10-K 1 d10k.htm FORM 10-K Form 10-K
Table of Contents

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 10-K

 

þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2010

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number 000-51360

LOGO

Liberty Global, Inc.

(Exact name of Registrant as specified in its charter)

 

State of Delaware   20-2197030

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

12300 Liberty Boulevard

Englewood, Colorado

  80112
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code:

(303) 220-6600

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

 

Name of Each Exchange on Which Registered

Series A Common Stock, par value $0.01 per share

  NASDAQ Global Select Market

Series B Common Stock, par value $0.01 per share

  NASDAQ Global Select Market

Series C Common Stock, par value $0.01 per share

  NASDAQ Global Select Market

Securities registered pursuant to Section 12(g) of the Act:

none

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  þ        No  ¨

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨        No  þ

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ        No  ¨

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months.    Yes  þ        No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer, accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Check one:

 

Large Accelerated Filer  þ    Accelerated Filer  ¨    Non-Accelerated Filer  ¨    Smaller Reporting Company  ¨

Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Exchange Act. Yes ¨ No þ

State the aggregate market value of the voting and non-voting common equity held by non-affiliates, computed by reference to the price at which the common equity was last sold, or the average bid and ask price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter: $6.1 billion.

The number of outstanding shares of Liberty Global, Inc.’s common stock as of February 17, 2011 was:

119,282,098 shares of Series A common stock;

10,242,728 shares of Series B common stock; and

112,873,907 shares of Series C common stock.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive proxy statement for the Registrant’s 2011 Annual Meeting of Stockholders are incorporated by reference in Part III of this Form 10-K.

 

 

 


Table of Contents

LIBERTY GLOBAL, INC.

2010 ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS

 

          Page  
   PART I   

Item 1.

   Business      I-1   

Item 1A.

   Risk Factors      I-44   

Item 1B.

   Unresolved Staff Comments      I-53   

Item 2.

   Properties      I-53   

Item 3.

   Legal Proceedings      I-54   
   PART II   

Item 5.

   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities      II-1   

Item 6.

   Selected Financial Data      II-4   

Item 7.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      II-5   

Item 7A.

   Quantitative and Qualitative Disclosures About Market Risk      II-55   

Item 8.

   Financial Statements and Supplementary Data      II-61   

Item 9.

   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure      II-61   

Item 9A.

   Controls and Procedures      II-61   

Item 9B.

   Other Information      II-61   
   PART III   

Item 10.

   Directors, Executive Officers and Corporate Governance      III-1   

Item 11.

   Executive Compensation      III-1   

Item 12.

   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters      III-1   

Item 13.

   Certain Relationships and Related Transactions, and Director Independence      III-1   

Item 14.

   Principal Accountant Fees and Services      III-1   
   PART IV   

Item 15.

   Exhibits and Financial Statement Schedules      IV-1   


Table of Contents

PART I

 

Item 1. BUSINESS

General Development of Business

Liberty Global, Inc. (LGI) is an international provider of video, broadband internet and telephony services, with consolidated broadband communications and/or direct-to-home satellite (DTH) operations at December 31, 2010, serving 17.6 million customers across 14 countries, primarily in Europe, Chile and Australia. Our European and Chilean operations are conducted through our 99.6%-owned subsidiary, Liberty Global Europe Holding BV (Liberty Global Europe). Through Liberty Global Europe’s wholly-owned subsidiary, UPC Holding BV (UPC Holding), we provide video, broadband internet and telephony services in nine European countries and in Chile. The European broadband communications and DTH operations of UPC Holding and the broadband communications operations in Germany of Unitymedia GmbH (Unitymedia), another wholly-owned subsidiary of Liberty Global Europe, are collectively referred to as the UPC Broadband Division. UPC Holding’s broadband communications operations in Chile are provided through its 80%-owned subsidiary, VTR Global Com SA (VTR). Through Liberty Global Europe’s 50.2%-owned subsidiary, Telenet Group Holding NV (Telenet), a publicly-listed Belgian company, we provide broadband communications services in Belgium. Through our 54.2%-owned subsidiary, Austar United Communications Limited (Austar), a publicly-listed Australian company, we provide DTH services in Australia. Our operations also include (1) consolidated broadband communications operations in Puerto Rico and (2) consolidated interests in certain programming businesses in Europe and Argentina. Our consolidated programming interests in Europe are primarily held through Chellomedia BV (Chellomedia), another wholly-owned subsidiary of Liberty Global Europe that also owns or manages investments in various other businesses, primarily in Europe. Certain of Chellomedia’s subsidiaries and affiliates provide programming services to certain of our broadband communications operations, primarily in Europe.

In the following text, the terms “we”, “our”, “our company”, and “us” may refer, as the context requires, to LGI or collectively to LGI and its predecessors and subsidiaries.

Unless otherwise indicated, convenience translations into United States (U.S.) dollars are calculated as of December 31, 2010, and operational data, including subscriber statistics and ownership percentages, are as of December 31, 2010.

Recent Developments

Acquisitions

Unitymedia. On January 28, 2010, Unitymedia, formerly UPC Germany GmbH, purchased from Unity Media S.C.A. for €2,006.0 million ($2,803.0 million at the transaction date) in cash, all of the issued and outstanding capital stock of an entity (Old Unitymedia) that provides broadband communications services in Germany (the Unitymedia Acquisition). The cash purchase price, together with Old Unitymedia’s net debt at January 28, 2010 (aggregate principal amount of debt and capital lease obligations outstanding less cash and cash equivalents) of €2,091.6 million ($2,922.0 million at the transaction date), resulted in total consideration of €4,097.2 million ($5,725.0 million at the transaction date), before direct acquisition costs. On September 16, 2010, we merged Old Unitymedia with Unitymedia and Unitymedia became the surviving corporation. Unitymedia is the second largest cable television provider in Germany and the largest in the German federal states of North Rhine-Westphalia and Hesse based on the number of video cable subscribers served.

Aster. On December 6, 2010, one of our subsidiaries entered into an agreement to acquire 100% of the outstanding equity of Aster Sp. z.o.o. (Aster) for an aggregate purchase price of PLN 870 million ($294 million). Such cash purchase price, together with Aster’s adjusted net debt at December 31, 2010, of approximately PLN 1,560 million ($527 million) results in total consideration of approximately PLN 2,430 million ($821 million), before direct acquisition costs. The transaction is subject to regulatory approval by the Polish competition authorities and is expected to close in the first half of 2011. Aster is one of the leading providers of broadband communications services in Poland.

 

I-1


Table of Contents

For additional information on the Unitymedia Acquisition, including related financings, see notes 4 and 10 to our consolidated financial statements included in Part II of this report. In addition, during 2010, we completed various other smaller acquisitions in the normal course of business.

Dispositions

J:COM. On February 18, 2010, we sold all of our ownership interests in three of our subsidiaries (the J:COM Disposal Group) that, directly or indirectly through LGI/Sumisho Super Media LP (Super Media) and certain trust arrangements, held our ownership interests in Jupiter Telecommunications Co. Ltd. (J:COM). In connection with the sale of the J:COM Disposal Group, we retained the right to receive the final 2009 dividend of ¥490 ($5.43 at the applicable rate) per share attributable to our interest in J:COM. We received such dividend in March 2010. Including both the proceeds received upon the sale and the dividend, we realized gross proceeds of approximately ¥362.9 billion ($4,013.7 million at the applicable rate). The net proceeds were used in part to repay in full the ¥75 billion ($831.8 million at the applicable rate) senior secured credit facility of our wholly-owned subsidiary, LGJ Holdings LLC, and to repay notes issued in connection with the purchase of the minority interests in one of the subsidiaries sold. Prior to the closing date, Sumitomo Corporation’s 41.3% interest in Super Media was redeemed for the J:COM shares attributable to such interest.

On February 16, 2010, Austar sold to NBN Co Limited (NBN Co), a statutory company incorporated by the Australia Government to own and operate a national broadband network, a wholly-owned subsidiary whose only assets were certain spectrum licenses and a third-party receivable of AUD 2.7 million ($2.8 million) (the Spectrum Sale). Austar received total sales consideration of AUD 119.4 million ($122.1 million), consisting of cash consideration of AUD 57.4 million ($58.7 million) for the share capital and a cash payment to Austar of AUD 62.0 million ($63.4 million) representing the repayment of the sold subsidiary’s intercompany debt.

For additional information on the foregoing dispositions, see notes 5 and 21 to our consolidated financial statements included in Part II of this report.

Financings

UPCB Finance Senior Secured Notes. UPCB Finance Limited (UPCB Finance) is a special purpose financing company created for the primary purpose of issuing senior notes and owned 100% by a charitable trust. On January 20, 2010, UPCB Finance issued €500.0 million ($668.3 million) principal amount of 7.625% senior secured notes (the UPCB Finance Senior Secured Notes) at an original issue discount of 0.862%, resulting in cash proceeds before commissions and fees of €495.7 million ($699.7 million at the transaction date). UPCB Finance used the proceeds from the UPCB Finance Senior Secured Notes and available cash to fund a new additional facility (Facility V) under the UPC Broadband Holding Bank Facility (described below), with UPC Financing Partnership (UPC Financing), a wholly-owned subsidiary of UPC Holding, as the borrower. The proceeds from Facility V were used to reduce outstanding amounts under Facilities M and Q of the UPC Broadband Holding Bank Facility through (1) the purchase of €152.7 million ($215.6 million at the transaction date) of loans under Facility M and (2) the repayment of €347.3 million ($490.2 million at the transaction date) of borrowings under Facility Q.

UPCB Finance is dependent on payments from UPC Financing under Facility V in order to service its payment obligations under the UPCB Finance Senior Secured Notes. Although UPC Financing has no equity or voting interest in UPCB Finance, the Facility V loan creates a variable interest in UPCB Finance for which UPC Financing is the primary beneficiary. As such, UPC Financing and its parent entities, including LGI, are required to consolidate UPCB Finance. UPCB Finance, as a lender under the UPC Broadband Holding Bank Facility, is treated the same as the other lenders under the UPC Broadband Holding Bank Facility, with benefits, rights and protections that are similar to those benefits, rights and protections afforded to the other lenders.

UPC Broadband Holding Bank Facility Refinancing Transactions. The UPC Broadband Holding Bank Facility is the senior secured credit facility of UPC Broadband Holding BV (UPC Broadband Holding), a wholly-owned subsidiary of UPC Holding. During 2010, pursuant to various additional facility accession agreements, new

 

I-2


Table of Contents

Facilities W and X were executed under the UPC Broadband Holding Bank Facility and commitments under existing Facilities R, S and T were increased. Facility W is a redrawable term loan facility and Facility X is a non-redrawable term loan facility.

In connection with the completion of these transactions, certain of the lenders under the existing Facilities M, N and P novated their commitments to a subsidiary of UPC Broadband Holding, and entered into one or more of Facilities R, S, T, W or X. As a result, total commitments of (1) €218.1 million ($291.5 million) under Facility M maturing on December 31, 2014, were rolled into Facility W maturing on March 31, 2015, (2) $1,042.8 million under Facility N maturing on December 31, 2014, were rolled into Facility X maturing on December 31, 2017, and (3) $322.9 million under Facility P maturing on September 2, 2013, were rolled into Facilities R, S, T and W maturing from March 31, 2015 to December 31, 2016. In addition, in July 2010, Facility W was increased by an aggregate principal amount of €25.0 million ($33.4 million). Among other matters, the completion of the foregoing transactions resulted in the extension of the maturity dates of a significant portion of the debt outstanding under the UPC Broadband Holding Bank Facility.

Prior to the redemption of the 2014 Senior Notes (as defined below) in August 2010, certain Facilities of the UPC Broadband Holding Bank Facility would have matured on or before October 17, 2013, if, in respect of Facilities S, T, U, W and X, the 2014 Senior Notes had an outstanding balance of €250.0 million ($334.1 million) or more on such maturity date or, in respect of Facilities M, N, Q and R, the 2014 Senior Notes had not been repaid, refinanced or redeemed prior to such maturity date. With the refinancing or redemption of the 2014 Senior Notes, as described below, such earlier maturity dates no longer apply.

