$30bn Three-Way Cable Merger on the Cards in UK.

The long-expected consolidation of the UK's three major cable operators may at last be taking shape. According to reports in London's Observer Sunday newspaper, Cable & Wireless Communications Plc - the country's second biggest cable operator with homes passed at 3.9 million - is in talks with NTL Inc, the third largest player according to networks passed (3.5 million) about a deal that could create a new 13bn pounds ($20.3bn) industry heavyweight.

Neither NTL nor CWC will confirm the rumor, which has sparked speculation that the tie-up may force the UK's biggest cable operator Telewest, whose networks pass 4.2 million homes, to join a three-way deal that could create a local giant worth 19.5bn pounds ($30.2bn).

Such a player would dominate the UK cable market, but would find strong opposition from British Satellite Broadcasting Plc and British Telecommunications Plc, both of which would demand that regulators step-in to prevent the merger. Oftel, the telecom regulator, and the Independent Television Commission are already investigating claims from BSkyB that the cable practice of bundling telephony services with pay-TV is anti-competitive. BSkyB says that since consumers cannot ask the cable companies for either service separately, BSkyB cannot compete in the telephony arena. BT, the main player in the telephony space, is banned by regulation from becoming a broadcaster for the next couple of years and it could argue that bundling is also against its interests.

The crux of the investigation lies in discovering whether the cable companies truly have dominant status. As the three currently operate alone in their own geographic franchise, the joint consultation seeks to discover whether the cable operators work in the same market as suppliers of pay-TV via satellite or digital terrestrial, which are not restrained by geography. The logic is that if NTL (say) is not in the same marketplace as BSkyB, then it cannot exert undue influence on the market and thus not be anti-competitive. A merged, national cable operator, would almost certainly be forced to unbundle its TV and telephony services.

But that may not be crucial, as broadband internet access over cable (and thus IP telephony at some stage) are seen by many as markets where the real growth lies. NTL is already rolling out cable modem services to its customers, and CWC intends to do the same in the first quarter 2000. Here competition will lie primarily at first in BT, which will begin providing ADSL net access services in spring next year.

Cable & Wireless Plc is the majority shareholder in CWC with over 50% of shares. Microsoft Corp owns just under 30% of Telewest and 5% of NTL, and is believed by some to be a catalyst of the merger talks.