Virgin Media Inc. (VMED), one of the leading entertainment and communication service providers in the U.K, is planning to lease out its Wi-Fi mobile network, which are placed in the London Underground stations. We believe that renting out its network to other operators will act as a new revenue stream for the company in addition to the revenue opportunity from the existing Wi-Fi customers. Earlier, Virgin Media had won the contract to roll out Wi-Fi network in and around the city of London and in the process had outbid rivals BT Group Plc (BT) and Telefonica S.A. (TEF) owned O2. During the Olympic Games, commuters using laptops, mobiles and tablets in the Underground tunnel can access the internet for free. However, once the Olympics conclude and the free service expires, the company plans to rent out its Wi-Fi network to rival operators Vodafone Group (VOD), BT, O2, and TalkTalk. The company has initiated its bidding process under a wholesale agreement, which is expected to be launched in September.
Increase in adaptation of tablets and smartphones has led to an unprecedented demand of internet data, which in turn requires good connectivity. It is expected that popularity of Wi-Fi service in London could create a shortfall of network capacity. So the operators need to continuously invest in network expansion.
We believe leasing out its network will provide Virgin Media with the additional funding required for maintenance and further enhancement of its capacity. The company plans to launch the service in 80 Underground stations by July, which could go up to 120 by the year end, making London one of the most connected cities.
Furthermore, the proposed wholesale model could be a win-win situation for Virgin Media and the other bidding companies. Virgin Media can provide Wi-Fi accessibility to its customers, either free of cost or on a pay-as-you-go basis, while other companies can offer the service using their own brand. We believe that sharing the Underground Wi-Fi network will relieve the pressure off mobile networks. However, it might also increase competition resulting in reduction in the tariff for the service.
We are maintaining our long-term Neutral recommendation on Virgin Media Inc. Currently, Virgin Media Inc has a Zacks #3 Rank, implying a short-term hold rating on the stock.
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