UPC Holding Senior Notes. On August 13, 2010, UPC Holding issued €640.0 million ($855.4 million) aggregate principal amount of 8.375% senior notes due August 2020 (the 8.375% Senior Notes), resulting in net cash proceeds after fees of €627.2 million ($818.7 million at the transaction date). Concurrently with the offering of the 8.375% Senior Notes, holders of UPC Holding’s (1) €384.6 million ($514.0 million) aggregate principal amount of 7.75% Senior Notes due 2014 (the 7.75% Senior Notes) and (2) €230.9 million ($308.6 million) aggregate principal amount of 8.625% Senior Notes due 2014 (the 8.625% Senior Notes and together with the 7.75% Senior Notes, the 2014 Senior Notes) were invited, subject to certain offering restrictions, to tender their 7.75% Senior Notes and 8.625% Senior Notes to UPC Holding (the Tender Offers). A total of €205.5 million ($274.7 million) aggregate principal amount of the 7.75% Senior Notes and €101.3 million ($135.4 million) aggregate principal amount of the 8.625% Senior Notes were tendered. The proceeds of the issuance of the 8.375% Senior Notes were used to (1) purchase the 2014 Senior Notes tendered pursuant to the Tender Offers, (2) redeem and discharge the 2014 Senior Notes not tendered in the Tender Offers (the Post-Closing Redemption) and (3) pay fees and expenses incurred in connection with the offering of the 8.375% Senior Notes and the Tender Offers. The Post-Closing Redemption was completed on (1) August 20, 2010, for the 7.75% Senior Notes and (2) September 13, 2010, for the 8.625% Senior Notes.

At any time prior to August 15, 2015, UPC Holding may redeem some or all of the Senior 8.375% Notes by paying a “make-whole” premium, which is the present value of all remaining scheduled interest payments until August 15, 2015, using the discount rate (as specified in the indenture) as of the redemption date, plus 50 basis points. On and after August 15, 2015, UPC Holding may redeem some or all of the 8.375% Senior Notes at specified redemption prices (expressed as a percentage of the principal amount), plus accrued and unpaid interest and additional amounts, if any, to the applicable redemption date.

UPCB Finance II and UPCB Finance III Senior Secured Notes. UPCB Finance II Limited (UPCB Finance II) and UPCB Finance III Limited (UPCB Finance III) are each incorporated under the laws of the Cayman Islands, as special purpose financing companies, for the primary purpose of facilitating the offering of their respective senior notes and each is owned 100% by a charitable trust. On January 31, 2011, UPCB Finance II issued €750.0 million ($1,002.4 million) principal amount of 6.375% senior secured notes (the UPCB Finance II Senior Secured Notes), at par. On February 16, 2011, UPCB Finance III issued $1.0 billion principal amount of 6.625% senior secured notes (the UPCB Financial III Senior Secured Notes and together with the UPCB Finance II Senior Secured Notes, the New UPCB Notes), at par. The New UPCB Notes mature on July 1, 2020.

 

I-3


Table of Contents

UPCB Finance II and UPCB Finance III used the proceeds from the UPCB Finance II Senior Secured Notes and the UPCB Finance III Senior Secured Notes to fund new additional facilities (Facility Y and Facility Z, respectively) under the UPC Broadband Holding Bank Facility, with UPC Financing as the borrower in each case. The proceeds from Facility Y were used to prepay outstanding amounts under Facilities M and U of the UPC Broadband Holding Bank Facility. The proceeds from Facility Z were used to prepay in full Facility P of the UPC Broadband Holding Bank Facility and to prepay $811.4 million under Facility T of the UPC Broadband Holding Bank Facility. UPCB Finance II and UPCB Finance III are dependent on payments from UPC Financing under Facility Y and Facility Z in order to service their respective payment obligations under the New UPCB Notes. Although UPC Financing has no equity or voting interest in either UPCB Finance II or UPCB Finance III, the Facility Y and Facility Z loans create variable interests in UPCB Finance II and UPCB Finance III for which UPC Financing is the primary beneficiary. As such, UPC Financing and its parent entities, including LGI, are required to consolidate UPCB Finance II and UPCB Finance III. UPCB Finance II and UPCB Finance III, as lenders under the UPC Broadband Holding Bank Facility, are treated the same as the other lenders under the UPC Broadband Holding Bank Facility, with benefits, rights and protections that are similar to those benefits, rights and protections afforded to the other lenders.

Telenet Credit Facility. On October 4, 2010, Telenet NV, a wholly-owned subsidiary of Telenet, entered into seven new additional facility accession agreements (the Additional Facility G, H, I, J, K, L1 and L2 Accession Agreements, together the Additional Facility Accession Agreements) under Telenet NV’s senior secured bank facility, originally dated August 1, 2007, as amended (the Telenet Credit Facility). Pursuant to the Additional Facility Accession Agreements, certain existing lenders under Facilities A, B1, B2A, B2B, C, D, E1, E2 and F rolled substantially all of their existing commitments under the Telenet Credit Facility into new term loan Facilities G, H, I, J, K, L1 and L2. This process was completed on October 12, 2010.

In connection with the Additional Facility Accession Agreements, Telenet NV entered into a supplemental agreement, dated October 4, 2010 (the Supplemental Agreement), amending the Telenet Credit Facility. The Supplemental Agreement provides that no new additional facility may be executed under the Telenet Credit Facility unless either (1) the average maturity date of the additional facility (taking into account any scheduled amortization and any voluntary or mandatory cancellation which is anticipated when the additional facility is arranged) is no earlier than July 31, 2017 or (2) after giving effect to the utilization in full of such additional facility, the ratio of Net Total Debt to Consolidated Annualized EBITDA (as defined in the Telenet Facility Agreement) would not be greater than 4:1.

Telenet Finance Senior Secured Notes. Telenet Finance Luxembourg S.C.A. (Telenet Finance) is a special purpose financing company created for the primary purpose of issuing senior notes and owned 99.9% by a Netherlands foundation and 0.01% by a Luxembourg private limited liability company as general partner. On November 3, 2010, Telenet Finance issued €500.0 million ($668.3 million) principal amount of 6.375% senior secured notes (the Telenet Finance Senior Notes) due November 15, 2020. Telenet Finance used the proceeds from the Telenet Finance Senior Notes to fund a new additional facility (Telenet Facility M) under the Telenet Credit Facility, with Telenet International Finance S.a.r.l. (Telenet International), a wholly-owned subsidiary of Telenet NV, as the borrower. Telenet International used €201.7 million ($269.6 million) of the proceeds from Telenet Facility M to reduce outstanding amounts under Facilities H, I and L2 of the Telenet Credit Facility, and to service certain payments to Telenet Finance under agreements related to Telenet Facility M and the Telenet Finance Senior Notes. The remainder of the proceeds from Telenet Facility M will be used for the general corporate purposes of Telenet.

Telenet Finance Luxembourg II S.A. (Telenet Finance II) is a special purpose financing company created for the primary purpose of issuing senior notes and is owned by a foundation established under the laws of the Netherlands. On November 26, 2010, Telenet Finance II issued €100.0 million ($133.7 million) principal amount of 5.3% senior secured notes (the Telenet Finance II Senior Notes and, together with the Telenet Finance Senior Notes, the Telenet Finance Senior Secured Notes) at an original issue price of 101.75% due November 15, 2016. Telenet Finance II used the proceeds from the Telenet Finance II Senior Notes to fund an additional facility (Telenet Facility N) under the Telenet Credit Facility, with Telenet International as the borrower.

 

I-4


Table of Contents

Telenet Finance and Telenet Finance II are dependent on payments from Telenet International under Telenet Facility M and Telenet Facility N, respectively, in order to service payment obligations under the Telenet Finance Senior Secured Notes. Although Telenet International has no equity or voting interest in Telenet Finance or Telenet Finance II, Telenet Facility M and Telenet Facility N create variable interests in Telenet Finance and Telenet Finance II, respectively, for which Telenet International is the primary beneficiary. As such, Telenet International and its parent entities, including LGI, are required to consolidate Telenet Finance and Telenet Finance II. Telenet Finance and Telenet Finance II, as lenders under the Telenet Credit Facility, are treated the same as the other lenders under the Telenet Credit Facility, with benefits, rights and protections that are similar to those benefits, rights and protections afforded to the other lenders.

Telenet Finance III Senior Secured Notes. Telenet Finance III Luxembourg S.C.A. (Telenet Finance III), is a special purpose financing company created for the primary purpose of issuing senior notes and is owned 99.9% by a foundation established under the laws of the Netherlands and 0.01% by a Luxembourg private limited liability company as general partner. On February 15, 2011, Telenet Finance III issued €300.0 million ($401.0 million) principal amount of 6.625% senior secured notes (the Telenet Finance III Senior Notes) due February 15, 2021. Telenet Finance III used the proceeds from the Telenet Finance III Senior Notes to fund a new additional facility (Telenet Facility O) under the Telenet Credit Facility, with Telenet International as the borrower. Telenet International expects to apply €286.5 million ($382.9 million) of the proceeds from Telenet Facility O to redeem a portion of the outstanding borrowings under Telenet Facilities K and L1 of the Telenet Credit Facility. The remaining €80.0 million ($106.9 million) of outstanding borrowings under Telenet Facilities K and L1 will be rolled into a new Telenet Facility G2, which is expected to have terms similar to the existing Telenet Facility G.

Telenet Finance III is dependent on payments from Telenet International under Telenet Facility O in order to service payment obligations under the Telenet Finance III Senior Notes. Although Telenet International has no equity or voting interests in Telenet Finance III, Telenet Facility O creates a variable interest in Telenet Finance III for which Telenet International is the primary beneficiary. As such, Telenet International and its parent entities, including LGI, are required to consolidate Telenet Finance III. Telenet Finance III, as a lender under the Telenet Credit Facility, is treated the same as the other lenders under the Telenet Credit Facility, with benefits, rights and protections that are similar to those benefits, rights and protections afforded to the other lenders.

UGC Convertible Notes. In May 2010, we repurchased €70.8 million ($86.9 million at the transaction dates) principal amount of the 1.75% convertible senior notes due April 15, 2024, of our wholly-owned subsidiary UnitedGlobalCom, Inc., at an aggregate purchase price equal to approximately 102.5% of face value, for a total of €72.6 million ($89.1 million at the transaction dates), including accrued interest thereon.

For a further description of the terms of the above financings and certain other transactions affecting our consolidated debt in 2010, see note 10 to our consolidated financial statements included in Part II of this report.

Stock Repurchases

Pursuant to our various stock repurchase programs, we repurchased during 2010 a total of 18,440,293 shares of LGI Series A common stock at a weighted average price of $27.07 per share and 13,887,284 shares of LGI Series C common stock at a weighted average price of $28.21 per share, for an aggregate cash purchase price of $890.9 million, including direct acquisition costs. At December 31, 2010, we were authorized under our current stock repurchase program to acquire an additional $109.7 million of LGI Series A and Series C common stock through open market purchases or privately negotiated transactions, which may include derivative transactions. The timing of the repurchase of shares pursuant to this program is dependent on a variety of factors, including market conditions. This program may be suspended or discontinued at any time. Subsequent to December 31, 2010, our board of directors authorized a new program of up to $1.0 billion for the repurchase of LGI Series A common stock, LGI Series C common stock, securities convertible into such stock or any combination of the foregoing, through open market and privately negotiated transactions, which may include derivative transactions.

