Reprogramming European cable: European cable companies are in dire financial straits. The reason? Not just debt but a strategy that has produced negative cash flows across the whole industry.(Illustration)(Industry Overview)

Europe's cable operators are undoubtedly suffering. After borrowing heavily in the mid-1990s to roll up small players and to upgrade digital systems intended to help them sell bundled services, they now find themselves counting losses rather than the profits they expected. The industry's "triple-play" bet--that customers would jump at the convenience of buying television, Internet, and telephony services from a single provider--hasn't yet paid off, for consumers have failed to summon enough interest to make it succeed.

Not surprisingly, attention has focused on the operators' enormous debts. NTL, a US company that is Europe's fourth-largest operator, declared bankruptcy in May 2002, exchanging $10.6 billion of debt for equity and wiping out its equity holders. United Pan-Europe Communications (UPC), Europe's third-largest operator, defaulted on its bond payments and was delisted from Euronext (the combined stock exchange of Belgium, France, and the Netherlands) when its debt exceeded its shareholder equity Ish, a German cable operator, has filed for Chapter 11. These are just a few of the many companies across Europe that are struggling. But merely restructuring this debt won't get them out of their predicament. The problem is strategy.

To survive, companies must create new business models for themselves quickly Under current conditions, many of them should consider dropping the monopoly-operator system (common in Europe and the United States), which excludes other service providers from their networks, and follow the lead of mobile-telecom operators and ISPs by sharing networks. Sharing, these companies have found, increases the size of the total market, lowers the costs of the operators, improves their use of capital, and spreads risk. It could do the same for cable operators.

During the dot-com boom, European cable companies were far from alone in believing that consumers would quickly adopt digital services and welcome the convenience of the triple play. But this wasn't their only illusion. They also thought that capital spending would decline swiftly once the networks were upgraded and that service and installation costs would remain stable. The result, they supposed, would be rapidly expanding operating margins offsetting the debt incurred both to fund the upgrades and to fuel the consolidation inspired by the pursuit of economies of scale.

Faith in the triple play's potential kept cable operators investing even as capital expenditures and the associated debt for network upgrades, new set-top boxes, IT systems, and digital products (from premium programs and television shopping to interactive games) rose beyond anyone's expectations. Yet a cash flow analysis reveals how little promise the triple-play strategy has in today's market conditions.

Current realities

Cable operators now serve 60 million customers in Europe and generate more than [euro]10 billion ($9.84 billion) in annual revenues. But most of the major operators have a negative cash flow-a state of affairs that wouldn't end even if all debt and spending on network …