O2-Virgin Media boss faces biggest battle of his career
Virgin Media boss Lutz Schuler is getting used to winning. Downloads on his fibre broadband network hit a record high on March 31 as gamers feasted on the latest update to Call of Duty: Warzone, the first-person shooter played by 80m people.
Such demand came just days before he survived two skirmishes of his own.
In early April, Schuler emerged victorious from a tussle with O2 chief Mark Evans to become the leader of Virgin Media and the mobile network following their £31bn mega merger. A second triumph followed last week, when the competition watchdog provisionally backed the deal, batting away concerns that it would affect service quality and increase prices.
But after winning these early battles, the towering German is now preparing for a longer war.
Integrating the two companies will mean juggling job cuts and technical challenges while launching new mobile, TV and broadband bundles to compete with BT.
Schuler only needs to look back 10 years to find a cautionary tale.
The merger of Orange UK and T-Mobile to create the network Everything Everywhere sapped staff morale as they grappled with clashing systems and duplicated teams a year after the deal was announced. Despite slashing more than 2,500 jobs, boss Tom Alexander eventually made way for Orange executive Olaf Swantee after customers tumbled and profits slipped.
Swantee accelerated the restructure, rebranding the network to EE and paring back the mobile mast estate before selling the network to BT for £12.5bn in 2016.
Virgin Media and O2’s respective owners Liberty Global and Telefonica may have had the Orange-T-Mobile tie-up in the back of their mind when they handed Schluer his promotion. The 53-year-old finds himself on familiar ground once again after overseeing the merger of Hansenet with Telefonica’s German unit a decade ago.
Schuler also played a part in Liberty Global’s €3.2bn swoop on German cable operator KabelBW in 2011 ahead of its integration with UnityMedia, where he was chief executive.
By the time Liberty offloaded UnityMedia and three smaller eastern European companies to Vodafone for €18.4bn in 2018, he had increased revenues by 60pc.
Repeating the same trick may prove difficult in the UK market, where BT is still struggling for revenue growth five years after its tie-up with EE.
Since joining Virgin Media three years ago, Schuler has made strides with “fixed-mobile convergence” – industry jargon for blended home broadband and mobile services .
The proportion of cable customers also signing up for mobile subscriptions rose from 19.5pc to 24.3pc between 2018 and 2020, the period in which he joined Virgin Media and was promoted to the top job.
While the customer total increased by 102,000 last year, revenue slipped 1pc to £5.1bn.
Telefonica and Liberty Global – the US investment fund controlled by billionaire “cable cowboy” John Malone – believe a significant sales boost will result as Schuler makes use of O2, the UK’s largest mobile network.
Reaching that point will take a hefty reshaping of both companies. As part of the deal, Telefonica will pocket £5.7bn and a £2.5bn “equalising payment” from Liberty, which will help tackle its hefty debt pile. Liberty, meanwhile, will receive a £1.4bn windfall after carving out Virgin Media’s Irish arm.
After all is said and done, the joint venture will have £6bn in new debt.
Schuler must work out how best to fold Virgin Media’s 5.3m broadband, TV and mobile users into O2’s customer base to make savings worth £6bn.
Job losses are inevitable, although no exact figure has emerged. Telefonica and Liberty claim 4,000 positions will be created following the tie-up, alongside a £10bn investment in the UK network.
James Barford of Enders Analysis says £180m a year would be saved by shifting Virgin Mobile’s network to O2, despite a recent deal for Vodafone to underpin the service. He believes about £100m in tax benefits are there for the taking by “netting O2’s profits against accumulated losses at Virgin Media”.
Further savings, meanwhile, could be found by allowing O2 to use more of Virgin Media’s “backhaul” – the lines leased by mobile operators to support their networks.
While there will be challenges, Barford thinks the task confronting Schuler is not as daunting as merging two mobile operators.
“Switching [Virgin Mobile’s network] and backhaul supply is complicated but routine work for a telco,” he adds. “Merging customer service and sales is complicated and a big job, but the extent to which they will merge these is unclear. They can keep them fairly separate indefinitely.”
Part of the test will be how quickly Schuler can cement the two businesses while bearing down on BT as it upgrades the nation to faster full-fibre broadband than Virgin’s cable network.
Sky was reportedly in talks with Liberty Global two years ago over investing in – and becoming a customer of – a new full-fibre network that would stiffen the competition with BT’s broadband builder Openreach.
Liberty Global boss Mike Fries told Deutsche Bank’s media conference earlier this year that Virgin Media would share broadband infrastructure where it made sense to do so.
“Can we do it in a way that we think drives great value for us?” he added. “If not, we wont. But I think we can, so I am excited about it.”
It followed comments in October when Fries said Liberty was looking at building a “robust network” in the UK, “potentially with other partners… creating some sort of wholesale arrangements”.
With Dana Strong – the former Virgin Media executive and friend of Fries – becoming the boss of Sky, the prospect of wholesale deal between the two companies has never felt closer.
However, improving Virgin Media’s customer service may be among the more urgent priorities for Schuler.
While the rate of customers cancelling their subscriptions, known as churn, may have hit record lows last year, research by the regulator Ofcom found that 85pc of customers were satisfied with Virgin Media service, compared with 93pc to O2.
Legacy systems have dogged previous attempts by the cable provider to shore up its position more quickly, but access to O2’s slicker customer service platforms could speed up the process.
Analysts at Assembly claim operators providing fixed mobile convergence have reduced churn by close to a third.
Greater attention must also be given to the fickle habits of TV viewers if he is to prevent subscribers ebbing away. Virgin’s TV Go app could secure its place as a “super aggregator” of streaming platforms, but only if it starts carrying services such as Netflix, Amazon Prime and Disney+, and allows viewers to pick services more flexibly.
Schuler will need to move quickly if he is to protect the legacy he built in his home nation.
It may take a bumper stock market flotation of the joint venture to discover whether he has been truly successful in creating value, while transforming Virgin Media and O2 into a BT battering ram.
In the meantime, Schuler must save this breath for the months ahead: the biggest battle of his career has only just begun.