* * * *

 

I-5


Table of Contents

Certain statements in this Annual Report on Form 10-K constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. To the extent that statements in this Annual Report are not recitations of historical fact, such statements constitute forward-looking statements, which, by definition, involve risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. In particular, statements under Item 1. Business, Item 2. Properties, Item 3. Legal Proceedings, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and Item 7A. Quantitative and Qualitative Disclosures About Market Risk contain forward-looking statements, including statements regarding business, product, foreign currency and finance strategies, our capital expenditures, subscriber growth and retention rates, competitive and economic factors, the maturity of our markets, anticipated cost increases, liquidity, credit risks, foreign currency risks and target leverage levels. Where, in any forward-looking statement, we express an expectation or belief as to future results or events, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the expectation or belief will result or be achieved or accomplished. In evaluating these statements, you should consider the risks and uncertainties discussed under Item 1A. Risk Factors and Item 7A. Quantitative and Qualitative Disclosures About Market Risk, as well as the following list of some but not all of the factors that could cause actual results or events to differ materially from anticipated results or events:

 

   

economic and business conditions and industry trends in the countries in which we operate;

 

   

the competitive environment in the broadband communications and programming industries in the countries in which we operate;

 

   

competitor responses to our products and services;

 

   

fluctuations in currency exchange rates and interest rates;

 

   

consumer disposable income and spending levels, including the availability and amount of individual consumer debt;

 

   

changes in consumer television viewing preferences and habits;

 

   

consumer acceptance of existing service offerings, including our digital video, broadband internet and telephony services;

 

   

consumer acceptance of new technology, programming alternatives and broadband services that we may offer;

 

   

our ability to manage rapid technological changes;

 

   

our ability to maintain or increase the number of subscriptions to our digital video, broadband internet and telephony services and our average revenue per household;

 

   

our ability to maintain or increase rates to our subscribers or to pass through increased costs to our subscribers;

 

   

the impact of our future financial performance, or market conditions generally, on the availability, terms and deployment of capital;

 

   

changes in, or failure or inability to comply with, government regulations in the countries in which we operate and adverse outcomes from regulatory proceedings;

 

   

government intervention that opens our broadband distribution networks to competitors;

 

   

our ability to obtain regulatory approval and satisfy other conditions necessary to close acquisitions, as well as our ability to satisfy conditions imposed by competition and other regulatory authorities in connection with acquisitions;

 

   

our ability to successfully negotiate rate increases where applicable;

 

   

changes in laws or treaties relating to taxation, or the interpretation thereof, in the United States or in countries in which we operate;

 

I-6


Table of Contents
   

changes in laws and government regulations that may impact the availability and cost of credit and the derivative instruments that hedge certain of our financial risks;

 

   

uncertainties inherent in the development and integration of new business lines and business strategies;

 

   

capital spending for the acquisition and/or development of telecommunications networks and services;

 

   

our ability to successfully integrate and recognize anticipated efficiencies from the businesses we acquire;

 

   

problems we may discover post-closing with the operations, including the internal controls and financial reporting process, of businesses we acquire;

 

   

the ability of suppliers and vendors to timely deliver products, equipment, software and services;

 

   

the availability of attractive programming for our digital video services at reasonable costs;

 

   

the outcome of any pending or threatened litigation;

 

   

continued consolidation of the foreign broadband distribution industry;

 

   

the loss of key employees and the availability of qualified personnel;

 

   

changes in the nature of key strategic relationships with partners and joint venturers; and

 

   

events that are outside of our control, such as political unrest in international markets, terrorist attacks, natural disasters, pandemics and other similar events.

The broadband communications services industries are changing rapidly and, therefore, the forward-looking statements of expectations, plans and intent in this Annual Report are subject to a significant degree of risk. These forward-looking statements and the above-described risks, uncertainties and other factors speak only as of the date of this Annual Report, and we expressly disclaim any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained herein, to reflect any change in our expectations with regard thereto, or any other change in events, conditions or circumstances on which any such statement is based. Readers are cautioned not to place undue reliance on any forward-looking statement.

Financial Information About Operating Segments

Financial information about our reportable segments appears in note 19 to our consolidated financial statements included in Part II of this report.

Narrative Description of Business

Overview

Broadband Distribution

We offer a variety of broadband services over our cable television systems, including video, broadband internet and telephony. Available service offerings depend on the bandwidth capacity of our systems and whether they have been upgraded for two-way communications. In select markets, we also offer video services through DTH or through multichannel multipoint (microwave) distribution systems (MMDS).

Our digital video service offerings include basic and premium programming and, in most markets, incremental product and service offerings, such as enhanced pay-per-view programming, including video-on-demand (VoD) and near-video-on-demand (NVoD), digital video recorders (DVR) and high definition (HD) television services. Our analog video service offerings include basic programming and in some markets expanded basic programming. We tailor both our basic channel line-up and our additional channel offerings to each system according to culture, demographics, programming preferences and local regulation.

 

I-7


Table of Contents

We offer broadband internet services in all of our broadband communications markets. Our residential subscribers generally access the internet via cable modems connected to their personal computers at various speeds depending on the tier of service selected. We determine pricing for each different tier of internet service through analysis of speed, data limits, market conditions and other factors. We currently offer ultra high-speed internet services in most of our European markets with download speeds up to 128 megabits per second (Mbps). We expect to continue to expand the availability of ultra high-speed internet services throughout our broadband communications markets.

We offer voice-over-internet-protocol, or VoIP, telephony services in all of our broadband communications markets. In Austria, Chile, Hungary and the Netherlands, we also provide circuit-switched telephony services. In select markets, including Australia and Belgium, we also offer mobile telephony services using third-party networks.

We operate our broadband distribution businesses in (1) Europe through Liberty Global Europe’s UPC Broadband Division and through its subsidiary, Telenet, and (2) the Americas through VTR and Liberty Cablevision of Puerto Rico Ltd. (Liberty Puerto Rico). We operate our satellite distribution business in Australia through Austar. Each of Liberty Global Europe, Telenet, VTR, Liberty Puerto Rico and Austar is a consolidated subsidiary. Except as otherwise noted, we refer to our operations in Puerto Rico and in South America collectively as the Americas.

 

I-8


Table of Contents

The following table presents certain operating data, as of December 31, 2010, with respect to the broadband communications, DTH and MMDS systems of our subsidiaries in Europe, the Americas and Australia. This table reflects 100% of the operational data applicable to each subsidiary regardless of our ownership percentage.

Consolidated Operating Data

December 31, 2010

 

    Homes
Passed
(1)
    Two-way
Homes
Passed
(2)
    Customer
Relationships
(3)
    Total
RGUs
(4)
    Video     Internet     Telephony  
          Analog
Cable
Subscribers

(5)
    Digital
Cable
Subscribers

(6)
    DTH
Subscribers
(7)
    MMDS
Subscribers
(8)
    Total
Video
    Homes
Serviceable

(9)
    Subscribers
(10)
    Homes
Serviceable

(11)
    Subscribers
(12)
 

UPC Broadband Division:

                         

Germany

    8,718,900        8,183,600        4,555,100        6,047,600        2,954,200        1,533,800                      4,488,000        8,183,600        780,300        8,183,600        779,300   

The Netherlands (13)

    2,789,500        2,682,000        1,895,000        3,470,200        997,900        894,200                      1,892,100        2,719,800        843,600        2,690,900        734,500   

Switzerland (13)

    2,061,800        1,729,600        1,555,100        2,357,700        1,055,500        464,800                      1,520,300        2,122,500        510,200        2,122,100        327,200   

Austria

    1,168,900        1,168,900        705,500        1,292,100        257,900        268,800                      526,700        1,168,900        439,800        1,169,400        325,600   

Ireland

    875,300        671,700        533,500        785,500        108,400        316,500               65,000        489,900        671,700        199,200        607,700        96,400   
                                                                                                       

Total Western Europe

    15,614,400        14,435,800        9,244,200        13,953,100        5,373,900        3,478,100               65,000        8,917,000        14,866,500        2,773,100        14,773,700        2,263,000   
                                                                                                       

Hungary

    1,250,100        1,236,200        889,500        1,416,900        334,900        247,500        189,700               772,100        1,236,200        369,300        1,238,700        275,500   

Romania

    2,069,600        1,635,700        1,156,400        1,552,200        645,900        283,900        226,600               1,156,400        1,635,700        255,000        1,573,900        140,800   

Poland

    2,049,500        1,938,900        1,096,400        1,770,100        650,300        370,700                      1,021,000        1,938,900        524,600        1,938,800        224,500   

Czech Republic

    1,326,900        1,217,600        755,400        1,205,300        112,500        411,800        85,500               609,800        1,217,600        408,400        1,213,500        187,100   

Slovakia

    495,100        445,400        273,200        367,100        136,400        85,200        37,500        2,700        261,800        408,400        71,300        408,400        34,000   
                                                                                                       

Total Central and Eastern Europe

    7,191,200        6,473,800        4,170,900        6,311,600        1,880,000        1,399,100        539,300        2,700        3,821,100        6,436,800        1,628,600        6,373,300        861,900   
                                                                                                       

Total UPC Broadband Division

    22,805,600        20,909,600        13,415,100        20,264,700        7,253,900        4,877,200        539,300        67,700        12,738,100        21,303,300        4,401,700        21,147,000        3,124,900   
                                                                                                       

Telenet (Belgium)

    2,818,800        2,818,800        2,274,400        4,315,600        1,032,500        1,241,900                      2,274,400        2,818,800        1,226,600        2,818,800        814,600   
                                                                                                       

The Americas:

                         

VTR (Chile)

    2,679,300        2,028,300        1,068,600        2,217,600        289,000        608,700                      897,700        2,028,300        698,000        2,017,300        621,900   

Puerto Rico

    352,200        352,200        120,700        211,300               81,300                      81,300        352,200        81,300        352,200        48,700   
                                                                                                       

Total The Americas

    3,031,500        2,380,500        1,189,300        2,428,900        289,000        690,000                      979,000        2,380,500        779,300        2,369,500        670,600   
                                                                                                       

Austar (Australia)

    2,536,800               764,300        764,300                      764,200               764,200        30,400        100                 
                                                                                                       

Grand Total

    31,192,700        26,108,900        17,643,100        27,773,500        8,575,400        6,809,100        1,303,500        67,700        16,755,700        26,533,000        6,407,700        26,335,300        4,610,100   
                                                                                                       

 

I-9


Table of Contents

 

(1) Homes Passed are homes or residential multiple dwelling units that can be connected to our networks without materially extending the distribution plant, except for DTH and MMDS homes. Our Homes Passed counts are based on census data that can change based on either revisions to the data or from new census results. With the exception of Austar, we do not count homes passed for DTH. With respect to Austar, we count all homes in the areas that Austar is authorized to serve as Homes Passed. With respect to MMDS, one MMDS customer is equal to one Home Passed. Due to the fact that we do not own the partner networks (defined below) used in Switzerland and the Netherlands (see note 13) or the unbundled loop and shared access network used by one of our Austrian subsidiaries, UPC Austria GmbH (Austria GmbH), we do not report homes passed for Cablecom’s partner networks or the unbundled loop and shared access network used by Austria GmbH.

 

(2) Two-way Homes Passed are Homes Passed by those sections of our networks that are technologically capable of providing two-way services, including video and internet services and, in most cases, telephony services. Due to the fact that we do not own the partner networks used in Switzerland and the Netherlands or the unbundled loop and shared access network used by Austria GmbH, we do not report two-way homes passed for Cablecom’s or the Netherlands’ partner networks or the unbundled loop and shared access network used by Austria GmbH.

 

(3) Customer Relationships are the number of customers who receive at least one of our video, internet or voice services that we count as Revenue Generating Units (RGUs), without regard to which, or to how many services they subscribe. To the extent that RGU counts include equivalent billing unit (EBU) adjustments, we reflect corresponding adjustments to our Customer Relationship counts. For further information regarding our EBU calculation, see Additional General Notes to Tables below. Customer Relationships generally are counted on a unique premise basis. Accordingly, if an individual receives our services in two premises (e.g., primary home and vacation home), that individual generally will count as two Customer Relationships. We exclude mobile customers from Customer Relationships. For Belgium, Customer Relationships only include customers who subscribe to an analog or digital cable service due to billing system limitations.

 

(4) Revenue Generating Unit is separately an Analog Cable Subscriber, Digital Cable Subscriber, DTH Subscriber, MMDS Subscriber, Internet Subscriber or Telephony Subscriber. A home, residential multiple dwelling unit, or commercial unit may contain one or more RGUs. For example, if a residential customer in our Austrian system subscribed to our digital cable service, telephony service and broadband internet service, the customer would constitute three RGUs. Total RGUs is the sum of Analog Cable, Digital Cable, DTH, MMDS, Internet and Telephony Subscribers. RGUs generally are counted on a unique premise basis such that a given premise does not count as more than one RGU for any given service. On the other hand, if an individual receives one of our services in two premises (e.g. a primary home and a vacation home), that individual will count as two RGUs for that service. Each bundled cable, internet or telephony service is counted as a separate RGU regardless of the nature of any bundling discount or promotion. Non-paying subscribers are counted as subscribers during their free promotional service period. Some of these subscribers may choose to disconnect after their free service period. Services offered without charge on a long-term basis (e.g., VIP subscribers, free service to employees) generally are not counted as RGUs.

