the market. And you know, the rising tide is going to sort of float all boats and as our products innovate. As our networks expand as we bundle better, the market grows and consumers are far more willing to spend the money, which is exactly what we're all after, is getting more money out of every home, so I'm not sure that it is a zero sum game, but to the extent that it is, I think clearly in Europe like the U.S. cable's in the best position to win that long-term battle.

Clearly if cable can use its video scale to lock up or get favorable treatment on the content side, that becomes a pretty big economic barrier to the -- to protect the video business.

Meanwhile, if the fight is data and voice bundled, the resellers, you know, the resellers in some cases get very favorable line charges by regulation, but to the degree that they want to offer voice service essentially they're reselling against the guy that they're renting the circuits from, and no regulator is going to allow that to go for very long. So when it comes to DSL versus cable, I put my money on cable. If the -- if anybody goes and overbuilds completely, a cable operator then you've got a traditional overbuild, but the cable operator should still have big scale advantages, since A it's the incumbent and B, it's got more scale than just in that one market. It's another reason why you want diversification. You want to be big.

You know, it's the question of, you know, can Verizon put Comcast out of business by overbuilding them in one market? The answer is no. You know, Comcast can take them head on in that one market, and the loser is going to be Verizon. Because you won't even see it in the Comcast numbers. So one of the benefits of scale, is you can discourage this kind of initiative against you, because you can take it on, and it's not that threatening to you. And I'm sure we'll be tested.

Yeah, we are being tested. That's fair.

But we have to meet the challenge and we have to speed up the introduction of new services where we're being challenged so that, you know, think about services like video on demand, and how scale sensitive those businesses are.

Uh-huh.

So same thing with VOIP. Scale is critically important to average switch costs and all of that. If you've got scale it's very profitable. If you don't, it's really hard to justify putting the capital in. So you know, to the degree that -- that -- that our entities can be Snow White and the 7 Dwarves, and we're Snow White. We're much better off. And I think that's one of the rationales for consolidation.

As always, thanks for all your comments.

And we'll move on to Arthur Lewis with Lewis and Lewis Incorporated.

Dr. Malone, my question has already been answered and I wanted to wish you a happy birthday, and continue all the great things with broadband around the world. Thank you.

Thank you. It's tough getting old. They can't call me young Dr. Malone anymore.

Have a good year, Dr. Malone.

Thank you.

And next we'll hear from Ted Henderson with Stifel Nicholaus.

I just had a quick question. We've talked a lot about content and distribution, and obviously you have a great understanding of that. One of the apparent opportunities is the low RPUs on the video side throughout Europe, and understanding the language barriers, the unlikelihood of seeing JPC spring up in every single UnitedGlobalCom market. I do notice that you've done deals with open TV with interactivity,y which increases functionality as you migrate to digital? How do you view interactivity throughout Europe, and I know Miranda has launched some open TV in Japan. Is it a revenue driver, is it an experience driver that doesn't necessarily carry a lot of revenue upside to it, how are you viewing interactivity?

I'll give you a real quick and then let Mike talk to it. I think from my view, the first element of interactivity -- is interactive guides and the ability to better

Navigate.

Navigate, you know, and that's critically important. Then you add to that on demand services, which -- which given the cheapness of servers and the fiber network that Mike has in Europe, you know, he essentially he has got his whole base tied together and it's pretty easy for him to offer large server, you know VOD services in scale, which is a huge competitive advantage, and I think will turn out to be in Europe perhaps more important than incremental channels.

Okay.

That is the flexibility of seeing what you want to see when you want to see it. Will perhaps be more important than adding the 32nd channel in Holland.

Finally my observation would be when I came in the cable business in the U.S. we charged a dollar a channel. We had six channels and the only place we had customers was where people couldn't receive TV with an antenna.

So we had markets very much like the reception markets in Holland, you know, where they're basically utilities, and the prices are low, but everybody's subscribes, and nobody has really thought about it as paying for television. They're more paying for convenience, connectivity, and you have to go through a psychological transformation, to where they say oh yeah, television is really worth paying for, and these utility markets haven't gone through that yet. They will. I mean, the pattern around the world has been that people will, but it takes -- it's a process of education, and Mike is trying to jump start that in Holland with his digital mass market move.

