TalkTalk: mass appeal

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Talk is cheap, but content costs. This is the new mantra for UK telecoms companies. While BT Group and BSkyB want to offer football and Game of Thrones, TalkTalk has staked out the low end of the broadband market. This defensive strategy may help profits rise in the short term, but it will not enhance the value of TalkTalk’s network.

TalkTalk aims to serve mass-market customers by subsidising set-top boxes used to receive all free-to-air television in the UK: nothing new. It believes it can profitably expand its business this way. Most important, it can follow its competitors (BT, BSkyB and Liberty Global’s Virgin) on any price increases.

That should work well. UK consumers are a bigger chunk of TalkTalk’s business than they are at any of its rivals. So any price increases in the UK market should quickly flow through to TalkTalk’s profits. JPMorgan thinks that every £1 increase in charges would lead, broadly, to a 25 per cent jump over March 2015 estimated pre-tax profits. Yet so far, three price increases since January 2013 have done little to boost average customer revenue, according to Berenberg.

TalkTalk’s best product offerings are basic broadband and TV. But otherwise it cannot compete – it does not offer any differentiated premium content in a crowded UK market for fixed-line broadband. At some point, TalkTalk holders may wish to walk. Could a mobile operator lacking its own network, such as Vodafone, have an interest in buying it? No. TalkTalk really does not offer much of an independent network. Nor can it afford to buy content given that it is expected to pay out more than two-thirds of its free cash flow, after capital spending, on dividends in the next two years.

Cheap is cheap. A low-end strategy may recapture some previously lost profits in the meantime. But without content, that strategy is all talk.

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