 

(5) Analog Cable Subscriber is a home, residential multiple dwelling unit or commercial unit that receives our analog cable service over our broadband network. In Europe, we have approximately 403,300 “lifeline” customers that are counted on a per connection basis, representing the least expensive regulated tier of basic cable service, with only a few channels.

 

(6) Digital Cable Subscriber is a home, residential multiple dwelling unit or commercial unit that receives our digital cable service over our broadband network or through a partner network. We count a subscriber with one or more digital converter boxes that receives our digital cable service in one premise as just one subscriber. A Digital Cable Subscriber is not counted as an Analog Cable Subscriber. As we migrate customers from analog to digital cable services, we report a decrease in our Analog Cable Subscribers equal to the increase in our Digital Cable Subscribers. Individuals who receive digital cable service through a purchased digital set-top box or through a “digicard”, but do not pay a monthly digital service fee are counted as Digital Cable Subscribers to the extent that such individuals are subscribing to our analog cable service. At December 31, 2010, we included 38,600 of these subscribers in the Digital Cable Subscribers reported for Cablecom. In the case of Cablecom, we estimate the number of such subscribers using publicly available data. A “digicard” is a small device that allows customers with a common interface plus (CI+) enabled television set who subscribe to, or otherwise have purchased access to, our digital cable services, to view such services without a digital set-top box. Subscribers to digital cable services provided by Cablecom over partner networks receive analog cable services from the partner networks as opposed to Cablecom.

 

(7) DTH Subscriber is a home, residential multiple dwelling unit or commercial unit that receives our video programming broadcast directly via a geosynchronous satellite. Austar’s DTH RGUs include 138,700 commercial RGUs that are calculated on an EBU basis.

 

(8) MMDS Subscriber is a home, residential multiple dwelling unit or commercial unit that receives our video programming via MMDS.

 

(9) Internet Homes Serviceable are Two-way Homes Passed that can be connected to our network, or a partner network with which we have a service agreement, for the provision of broadband internet services if requested by the customer, building owner or housing association, as applicable. With respect to Austria GmbH, we do not report as Internet Homes Serviceable those homes served either over an unbundled loop or over a shared access network.

 

(10) Internet Subscriber is a home, residential multiple dwelling unit or commercial unit that receives internet services over our networks, or that we service through a partner network. Our Internet Subscribers in Austria include 78,900 residential digital subscriber line (DSL) subscribers of Austria GmbH that are not serviced over our networks. Our Internet Subscribers do not include customers that receive services from dial-up connections. Unitymedia offers a 128 Kbps wholesale internet service to housing associations on a bulk basis. Our Internet Subscribers in Germany include 5,400 subscribers within such housing associations who have requested and received a modem that enables the receipt of Unitymedia’s 128 Kbps wholesale internet service.

 

(11) Telephony Homes Serviceable are Two-way Homes Passed that can be connected to our network, or a partner network with which we have a service agreement, for the provision of telephony services if requested by the customer, building owner or housing association, as applicable. With respect to Austria GmbH, we do not report as Telephony Homes Serviceable those homes served over an unbundled loop rather than our network.

 

(12) Telephony Subscriber is a home, residential multiple dwelling unit or commercial unit that receives voice services over our networks, or that we service through a partner network. Telephony Subscribers exclude mobile telephony subscribers. Our Telephony Subscribers in Austria include 57,000 residential subscribers of Austria GmbH that are not serviced over our networks.

 

(13) Pursuant to service agreements, Cablecom and, to a much lesser extent, the Netherlands offer digital cable, broadband internet and telephony services over networks owned by third-party cable operators (partner networks). A partner network RGU is only recognized if there is a direct billing relationship with the customer. Homes Serviceable for partner networks represent the estimated number of homes that are technologically capable of receiving the applicable service within the geographic regions covered by the applicable service agreements. Internet and Telephony Homes Serviceable with respect to partner networks have been estimated by Cablecom. These estimates may change in future periods as more accurate information becomes available. At December 31, 2010, Cablecom’s partner networks account for 99,400 Customer Relationships, 156,900 RGUs, 64,500 Digital Cable Subscribers, 392,900 Internet Homes Serviceable, 392,500 Telephony Homes Serviceable, 55,300 Internet Subscribers, and 37,100 Telephony Subscribers. In addition, partner networks account for 479,500 of Cablecom’s digital cable homes serviceable, that are not included in Homes Passed or Two-way Homes Passed in our December 31, 2010 subscriber table.

 

I-10


Table of Contents

Additional General Notes to Tables:

With respect to Chile and Puerto Rico, residential multiple dwelling units with a discounted pricing structure for video, broadband internet or telephony services are counted on an EBU basis. With respect to commercial establishments, such as bars, hotels and hospitals, to which we provide video and other services primarily for the patrons of such establishments, the subscriber count is generally calculated on an EBU basis by our subsidiaries (with the exception of Telenet, which counts commercial establishments on a per establishment basis). EBU is generally calculated by dividing the bulk price charged to accounts in an area by the most prevalent price charged to non-bulk residential customers in that market for the comparable tier of service. As such, we may experience variances in our EBU counts solely as a result of changes in rates. Telenet leases a portion of its network under a long-term capital lease arrangement. These tables include operating statistics for Telenet’s owned and leased networks. On a business-to- business basis, certain of our subsidiaries provide voice, broadband internet, data and other services to businesses, primarily in Switzerland, Belgium, the Netherlands, Austria, Hungary, Ireland and Romania. We generally do not count customers of these services as subscribers, customers or RGUs. In Germany, homes passed reflect the footprint, and two-way homes passed and internet and telephony homes serviceable reflect the technological capability, of our network up to the street cabinet, with drops from the street cabinet to the building generally added, and in-home wiring generally upgraded, on an as needed or success-based basis.

While we take appropriate steps to ensure that subscriber statistics are presented on a consistent and accurate basis at any given balance sheet date, the variability from country to country in (i) the nature and pricing of products and services, (ii) the distribution platform, (iii) billing systems, (iv) bad debt collection experience and (v) other factors add complexity to the subscriber counting process. We periodically review our subscriber counting policies and underlying systems to improve the accuracy and consistency of the data reported on a prospective basis. Accordingly, we may from time to time make appropriate adjustments to our subscriber statistics based on those reviews.

Subscriber information for acquired entities is preliminary and subject to adjustment until we have completed our review of such information and determined that it is presented in accordance with our policies.

Programming Services

We own programming networks that provide video programming channels to multi-channel distribution systems owned by us and by third parties. We also represent programming networks owned by others. Our programming networks distribute their services through a number of distribution technologies, principally cable television and DTH. Programming services may be delivered to subscribers as part of a video distributor’s basic package of programming services for a fixed monthly fee, or may be delivered as a “premium” programming service for an additional monthly charge or on a VoD or pay-per-view basis. Whether a programming service is on a basic or premium tier, the programmer generally enters into separate affiliation agreements, providing for terms of one or more years, with those distributors that agree to carry the service. Basic programming services generally derive their revenue from per-subscriber license fees received from distributors and the sale of advertising time on their networks. Premium services generally do not sell advertising and primarily generate their revenue from per-subscriber license fees. Programming providers generally have two sources of content: (1) rights to productions that are purchased from various independent producers and distributors, and (2) original productions filmed for the programming provider by internal personnel or third-party contractors. We operate our programming businesses in Europe principally through our subsidiary Chellomedia, and in the Americas principally through our subsidiary Pramer S.C.A. We also own joint venture interests in MGM Networks Latin America, LLC, a programming business that serves the Americas, and in XYZ Networks Pty Ltd. (XYZ Networks), a programming business in Australia. Through Chellomedia, we own interests in the following joint ventures: a joint venture with A&E Television Networks, serving Spain and Portugal; a joint venture with Zon Multimédia, serving Portugal; a joint venture with ARA Amigos Ireland Ltd., serving Europe, the Middle East and Africa; a joint venture with CBS Studios International, serving the United Kingdom, and a joint venture with Scripps Network International Inc., serving Europe, the Middle East and Africa.

Operations

Europe — Liberty Global Europe

Our European operations are conducted through our subsidiary, Liberty Global Europe, which provides video, broadband internet and telephony services in 11 countries in Europe. Liberty Global Europe’s operations are currently organized into the UPC Broadband Division, Telenet and the Chellomedia Division. Through the UPC Broadband Division, and Telenet, Liberty Global Europe provides video, broadband internet, and fixed-line and mobile telephony services. In terms of video subscribers, Liberty Global Europe operates the largest cable network in each of Austria, Belgium, Czech Republic, Hungary, Ireland, Poland, Slovakia and Switzerland and the second largest cable network in Germany, the Netherlands and Romania. For information concerning the Chellomedia Division, see “Chellomedia” below.

 

I-11


Table of Contents

Provided below is country-specific information with respect to the broadband communications and DTH services of our UPC Broadband Division and Telenet.

Germany

The UPC Broadband Division’s operations in Germany are operated by Unitymedia and are located in the German federal states of North Rhine-Westphalia and Hesse, including the major cities of Cologne, Dortmund, Dusseldorf, Essen and Frankfurt. Unitymedia’s cable networks are 94% upgraded to two-way capability and 94% of its cable homes passed are served by a network with a bandwidth of at least 860 megahertz (MHz). Assuming the contractual right to serve the building exists in the case of multiple dwelling units, Unitymedia makes its digital video, broadband internet and fixed-line telephony services available to almost 100%, 94% and 94%, respectively, of its homes passed.

For its analog cable customers, Unitymedia offers a basic service of up to 36 video channels and up to 34 radio channels, depending on a customer’s location. For its digital cable customers, Unitymedia offers three digital cable packages of up to 128 video channels and 119 radio channels (including the channels in its basic analog service). Its basic digital service has up to 75 video channels (including up to three public HD channels), depending on a customer’s location, and 69 radio channels. Unitymedia offers its basic digital service at no incremental charge over the standard analog rate. For an additional monthly charge, a digital subscriber may upgrade to one of two extended digital tier subscriptions. Each subscription includes all the channels in the basic digital service, plus an extra channel package of either 17 or 53 video channels. The extended digital tier customers may also subscribe for an additional 50 radio channels. Digital subscribers may also subscribe to one of four premium packages with eight to 19 channels each, plus another 15 foreign language packages with over 50 channels in various languages in total (such as Arabic, Greek, Italian, Japanese, Polish and Turkish). Program offerings include general entertainment, kids, sports, movies, documentaries and special interests channels. All digital services include an electronic programming guide and NVoD services. Unitymedia offers digital boxes with DVR or HD DVR time-shifting functionality to its customers for an incremental monthly charge. It launched HD programming in May 2010 and currently offers 15 HD channels. Unitymedia has announced it will introduce a digicard for its cable customers in the first part of 2011. The digicard will be available to customers who receive the basic digital service for an incremental monthly charge.

Unitymedia provides four tiers of broadband internet service with download speeds ranging from 16 Mbps to an ultra high-speed internet service with download speeds of up to 128 Mbps based on Euro DOCSIS 3.0 technology. Unitymedia launched its ultra high-speed internet service in November 2009, and it is available to 81% of its two-way homes passed. Unitymedia offers value-added broadband services, such as security or online storage solutions, to its customers for an incremental charge. Multi-feature telephony services are also available from Unitymedia using VoIP. Of Unitymedia’s total customers, 2.2% subscribe to two services (double-play customers) and 15.3% subscribe to three services (triple-play customers) offered by Unitymedia (video, broadband internet and telephony).