Yeah, I mean, I think that's exactly right. There's a fair amount of inertia that characterizes customers in many of the western European markets we operate in. They're getting 30 channels and they're not paying much for it, and in some cases it's in their rent.

You have to keep in mind the starting point. The second thing things like an EPG, having a device for the first time on your television set, being able to navigate through basic channels, that in and of itself is going to be an experience changer for most if not all of our consumers, who don't even have any device in their home today, or the ability to navigate or scroll through channels, so the EPG as a form of interactivity if you will will be to some extent a change.

Our VOD piece of it is important, our VOD strategy doesn't look hugely dissimilar to the U.S. guide, although we'll probably layer it in over a longer period of time, and our revenue aspirations are conservative. I think your basic question though, is it a -- is it a TV enhancer or are revenue producer, my personal view is it's more of the latter than the former, but if the TV experience isn't exciting, if people aren't motivated to utilize a device, you'll never get, you know, whether it's VOD, or games, or other types of traffic and activity, so it's about getting folks to use it first and foremost, and appreciate it, and perhaps over time it's a -- it's a -- it's a revenue enhancer.

The other point I'd make, is in the States and in the UK, there's a fair amount of content providers behind the interactive strategy, we've got to do some work in some of our markets to get broadcasters and digital content providers motivated to program interactivity, and create stuff that's meaningful and useful for customers, but as we're in this paradigm shift between sort of an analog utility history into a digital future, you know the interactivity, you know, broadly speaking is going to be a very, very important part of the puzzle, but first I think and foremost, in terms of giving people a sense of what the digital experience can be and then over time perhaps a greater revenue producer.

I'll make the prediction that once digital is -- is pretty fully penetrated, the big breakthrough on interactivity is going to be advertising. It's going to bring advertising and merchandising revenue into the -- the niche networks, the nonbroadcast networks and it will turn out to be critical leverage between the cable distribution and the broadcast networks, the ability to provide interactivity as an element of advertising.

Right. And it becomes more valuable to the guys that are buying the advertising you the drill down deeper into just how many eyeballs are being delivered, and what type of eyeballs are being delivered and I assume that you've had some attractiveness with Open TV, because there's a lot of things that are kind of up in the air, whether or not they truly get any traction with the consumer, but certainly on the advertising side, it's a fact if you can provide more reliability data there's currency in that.

We used to have seminars at TCI, where we bring in the advertising community and we talk about the state of the technology and our ability to do these things. These were very heavily attended with a great deal of enthusiasm. The industry has kind of gotten some other priorities, like very high profit margin data in VOIP, but when the industry comes back to thinking about what it can do for the advertising community, in terms of real time interactivity, something like 30 percent of ads ask you to do something, but don't give you a way to do it.

Giving people the way to do it will reinvigorate the advertising model, and I firmly believe that. I know I've been too early on that subject, but I do believe it will ultimately be the reason why JPC for instance, is a terrific asset, because once advertising revenues start to flow into it, its economics will dramatically accelerate so that would be my thought on that.

Thank you very much.

And Alan Gould with Natexis will have our next question.

A question about this enhanced data product. When you're offering 30 megabits of throughput going up to 100 megabits, what kind of incremental revenue can you get out of it, what kind of incremental products are you establishing, and what are the incremental costs, and technologically how do you do this, do you have to allocate a lot more of your frequency to offer the high speed data products? To be able to offer 30 going to 100 megabits of service?

Yeah, I think it too a large degree, this is -- this is almost marketing as opposed to science. Will people actually use 100 megabits?, -- what terminal devices do they have that can speak at those speeds, what server can they go to that can speak at those speeds, so I think there's a little bit of windage in this stuff, and what we're really talking about is if fiber to the home in Japan can claim 100 megabits, well so can we.

We can demonstrate it and you can buy it and whether you can fully utilize it in any meaningful way, I think remains to be seen. The -- you know, an awful lot of -- of communications is peer to peer. If you're going to download a movie you don't need 100 megabits. Even in real time, you can get a terrific movie at about 4 megabits, so you know, a lot of people will buy the higher end service, and probably pay a premium for it.

So far the premiums have tended to be what, 15, 20 bucks between sort of the -- the average service and the top service?