Approximately 65% of Unitymedia’s video customers are in multiple dwelling units where Unitymedia has the billing relationship with the landlord or housing association or with a third party (Professional Operator) that operates and administers the in-building network on behalf of housing associations. The majority of Unitymedia’s service agreements with housing associations have multi-year terms and many of these agreements allow Unitymedia to offer its digital video, broadband internet and telephony services directly to the tenant. Professional Operators may procure the basic analog signals from Unitymedia at volume-based discounts and generally resell them to housing associations with whom the operator maintains the customer relationship. Unitymedia has entered into agreements with Professional Operators, such as Tele Columbus Multimedia GmbH, that allow Unitymedia to market its digital video, broadband internet and telephony services directly to the Professional Operator’s subscriber base. In order to provide these advanced services to tenants who request them, Unitymedia adds drops to connect its distribution network to the building and upgrades the in–home wiring as needed.

In July 2010, Unitymedia launched a range of voice and broadband internet services to business customers in the portions of its service area where its network is two-way capable.

 

I-12


Table of Contents

Unitymedia has entered into various long-term agreements with the incumbent telecommunications operator, Deutsche Telekom AG (Deutsche Telekom), for the lease of cable duct space and hubs, as well as use of fiber optic transmission systems, towers and facility space. Unitymedia’s ability to offer its broadband communications services to customers is dependent on the agreements with Deutsche Telekom. These agreements may only be terminated under certain circumstances. Any termination, however, would have a material adverse effect on the operations of Unitymedia.

The Netherlands

The UPC Broadband Division’s operations in the Netherlands (UPC Netherlands) are located in six broad regional clusters, including the major cities of Amsterdam and Rotterdam. Almost all of its cable networks are upgraded to two-way capability, and almost all of its cable homes passed are served by a network with a bandwidth of at least 860 MHz. UPC Netherlands makes its digital video, broadband internet and fixed-line telephony services available to 98%, 96% and 96%, respectively, of its homes passed.

For its analog cable customers, UPC Netherlands offers a basic service of approximately 30 video channels and approximately 40 radio channels, depending on a customer’s location. For its digital cable customers, UPC Netherlands offers two digital cable packages in either a standard definition (SD) version or an HD version, plus a third package to a limited number of subscribers who do not have two-way capability. Its entry level digital service includes 50 video channels and 70 radio channels (including the channels in its basic analog service). For an additional monthly charge, a digital subscriber may upgrade to an extended digital tier subscription. The extended digital tier includes all the channels of the entry level digital service, plus an extra channel package of approximately 40 general entertainment, sports, movies, documentary, music, adult, children and ethnic channels. Both digital cable packages include an electronic program guide, interactive services and the functionality for VoD service, including catch-up television and pay-per-view services. Its third digital service has 80 video channels and 70 radio channels.

The VoD service includes transaction-based VoD and, in the extended digital tier for no additional charge, a subscription-based VoD service. The subscription-based VoD service includes various programming, such as music, kids (e.g. Disney and Nickelodeon), documentaries (e.g. Discovery and National Geographic), sports or series (e.g. Criminal Minds, Grey’s Anatomy and Fawlty Towers) and from November 2010, a limited amount of 3D programming. Digital cable customers may also subscribe to premium channels, such as Film 1, Sport 1 NL and the premium football league channel, Eredivisie Live, alone or in combination, for additional monthly charges. The premium channels are available through 18 different packages, with a total of 40 premium channels. In all digital packages, a customer also has the option for an incremental monthly charge to upgrade the digital box to one with DVR or HD DVR time-shifting functionality. UPC Netherlands currently offers up to 22 HD channels, depending on the digital service selected. In 2010, UPC Netherlands introduced an application that allows its subscribers to record a program remotely through an iPhone or iPad mobile digital device or a mobile internet browser, as well as an internet browser on a laptop or desktop computer.

UPC Netherlands offers six tiers of broadband internet service with download speeds ranging from five Mbps to an ultra high-speed internet service with download speeds of up to 120 Mbps based on Euro DOCSIS 3.0 technology. The ultra high-speed internet service is available to all of UPC Netherlands’ two-way homes passed. Multi-feature telephony services are also available from UPC Netherlands through either circuit-switched telephony or VoIP. Of UPC Netherlands’ total customers, 8.5% are double-play customers and 37.3% are triple-play customers.

In addition, UPC Netherlands offers a range of voice, broadband internet and data services to small office at home (SOHO) customers and business customers primarily in its core metropolitan networks. In April 2010, Ziggo 4 BV, a joint venture between UPC Netherlands and Ziggo BV (the largest cable operator in the Netherlands), acquired licenses in the 2.6 GHz spectrum bands. This band is suited for long-term evolution wireless service (the next generation of ultra high-speed mobile data).

 

I-13


Table of Contents

Switzerland

The UPC Broadband Division’s operations in Switzerland and a small portion of Austria, including the city of Vorarlberg, are operated by Cablecom and are located in 24 of the 26 member states (Cantons) of Switzerland, including major cities such as Bern, Zürich, Lausanne and Geneva. Cablecom’s cable networks are 84% upgraded to two-way capability and 90% of its cable homes passed are served by a network with a bandwidth of at least 860 MHz. Assuming the contractual right to serve the building exists in the case of multiple dwelling units, Cablecom makes its digital video, broadband internet and fixed-line telephony services available to 86%, 84% and 84%, respectively, of its homes passed.

For its analog cable customers, Cablecom offers a basic service of 36 video channels and 45 radio channels. The basic service is available in any one of three languages (French, German or Italian). For 65% of its analog cable subscribers, Cablecom maintains billing relationships with landlords or housing associations, which typically provide analog cable service for an entire building and do not terminate service each time there is a change of tenant in the landlord’s or housing association’s premises.

For its digital cable customers, Cablecom offers four digital cable packages of up to 170 video channels (including the channels in its basic analog service). Its entry level digital service includes 55 video channels. For an additional monthly charge, a digital subscriber may upgrade to one of three other digital packages. All of the digital packages include 100 radio channels (including the channels in its basic analog service). Cablecom also offers a range of additional pay television programming in a variety of foreign language program packages and premium channel packages. A channel package includes general entertainment, sports, movies, adult and ethnic channels. Cablecom’s 95 premium channels are available either in packages or for individual subscriptions. The digital cable packages include an electronic programming guide, the functionality for transaction-based VoD service (depending on location), including catch-up television and pay-per-view services, and a limited number of HD channels. Cablecom offers digital boxes with DVR and HD DVR time-shifting functionality, plus additional HD channels, to its customers for an incremental monthly charge. It currently offers 17 HD channels, including those channels in its digital packages. In 2010, Cablecom introduced a digicard. A customer purchasing the digicard for a one-time fee, may view Cablecom’s digital entry tier service without an additional monthly charge. A digicard may also be used to view any of Cablecom’s other digital packages with the customer paying the incremental charge over the digital entry tier’s applicable rate.

Cablecom offers eight tiers of broadband internet service with download speeds ranging from 500 Kbps to an ultra high-speed internet service of up to 100 Mbps, based on U.S. DOCSIS 3.0 technology. Cablecom launched its ultra high-speed internet service in September 2009 in Zurich and it is now available to 75% of Cablecom’s two-way homes passed. Multi-feature telephony services are also available from Cablecom using VoIP. Of Cablecom’s total customers, 17.2% are double-play customers and 17.2% are triple-play customers.

Cablecom offers digital video, broadband internet and fixed-line telephony service directly to the analog cable subscribers of those partner networks that enter into service operating contracts with Cablecom. Cablecom has the direct customer billing relationship with the subscribers who take these services on the partner networks. By permitting Cablecom to offer some or all of its digital video, broadband internet and fixed-line telephony products directly to those partner network subscribers, Cablecom’s service operating contracts have expanded the addressable markets for Cablecom’s digital products. In exchange for the right to provide digital products directly to the partner network subscribers, Cablecom pays to the partner network a share of the revenue generated from those subscribers. Cablecom also provides full or partial analog television signal delivery services, network maintenance services and engineering and construction services to its partner networks.

In addition, Cablecom offers a complete range of voice, broadband internet, data and hosting services to the business market throughout Switzerland, as well as video services on a wholesale basis.

 

I-14


Table of Contents

Other Western Europe

The UPC Broadband Division also operates cable and DSL networks in Austria (excluding the Austrian portion of Cablecom’s network) (UPC Austria) and cable and MMDS networks in Ireland (UPC Ireland). The DSL services are provided over an unbundled loop or, in certain cases, over a shared access network. UPC Austria’s DSL operations are available in the majority of Austria, wherever the incumbent telecommunications operator has implemented DSL technology. UPC Austria’s entire cable network is upgraded to two-way capability and approximately 90% of its cable homes passed are served by a network with a bandwidth of at least 860 MHz. UPC Ireland’s cable network is 77% upgraded to two-way capability, and 63% of its cable homes passed are served by a network with a bandwidth of at least 750 MHz. For an incremental monthly charge, both operations offer their digital customers a digital box with DVR or HD DVR time-shifting functionality. The number of HD channels offered are up to 14 in Austria and 12 in Ireland. Also, both UPC Austria and UPC Ireland offer business customers a complete range of voice, broadband internet, data and hosting services.

 

   

Austria. UPC Austria’s cable operations are located in regional clusters encompassing the capital city of Vienna, the regional capitals of Graz, Innsbruck and Klagenfurt, and two smaller cities. Three of these cities (Vienna, Wr. Neustadt and Baden), directly or indirectly, own 5% of the local operating subsidiary of UPC Austria serving the applicable city. For its analog cable subscribers, UPC Austria offers a package of 38 video channels, mostly in the German language, plus 35 radio channels. For its digital cable customers, UPC Austria offers two digital cable packages (entry and plus) with either 73 or 110 video channels and 73 radio channels (including a limited number of HD channels and the channels in its analog package), depending on the package selected, as well as an electronic program guide and the functionality for VoD service, including catch-up television. UPC Austria provides its basic digital service at no incremental charge over the standard analog rate. Digital cable customers may also subscribe to one or more of eight premium channel packages for an additional monthly charge. These packages include ethnic channels (such as Serb, Bosnian and Turkish channels), music, adult and international channels. Additional HD channels and the functionality of DVR or HD DVR are also available.

UPC Austria offers five tiers of broadband internet service over cable with download speeds ranging from two Mbps to an ultra high-speed internet service of 100 Mbps, and a student package. UPC Austria launched its ultra high-speed internet service based on Euro DOCSIS 3.0 technology on its Vienna network in June 2009. This service is now available to almost all of UPC Austria’s two-way homes passed. Over DSL technology, UPC Austria offers two tiers of unbundled DSL broadband internet, plus additional tiers via wholesale offerings. It also offers a double-play package of broadband internet and telephony over DSL. Multi-feature telephony services are also available from UPC Austria. In addition, UPC Austria offers a bundle of fixed-line and mobile telephony in a co-branding arrangement with a telephony operator. UPC Austria offers its telephony services through VoIP, which is available to all DSL and cable customers. It also continues to offer telephony services through circuit-switched telephony to cable customers in Vienna, Graz and Klagenfurt. UPC Austria makes its digital video available to almost all of its homes passed and broadband internet and fixed-line telephony services available to all of its homes passed. Of UPC Austria’s total customers, 24.0% are double-play customers and 29.6% are triple-play customers.

 

   

Ireland. UPC Ireland’s operations are located in five regional clusters, including the capital city of Dublin and other cities, including Cork, Galway and Limerick. For its analog cable customers, UPC Ireland offers an analog cable package with 18 video channels and 17 radio channels. An analog package of 10 video channels is also offered to its MMDS subscribers. For its digital cable customers, UPC Ireland offers three digital cable packages (all of which include the channels in its analog package). Its entry level digital package consists of 52 video channels and 39 radio channels. Similar digital packages are also offered to its MMDS subscribers. To encourage analog subscribers to switch to a digital subscription, the entry level digital package is priced lower than the analog service. For an incremental monthly charge, the digital cable subscriber may upgrade to one of two other digital packages, which offer up to either 83 or 105 video channels, respectively, and 39 radio channels. Each

 

I-15


Table of Contents
 

of these packages include two premium channels (both ESPN sports channels) for no additional charge. The program offerings for each type of service include general entertainment, kids, sports, documentaries and special interests channels. In addition, digital customers can receive event channels such as seasonal sport and real life stories. To complement its digital offering, UPC Ireland also offers its digital subscribers 25 premium channels (sports, movies, adult, ethnic and kids) and a pay-per-view service.

UPC Ireland offers three tiers of broadband internet service with download speeds ranging from one Mbps to 30 Mbps. In December 2010, UPC Ireland began offering its ultra high-speed internet service with a download speed of 100 Mbps based on Euro DOCSIS 3.0 technology, to select subscribers in Dublin. Multi-feature telephony services are also available from UPC Ireland through VoIP. UPC Ireland makes its digital video, broadband internet and fixed-line telephony services available to 96%, 77% and 69%, respectively, of its homes passed. Of UPC Ireland’s total customers, 17.0% are double-play customers and 15.1% are triple-play customers.

Central and Eastern Europe

The UPC Broadband Division also operates cable networks in the Czech Republic (UPC Czech), Hungary (UPC Hungary), Poland (UPC Poland) and Romania (UPC Romania), and cable and MMDS networks in Slovakia (UPC Slovakia). In each of these operations, at least 79% of the cable networks are upgraded to two-way capability. Of the cable homes passed, at least 66% in Hungary and 80% or more in the other Central and Eastern Europe operations are served by a network with a bandwidth of at least 750 MHz. In each of these cable operations, for an incremental monthly charge, digital cable customers may upgrade the digital box to one with DVR or HD DVR time-shifting functionality. The number of HD channels offered range from seven in Hungary and Slovakia to 22 in Poland. VoD service, including catch-up television, is available to our subscribers nationwide in Hungary and in major metropolitan areas in Poland. During 2010, UPC Slovakia launched a 3D programming channel. The UPC Broadband Division also has DTH operations in certain of these countries, which it provides through UPC DTH S.a.r.l (UPC DTH), a subsidiary of Liberty Global Europe organized in Luxembourg.

 

   

Czech Republic. UPC Czech’s operations are located in cities and towns throughout the Czech Republic, including Prague, Brno, Ostrava, Plzen and Liberec. For its analog cable customers, UPC Czech offers two tiers of analog programming services (lifeline and basic) with either nine to 15 or 41 video channels, depending on the package selected, 25 radio channels and two premium channels. Of UPC Czech’s total video cable subscribers, approximately 21% subscribe to an analog service, with 79% of such customers subscribing to the lower priced lifeline package. For its digital cable subscribers, UPC Czech offers three packages of digital programming services (entry, basic and supreme) with up to 103 video channels and 28 radio channels (including the channels in its analog service), depending on the package selected. Ten premium video channels are also available. Of UPC Czech’s digital cable subscribers, 53% subscribe to the entry level package. UPC Czech offers five tiers of broadband internet service with download speeds ranging from one Mbps to an ultra high-speed internet service of 100 Mbps based on Euro DOCSIS 3.0 technology. Its ultra high-speed internet service is available to 88% of UPC Czech’s two-way homes passed. UPC Czech also offers VoIP multi-featured telephony services. UPC Czech makes its digital video, broadband internet and fixed-line telephony services available to over 90% of its homes passed. Of UPC Czech’s total cable customers, 35.2% are double-play customers and 16.0% are triple-play customers. UPC Czech also makes its digital video service available through a digicard and offers voice, broadband internet and data services to SOHO and business customers.

 

   

Hungary. UPC Hungary’s operations are located in 22 major Hungarian towns and cities, including the capital city of Budapest and the cities of Debrecen, Miskolc, Pécs and Székesfehérvár. For its analog cable customers, UPC Hungary offers four tiers of analog programming services, including a lifeline tier, with five to 46 video channels and three to 17 radio channels and a premium movie package, depending on the tier selected and technical capability of the network. Less than 1% of UPC Hungary’s analog cable subscribers receive the lifeline tier. For its digital cable customers, UPC Hungary offers

 

I-16


Table of Contents
 

two tiers of digital programming services, each of which may be upgraded for HD services or with DVR functionality. Depending on the tier selected, a digital cable subscriber may receive up to 123 video channels and 51 radio channels (including the channels in its analog service). For an incremental monthly charge, the digital cable subscriber may also subscribe to any of six premium packages (three movie packages, two foreign language packages and an adult package). UPC Hungary offers eight tiers of broadband internet service with download speeds ranging from two Mbps to an ultra high-speed internet service of up to 120 Mbps based on Euro DOCSIS 3.0 technology. This internet service is available to 93% of its two-way homes passed. UPC Hungary also has 35,400 asymmetric digital subscriber line (ADSL) subscribers on its twisted copper pair network located in the southeast part of Pest County. Multi-feature telephony services are also available from UPC Hungary. It offers its telephony services through circuit-switched telephony to subscribers on its twisted copper pair network and through VoIP over its two-way capable cable network. UPC Hungary makes its digital video, broadband internet and fixed-line telephony services available to almost all of its homes passed. Of UPC Hungary’s total cable customers, 32.5% are double-play customers and 21.4% are triple-play customers. UPC Hungary offers voice, broadband internet and data services to business customers located inside and outside its service areas, including SOHO customers, medium to large enterprises and wholesale partners.

 

   

Poland. UPC Poland’s operations are located in regional clusters encompassing eight of the 10 largest cities in Poland, including Warsaw, the capital city, and Katowice. For its analog cable subscribers, UPC Poland offers three tiers of analog service. Its lowest tier, the lifeline package, includes six to 10 video channels and the intermediate package includes 12 to 30 video channels. Approximately 40% of UPC Poland’s analog cable subscribers receive the lifeline package. For the highest tier (basic), the full package includes 47 to 58 video channels. For an additional monthly charge, UPC Poland offers an HBO premium service. UPC Poland also offers two packages of digital programming services (with each package including the video channels in its analog service). Depending on the tier selected, a digital subscriber may receive (1) either 83 or 113 video channels, both of which include four HD channels, and (2) 19 radio channels. Up to 36 digital premium channels are also available. UPC Poland offers five tiers of broadband internet service in portions of its network with download speeds ranging from five Mbps to its ultra high-speed internet service of up to 120 Mbps based on Euro DOCSIS 3.0 technology. The ultra high-speed internet service is available to 67% of its two-way homes passed. UPC Poland also offers VoIP multi-feature telephony services. UPC Poland makes its digital video, broadband internet and fixed-line telephony services available to 90%, 95% and 95%, respectively, of its homes passed. Of UPC Poland’s total customers, 27.2% are double-play customers and 17.1% are triple-play customers. In addition, UPC Poland offers voice, broadband internet and data services to SOHO customers.

 

   

Romania. UPC Romania’s operations are located primarily in two regional clusters, which include 10 of the 12 largest cities (with more than 200,000 inhabitants) in Romania, including the capital city of Bucharest and the cities of Timisoara, Cluj-Napoca and Constanta. For its analog cable customers, UPC Romania offers a basic package of approximately 54 video channels (depending on location), which include Romanian terrestrial broadcast channels, selected European satellite programming and other programming. In the main cities, it also offers three premium channels (HBO Romania, Motors TV and Adult). UPC Romania also offers three packages of digital cable service to customers with up to 170 video channels (including the video channels in its analog service), depending on the package selected, and with 18 radio channels. UPC Romania also offers four packages of digital premium services with a total of 23 channels (HBO MaxPack, CineStar, Panonia and Passion). UPC Romania offers three tiers of broadband internet service, with download speeds ranging from two Mbps to 24 Mbps, and VoIP telephony services. UPC Romania also offers a 256 Kbps service at no incremental charge as an inducement for customers to subscribe to bundled services. In November 2010, UPC Romania launched an ultra high-speed internet service based on Euro DOCSIS 3.0 technology in the city of Cluj-Napoca, where subscribers may receive service with download speeds of either 60 or 100 Mbps. UPC Romania makes its digital video, broadband internet and fixed-line telephony services available to 83%, 79% and 76%, respectively, of its homes passed. Of UPC Romania’s total cable

 

I-17


Table of Contents
 

customers, 21.5% are double-play customers and 10.6% are triple-play customers. In addition, UPC Romania offers a wide range of voice, broadband internet and data services to business and SOHO customers.

 

   

Slovakia. UPC Slovakia operations are located in seven regions in Slovakia, including the five largest cities of Bratislava, Košice, Prešov, Banská Bystrica and Žilina. UPC Slovakia offers its analog cable subscribers two tiers of analog service and its MMDS subscribers a basic tier of service. Its lower tier, the lifeline package, includes six to 11 video channels and up to 11 radio channels. Of UPC Slovakia’s analog cable subscribers, approximately 37% subscribe to the lifeline analog service. UPC Slovakia’s most popular tier, the basic package, includes 24 to 50 video channels, which generally offer all Slovakian terrestrial, cable and local channels, selected European satellite and other programming, and 11 radio channels. Its MMDS service has 12 video channels. For an additional monthly charge, UPC Slovakia offers an HBO premium service. For its digital cable subscribers, UPC Slovakia offers two packages of digital programming service with up to 76 video channels (including the video channels in its analog service), depending on the package selected, and with 15 radio channels. In addition, seven channel packages with up to 35 premium channels are available, including German and Hungarian programs. UPC Slovakia offers five tiers of broadband internet service with download speeds ranging from two Mbps to an ultra high-speed internet service of up to 120 Mbps based on Euro DOCSIS 3.0 technology. Its ultra high-speed internet service is available to 76% of its two-way homes passed. UPC Slovakia also offers VoIP multi-featured telephony services. UPC Slovakia makes its digital video, broadband internet and fixed-line telephony services available to 86%, 82% and 82%, respectively, of its homes passed. Of UPC Slovakia’s total cable customers, 13.6% are double-play customers and 12.6% are triple-play customers. In addition, UPC Slovakia offers broadband internet and data services to SOHO customers in its service areas.

 

   

UPC DTH. UPC DTH provides DTH services in the countries of Czech Republic, Hungary and Slovakia and manages the Romania DTH provider FocusSat Romania Srl (FocusSat), a subsidiary of Liberty Global Europe. UPC DTH and FocusSat together provide DTH services to over 500,000 customers. UPC DTH offers directly or through FocusSat a basic tier, plus extended tier and premium channel options, as well as over 50 free-to-air (FTA) television and radio channels. Depending on the broadcast rights for a subscriber’s location, a subscriber may receive from 47 to 62 channels for basic service and, for an additional monthly charge, a subscriber may upgrade to an extended basic tier package, plus various premium package options for specialty channels. UPC DTH offers its subscribers in the Czech Republic and Hungary seven such packages, in Slovakia five such packages and in Romania, through FocusSat, five such packages. Through these package offerings, a subscriber may receive up to 155 channels, covering a range of interests (such as movies, adventure, sports, adult and comedy). UPC DTH provides DTH services to 14.0% of our total video subscribers in Czech Republic, 24.6% of our total video subscribers in Hungary, 14.3% of our total video subscribers in Slovakia and, through FocusSat, 19.6% of our total video subscribers in Romania.

UPC DTH has entered into an agreement with Telenor Satellite Broadcasting for the lease of additional transponder space on the Thor 5 and Thor 6 satellites. The agreement will expire in 2018. Pursuant to an agreement expiring at the end of 2011, FocusSat has transponder space on these satellites as well. FocasSat intends to exercise its extension rights under such agreement by June 2011. As a result of these agreements, the UPC Broadband Division has centralized all of its DTH services on the Thor satellite system. During 2010, UPC DTH repositioned its customers’ satellite dishes in the Czech Republic, Hungary and Slovakia to the new satellites. With the repositioning, UPC DTH is able to offer additional SD services to all its customers and HD services to the customers in Hungary, Czech Republic and Slovakia.

Telenet (Belgium)

Liberty Global Europe’s operations in Belgium are operated by Telenet. We own 50.2% of Telenet’s outstanding ordinary shares. Telenet offers video, broadband internet and fixed and mobile telephony services in

 

I-18


Table of Contents

Belgium, primarily to residential customers in the Flanders region, including Antwerp and Ghent and approximately one-third of the city of Brussels. Telenet makes all of these services, a quadruple-play, available to all of the homes passed by its cable network. In addition, pursuant to an agreement executed on June 28, 2008 (the PICs Agreement), with four associations of municipalities in Belgium (the pure intercommunales or PICs), Telenet makes its services available to all of the homes passed by the cable network owned by the PICs. Its cable networks and the PICs network are all upgraded to two-way capability and almost all of its cable homes passed are served by a network with a bandwidth of at least 550 MHz.