Well, the real focus I think on the development of the 30 megabits has been but it helps to drive and maintain the customer base in the bundle. As John says we have to have 30 megabits to be competitive with DSL with FTDH, and the focus has been on maintaining rather than incremental revenue services.

I think the reality is that if you look at what people's average usage is people who subscribe to 30 megabits.

Doesn't use anything like it.

It's -- you know, everyone if they're on all the time doing everything they can think of, they're lucky to be able to use 5 megabits of capacity.

That's right.

That's what I mean, by saying a lot of this is sort of Tour de Force from a technology point of view, and very interesting in terms of generating image and revenue, but in terms of real pressure on the facilities, it's not as bad as people think.

I think the cost to, you know, rebuild our entire -- rebuild -- update our entire data network in Europe to [Euro Docs'] 2.0 which more than doubles our capacity, was $20 million and that's across 10 plus million homes, so it's not, and that will service for some period of time. It's money well spent.

The economics are compelling and if you can retain customers, keep them in that higher RPU product, promote the bundle more effectively. The return pays for itself with 98 percent gross margins, and very, very substantial OCF or operating cash flow margins on these products, it's very well spent so I don't think there's an economic challenge or a CapEx challenge in this particular product, to be too concerned about.

And as a follow up if the phone companies can offer 20 or 30 megabit DSL service can they offer competitive IP TV type product?

In Japan they're not licensed to support to offer the key product which is relay of high definition digital terrestrial signal, so that's a unique advantage for cable.

Yeah, I would say in Europe, most networks that are ADSL are yet to be or perhaps are just in the process of being upgraded to ADSL 2 plus. We think they probably peak at 20 meg, and obviously we don't. We've trialed 30 and 50 meg, and continue to ramp so we view it as a competitive advantage.

But yeah, the IPTV product if you see it working is, can be a reasonable video alternative. The challenge will be, you know, there's delays, I mean, I've read reports, I've seen it, it doesn't change channels quickly. Sometimes the quality is affected. If they start providing that on any kind of meaningful basis, it does not scale as well in the sense that you'll need to use a larger portions of your network for that product over time.

They've got to package it correctly. I mean, they're going to get a few customers, they don't have many today across Europe, and they've launched 15 different services in almost every major country in western Europe, they don't have many customers, we're not taking them lightly, but it's not easy in the sense that to reorient your marketing organization, your company, your focus, your branding, your products, I think we're going to have an easier time stealing phone customers, than they're going to have stealing video customers, if our recent experience is any indication.

I guess we have time for one more.

And our last question will come from David Gibson with Mackory Securities.

Thank you. Two quick questions. Firstly, why did you join the cable vision board and secondly related to that, do you believe there's an opportunity for a third satellite provider in the U.S. and how that makes good business sense longer term?

Well, of course, this isn't an LMI question but I joined the Cable Vision board because Chuck Dolan asked me to and he's been a friend for 40 years. And it seemed like -- like I might be helpful to him, in terms of settling things down for him.

Is there room for a third satellite provider in the U.S.? I think that is a tough question. I -- you know, initially I think when that project got started the goal was that high definition was going to come in relatively fast, and the existing satellite and cable distribution systems weren't going to be able to accommodate it in scale, and in time, and that that created a window of opportunity -- for Cable Vision's efforts in the area because they were going to launch with entirely new technology, MPEG-4 and you know, which gives them much greater channel capacity, a lower satellite cost. Those are the greater compression, and they'd be sort of all high definition with just a handful of standard definition channels, and that this would give them a timing to market advantage.

I believe that that window is -- is closing for them. They may still be able to squeak through it. They may find existence as a subset of one of the major two distributors distribution systems with that. I don't know. That's really a Cable Vision issue and I -- I really, you know, as a director I'm not -- not to talk about Cable Vision, what should or shouldn't do.

You asked me philosophically if -- let me put it this way. We were offered on a number of occasions an opportunity to participate in a third satellite competitor, and we declined to participate, because we didn't think that the risks were warranted by the potential returns. And that was, you know, that was last year, so I wouldn't do it with my money. Let me put it that way.

Thank you.

You're welcome. And thanks, everybody.

And that will conclude today's conference call. Thank you for your participation.