For its analog cable customers, Telenet offers a basic package of 24 video channels and 22 radio channels. For no additional fee, Telenet offers its digital cable subscribers a basic package of digital programming service with 70 video channels and 33 radio channels (including channels from the basic analog package). Such subscribers may also subscribe to up to eight additional packages of one to 14 channels of pay television programming based on interests. These packages include general entertainment, documentary, foreign language, kids, music, sports, adult and movies. The digital cable package includes an electronic programming guide, interactive services and the functionality for VoD service, including catch-up television. Also, a customer has the option to upgrade the digital box to one with DVR or HD DVR functionality for an incremental monthly charge. Telenet also offers HD boxes and 16 HD channels, depending on the package selected and the region. Of Telenet’s basic cable television subscribers, 55% have upgraded from analog to digital television. In December 2010, Telenet launched a multimedia platform branded “Yelo”. Yelo allows Telenet’s digital video customers to view programs remotely on an iPad or iPhone mobile digital device .

Telenet offers six tiers of broadband internet service with download speeds ranging from four Mbps to 100 Mbps. In February 2010, Telenet launched ultra high-speed internet services based on Euro DOCSIS 3.0 technology. This service is available to all of the homes passed by Telenet’s cable network. Telenet offers digital telephony services through VoIP, including value-added services. In addition, Telenet offers, individually and as a bundle, fixed-line telephony services over its network and mobile telephony services as a mobile virtual network operator reselling leased network capacity under the “Telenet Mobile” brand name. Of Telenet’s total customers (excluding mobile customers), 26.5% are double-play customers and 31.6% are triple-play customers.

Telenet also offers a range of data, broadband internet and telephony services to SOHO and business customers throughout Belgium and parts of Luxembourg under the brand “Telenet Solutions”.

Telenet has the direct customer relationship with the analog and digital video subscribers on the PICs network. Pursuant to the PICs Agreement, Telenet has full rights to use substantially all of the PICs network under a long-term capital lease for a period of 38 years, for which it is required to pay recurring fees in addition to the fees paid under certain pre-existing agreements with the PICs. The PICs remain the legal owners of the PICs network. All capital expenditures associated with the PICs network will be initiated by Telenet, but executed and pre-financed by the PICs through an addition to the long-term capital lease, and will follow a 15-year reimbursement schedule. The PICs Agreement has the form of an emphyotic lease agreement, which under Belgian law is the legal form that is closest to ownership of a real estate asset without actually having the full legal ownership. Unless extended, the PICs Agreement will expire on September 23, 2046, and cannot be terminated earlier (except in the case of non-payment or bankruptcy of the lessee). For additional information on the provisions of the PICs Agreement, see note 4 to our consolidated financial statements included in Part II of this report.

Chellomedia

Liberty Global Europe’s Chellomedia Division provides interactive digital products and services, produces and markets 44 thematic channels, operates a digital media center and manages our investments in various businesses in Europe. Below is a description of the business unit operations of our Chellomedia Division:

 

   

Chello Programming. 

Chello Zone. Chellomedia produces and markets a number of widely distributed multi-territory thematic channels in over 100 countries and in 24 languages. Chellomedia owns five of these channels

 

I-19


Table of Contents

and the rest are held by joint ventures with unrelated third parties, such as CBS Studios International and Scripps Networks Interactive Inc. These channels target the following genres: extreme sports and lifestyles (the Extreme Sports Channel and Outdoor), horror films (Horror Channel), real life stories (Zone Reality and CBS Reality), women’s information and entertainment and drama (Zone Romantica and CBS Drama), action (CBS Action), science fiction and fantasy (Zone Fantasy), cooking (Food Network and Fine Living Network) and children’s pre-school (Jim Jam). In addition, Chellomedia has a channel representation business, which represents both wholly-owned and third-party channels across Europe.

Chello Benelux. Chellomedia owns and manages a premium sports channel (Sport 1 NL) and a premium movie channel (Film 1) in the Netherlands. Sport 1 NL has exclusive pay television rights for a variety of sports, but it is primarily football (soccer) oriented. These exclusive pay television rights expire at various dates in 2012 and 2013. For Film 1, Chellomedia has exclusive pay television output deals with key Hollywood studios that expire at various dates through 2014. It also distributes Weer & Verkeer (Weather & Traffic Channel) to cable networks and satellite operators.

The channels originate from Chellomedia’s digital media center (DMC), located in Amsterdam. The DMC is a technologically advanced production facility that services the Chellomedia Division, the UPC Broadband Division and third-party clients with channel origination, post-production and satellite and fiber transmission. The DMC delivers high-quality, customized programming by integrating different video elements, languages (either in dubbed or sub-titled form) and special effects and then transmits the final product to various customers in numerous countries through affiliated and unaffiliated cable systems and DTH platforms.

Chello Central Europe. Chellomedia owns the thematic channels Filmmuzeum (a Hungarian library film channel), TV Paprika (a cooking channel), Deko (a home and lifestyle channel), Spektrum (a documentary channel), Zone Club CCE (women’s information and entertainment), Zone Europa CCE (art house basic movies), Zone Romantica CCE (entertainment) and sports channels Sport1, Sport2 and the Hungarian channel Sport M. The programming on the sport channels varies by country, but is predominately football (soccer) oriented. Sport1 and Minimax are distributed to the UPC Broadband Division and other broadband operators principally in Hungary, Czech Republic, Slovakia and Romania. Filmmuzeum and Sport M are distributed to the UPC Broadband Division and other broadband operators in Hungary. In addition, Sport M is distributed in Romania, Slovakia and Serbia. TV Paprika, Sport2, Deko and Spektrum are distributed to the UPC Broadband Division and other broadband operators in Hungary, Czech Republic and Slovakia. TV Paprika is also distributed in Romania and Moldova. Zone Club CCE, Zone Europa CCE and Zone Romantica CCE are distributed in Poland and, except for Zone Europa CCE, in Hungary in addition to the distribution of such channels in other countries by our Chello Zone business unit. Chellomedia also operates At Media Sp. z o.o, an advertising sales representation business in Poland, the Czech Republic and Hungary.

Chello Multicanal. Through its subsidiary Multicanal Iberia S.L.U. (Multicanal), Chellomedia owns or manages a suite of 18 thematic channels carried on a number of major pay television platforms in Spain, Portugal and Portuguese speaking countries in Africa. Multicanal has 12 wholly-owned thematic channels (such as Canal Hollywood, Odisea, Sol Musica, Canal Cocina and Decasa), two joint venture channels with A&E Television Networks (Canal de Historia and The Biography Channel), and four joint venture channels for Portuguese speaking territories with Servicos de Telecomunicacóes e Multimédia SGPS SA doing business as Zon Multimédia (Canal Hollywood, Panda, Panda Biggs and Mov).

 

   

Chello On Demand (Transactional Television). Chello On Demand aggregates and delivers entertainment content into VoD offers (transactional and subscription based) for the UPC Broadband Division and other broadband operators. This service offers movies, international comedy and drama, documentaries, children’s entertainment and local content on the subscriber’s request. Chello On Demand offers VoD services in Austria, Hungary, the Netherlands, Poland and Switzerland.

 

I-20


Table of Contents
   

Investments. Chellomedia is an investor in various ventures for the development of country-specific Pan European programming, including a 50.05% interest in The MGM Channel Central Europe, a 20% interest in Disney XD Poland, a 50% interest in Weer & Verkeer (Weather & Traffic Channel), a 38.6% interest in City Channel (distributed in Ireland) and a 25% interest in Shorts HD and Shorts TV channels. Chellomedia also owns minority non-controlling interests in Canal+ Cyfrowy Sp zoo, a DTH platform in Poland, in O3B Networks Limited, a development stage company that plans to operate a satellite-based data backhaul business across the developing world (predominately Africa), and in various entities developing technology relevant to our operations.

Asia/Pacific

Our operations in Australia are conducted primarily through Austar in which we own a 54.2% indirect majority ownership interest. Through February 17, 2010, we also had operations in Japan, conducted primarily through Super Media and its then subsidiary J:COM.

Australia

Austar is Australia’s leading pay television service provider to regional and rural Australia and the capital cities of Hobart and Darwin. Austar’s pay television services are provided through DTH satellite. FOXTEL Management Pty Ltd. (Foxtel), the other main provider of pay television services in Australia, has leased space on the Optus C1 and D3 satellites. Austar and Foxtel have entered into an agreement pursuant to which Austar is able to use a portion of Foxtel’s leased satellite space to provide its DTH services. This agreement will expire in 2017. Foxtel manages the satellite platform on Austar’s behalf as part of such agreement.

Austar’s DTH service is available to 2.5 million households, which is approximately one-third of Australian homes. Austar’s territory covers all of Tasmania and the Northern Territory and the regional areas outside of the capital cities in South Australia, Victoria, New South Wales and Queensland. Austar does not provide DTH service to Western Australia. Foxtel’s service area is concentrated in metropolitan areas and covers the balance of the other two-thirds of Australian homes. Foxtel and Austar do not compete with each other, except in the Gold Coast area in Queensland.

For the base level service, a DTH subscriber receives 50 channels, including 10 time shifted channels. Austar’s DTH service also offers over 130 premium channels, including 19 pay-per-view channels, interactive services and DVR functionality. Austar’s channel offerings include movies, sports, lifestyle programs, children’s programs, documentaries, drama and news. An NVoD pay-per-view service is comprised of 16 channels, dedicated to recently released movies. The interactive services include Sports Active, Weather Active and SKY News Active and 30 digital radio channels. In November 2009, Austar launched its HD television service. For an incremental monthly charge, subscribers may upgrade to Austar’s HD service and receive one or more of 13 HD channels, depending on the package selected, in addition to Austar’s other channel offerings and FTA television channels. Austar plans to launch two more HD channels in March 2011. In addition to residential subscribers, Austar also provides its television services to commercial premises, including hotels, retailers and licensed venues. Beginning in August 2010, Austar customers who have internet service may access programming from 38 channels to view on their computer at no additional cost.

Austar owns a 50% interest in XYZ Networks. XYZ Networks has an ownership interest in or distributes 17 channels, including five time shifted channels. Some of the channels are Discovery Channel, Nickelodeon, Nick Jr., arena, The LifeStyle Channel, LifeStyle Food, LifeStyle You, Channel [v], [V] Hits, MAX, Country Music Channel and The Weather Channel. The channels are distributed throughout Australia. Austar’s partner in XYZ Networks is Foxtel. Through agreements with XYZ Networks and other programmers, Austar has a number of long-term and key exclusive programming agreements for its regional territory expiring at various dates through 2020. In addition, Austar offers mobile telephony services through a reseller agreement.

Recently, certain areas in Australia that Austar is authorized to serve experienced significant flooding. Austar currently estimates that less than 10,000 of its subscribers were severely impacted by the flooding.

 

I-21


Table of Contents

The Americas

Our operations in the Americas are conducted primarily through UPC Holding’s 80% owned subsidiary VTR in Chile and our wholly-owned subsidiary Liberty Puerto Rico. We also have a subsidiary in Argentina and a joint venture interest in MGM Networks Latin America, both of which offer programming content in the Americas. On January 20, 2010, UPC Holding’s partner in VTR, Cristalerías de Chile SA (Cristalerías), sold its 20% interest in VTR to Corp Rec SA (Corp Rec). In connection with such sale, Cristalerías’ put right and other agreements concerning VTR terminated and we entered into a shareholders’ agreement with our new partner in VTR, Corp Rec.

VTR

VTR provides video, broadband internet and fixed telephony services in 56 cities, including Santiago, Chile’s largest city, the large regional cities of Iquique, Antofagasta, Concepción, Viña del Mar, Valparaiso and Rancagua, and smaller cities across Chile. VTR is Chile’s largest multi-channel television provider in terms of the number of video cable subscribers, and a leading provider of broadband internet and residential telephony services. VTR’s cable network is 76% upgraded to two-way capability and 82% of cable homes passed are served by a network with a bandwidth of at least 750 MHz. VTR makes its digital video, broadband internet and fixed-line telephony services available to 88%, 76% and 75%, respectively, of its homes passed.

VTR’s analog service is offered only in areas where its digital service is not available. For its analog cable customers, VTR offers two tiers of analog programming service: an entry tier analog service with up to 47 video channels and a full tier analog service with up to 68 video channels. For an additional monthly charge, analog subscribers may receive up to 10 premium channels (sports, movies and adult). VTR obtains programming from the United States, Europe, Argentina and Mexico. There is also domestic cable programming in Chile, based on local events such as football (soccer) matches and regional content. For its digital cable customers, VTR offers three digital cable packages. Its entry tier digital service includes 31 video channels. Its intermediate tier digital service includes up to 72 video channels (including channels in its entry tier analog service). For an additional monthly charge, a digital subscriber may upgrade to the full tier subscription with up to 96 video channels (including the channels in its full tier analog service). Each digital service also has 40 radio channels. A subscriber to the digital full tier may receive nine additional channels in HD, if the subscriber receives more than one service from VTR. Digital cable customers may also subscribe to one or more of 36 premium video channels, including up to 14 HD channels for an additional monthly charge. The premium channels include movies, sports, kids, international and adult channels. All digital cable packages include an electronic programming guide, the functionality for VoD service, including catch-up television and pay-per-view options. For an additional monthly charge, VTR offers digital boxes with DVR or HD DVR time-shifting functionality.

VTR offers four tiers of broadband internet services with download speeds ranging from one Mbps to 30 Mbps in 31 communities within Santiago and 35 communities outside Santiago. VTR also offers multi-feature telephony service over its cable network to customers in 31 communities within Santiago and 35 communities outside Santiago via either circuit-switched telephony or VoIP, depending on location. Of VTR’s total customers, 21.9% are double-play customers and 42.8% are triple-play customers.

VTR offers its broadband communications services to SOHO customers in its core communities within Santiago and its core metropolitan networks outside of Santiago.

In September 2009, the Subsecretary of Telecommunications (SubTel), which regulates the telecommunications industry for the Ministry of Transportation and Telecommunications, awarded a wholly-owned subsidiary of VTR a mobile license for one of three blocks of 30 MHz in the 1700/2100 MHz frequency band following a public auction process. Pursuant to such award, VTR’s subsidiary purchased the license for CLP 1,669.0 million ($3.6 million) and delivered a CLP 35.6 billion ($76.1 million) performance bond to guarantee the timely completion of the minimum buildout of the project required as a condition to the license. Following satisfaction of this requirement, SubTel released VTR’s obligations under the performance bond in December 2010. VTR plans to use this mobile license to construct its own mobile network that will be used in combination with mobile virtual network operator arrangements to provide mobile voice and broadband products.

 

I-22


Table of Contents

On February 27, 2010, certain areas served by VTR’s broadband distribution network in Chile experienced a significant earthquake. This earthquake and the related tsunami destroyed or otherwise adversely impacted an estimated 24,000 homes passed by VTR’s broadband communications network, resulting in the loss of an estimated 15,500 RGUs. With the exception of destroyed homes, service has been restored to substantially all of the homes within VTR’s network footprint.

Regulatory Matters

Overview

Video distribution, internet, telephony and content businesses are regulated in each of the countries in which we operate. The scope of regulation varies from country to country. In some significant respects, however, regulation in European markets, with the exception of Switzerland, is harmonized under the regulatory structure of the European Union (EU).

Adverse regulatory developments could subject our businesses to a number of risks. Regulation could limit growth, revenue and the number and types of services offered and could lead to increased operating costs and capital expenditures. In addition, regulation may restrict our operations and subject them to further competitive pressure, including pricing restrictions, interconnect and other access obligations, and restrictions or controls on content. Failure to comply with current or future regulation could expose our businesses to penalties.

Europe

Austria, Belgium, Bulgaria, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden and the United Kingdom are the Member States of the EU. As such, these countries are required to harmonize certain of their laws with certain EU rules. In addition, other EU rules are directly enforceable in those countries. Certain EU rules are also applicable across the European Economic Area, whose Member States are the EU Member States as well as Iceland, Liechtenstein and Norway.

In the broadcasting and communications sectors, there has been extensive EU-level legislative action. As a result, most of the markets in Europe in which our businesses operate have been significantly affected by the regulatory framework that has been developed by the EU. The exception to this is Switzerland, which is not a Member State of the EU or the European Economic Area and is currently not seeking any such membership. Regulation in Switzerland is discussed separately below, as well as regulation in certain Member States in which we face regulatory issues that may have a material impact on our business in that country.

EU Communications Regulation

The body of EU law that deals with communications regulation consists of a variety of legal instruments and policies (collectively referred to as the EU Communications Regulatory Framework or Regulatory Framework). The key elements of the Regulatory Framework are various legal measures, which we refer to as the Directives, that require Member States to harmonize their laws, as well as certain regulations that have effect without any transposition into national law.

The Regulatory Framework primarily seeks to open European markets for communications services. It harmonizes the rules for the establishment and operation of electronic communications networks, including cable television and traditional telephony networks, and the offer of electronic communications services, such as telephony, internet and, to some degree, television services. The Regulatory Framework does not generally address issues of content.

On December 18, 2009, the Official Journal of the EU published revisions to the Regulatory Framework. Such revisions must be transposed into the laws of the Member States before May 25, 2011. Although the changes to the

 

I-23


Table of Contents

Regulatory Framework are limited, they will affect us. Some changes are administrative. For example, a new body of European regulators has been created. Some new powers, however, have been given to national regulators, such as the right to mandate access to ducts without finding operators or service providers to have “Significant Market Power” (defined below). This power, in particular, could require us to open our ducts to competitors and not allow us to make use of all capacity in our ducts for our own needs, or could mean we get access to ducts of third parties instead of building our own ducts. Also, there will be enhanced powers for Member States to impose transparency obligations and quality of service requirements on internet service providers (ISPs), which may restrict our flexibility in respect of our broadband services.

In general, pending the adoption and the transposition by the Member States of the new Directives, the existing legal situation is unchanged.

Certain key provisions included in the current Regulatory Framework are set forth below. This description is not intended to be a comprehensive description of all regulation in this area.

Licensing and Exclusivity. The Regulatory Framework requires Member States to abolish exclusivities on communication networks and services in their territory and allow operators into their markets based on a simple registration. The Regulatory Framework sets forth an exhaustive list of conditions that may be imposed on communication networks and services. Possible obligations include, among other things, financial charges for universal service or for the costs of regulation, environmental requirements, data privacy and other consumer protection rules, “must carry” obligations, provision of customer information to law enforcement agencies and access obligations.

Significant Market Power. Certain of the obligations allowed by the Regulatory Framework apply only to operators or service providers with “Significant Market Power” in a relevant market. For example, the provisions of the Access Directive allow EU Member States to mandate certain access obligations only for those operators and service providers that are deemed to have Significant Market Power. For purposes of the Regulatory Framework, an operator or service provider will be deemed to have Significant Market Power where, either individually or jointly with others, it enjoys a position of significant economic strength affording it the power to behave to an appreciable extent independently of competitors, customers and consumers.

As part of the implementation of certain provisions of the Regulatory Framework, each Member State’s National Regulatory Authority (NRA) is required to analyze certain markets predefined by the EU Commission to determine if any operator or service provider has Significant Market Power. Until November 2007, there were 18 such markets but on November 13, 2007, the EU Commission adopted a new recommendation reducing the list of markets to seven. Such markets are referred to as the predefined markets. The effect of such new recommendation is that those Member States who had not analyzed one of the deleted markets or who had analyzed such a market and found no Significant Market Power are no longer required to carry out any analysis in that market. Member States who have analyzed one of the deleted markets and found Significant Market Power will have to re-analyze that market and, if they still find Significant Market Power, notify the EU Commission of the finding of Significant Market Power outside the seven predefined markets. Pending such re-analysis, the prior finding of Significant Market Power will remain in effect until the end of its duration. This process of re-analysis is not yet complete across the Member States. There is no specific timetable for such re-analysis, although the EU Commission may pressure Member States if it sees them as being slow in performing market analyses.

We have been found to have Significant Market Power in certain markets in which we operate and further findings are possible. In particular, in those markets where we offer telephony services, we have been found to have Significant Market Power in the termination of calls on our own network.

NRAs might seek to define us as having Significant Market Power in any of the seven predefined markets or they may define and analyze additional markets. In the event that we are found to have Significant Market Power in any particular market, a NRA could impose certain conditions on us. Under the Regulatory Framework, the EU Commission has the power to veto a finding by an NRA of Significant Market Power (or the absence thereof) in any market whether or not it is included in the seven predefined markets.

 

I-24


Table of Contents

Video Services. The distribution, but not the content, of television services to the public is harmonized by the Regulatory Framework. Member States are allowed to impose reasonable must carry obligations for the transmission of specified radio and television broadcast channels on certain operators under their jurisdiction. Such obligations should be based on clearly defined general interest objectives, be proportionate and transparent and be subject to periodic review. We are subject to some degree of “must carry” regulation in all European markets in which we operate. In some cases, these obligations go beyond what we believe is allowable under the Regulatory Framework. To date, however, the EU Commission has taken very limited steps to enforce EU law in this area, leaving intact “must carry” obligations that are in excess of what we believe to be allowed. Moreover, on December 22, 2008, the European Court of Justice took a very narrow view of the restriction on “must carry” under the Regulatory Framework, treating it as a procedural formality. Therefore, it is unlikely that there will be any reduction in the “must carry” regulations in the foreseeable future.

Net Neutrality/Traffic Management. Other current regulatory debates at the EU and national level include net neutrality/traffic management, as well as responsibilities for ISPs on illegal content or activities on the internet. With respect to net neutrality/traffic management, the EU Commission is expected to give guidance to national regulators in 2011 as to how they should exercise their powers on transparency and quality of service for internet providers. We are unable to predict what affect these various debates will have on our European operations. It is possible, however, that new obligations will be imposed on us.

EU Broadcasting Law

Although the distribution of video channels by a cable operator is within the scope of the Regulatory Framework, the activities of a broadcaster are harmonized by other elements of EU law, in particular the Audiovisual Media Services Directive (AVMS). AVMS, which was published in its final form on March 10, 2010, replaced the pre-existing EU regime in this area. Generally, broadcasts originating in and intended for reception within an EU Member State must respect the laws of that Member State. Pursuant to AVMS, however, EU Member States are required to allow broadcast signals of broadcasters established in another EU Member State to be freely transmitted within their territory so long as the broadcaster complies with the law of their home state. This is referred to as the country of origin principle. Under AVMS (a change from pre-existing rules), the country of origin principle applies also to non-linear services, such as VoD. Accordingly, we should be able, if we so elect, to offer our own VoD services across the European Economic Area based on the regulation of the country of origin. As a result, we could structure our business to have a single regulatory regime for all of our VoD service offered in Europe. In addition, when we offer third party VoD services on our network, it should be the business of the third party, in its capacity as provider of the services, and not us as the local distributor, that is regulated in respect of these services.

Although Member States should have transposed the requirements of AVMS into national law, not all have completed such transposition. It is not clear what practical effect this will have on our operations. Pending accurate transposition, there can be no assurance that the requirements on VoD will, in fact, operate in the manner described above in any individual Member State. As a result, we may face inconsistent and uncertain regulation of our VoD service in Europe.

In respect of channels originating in many European countries, The European Convention on Transfrontier Television extends the country of origin principle beyond the EU’s borders into certain other European territories into which we sell our channels, including Switzerland. The Convention is an instrument of the Council of Europe, with 47 member countries, including the 27 EU Member States, and is quite similar to the EU rules in effect before AVMS in its aims of free movement of channels, although it only achieves that with member countries that have ratified its text and not all have so ratified. The Council of Europe has considered modifying the Convention along the lines of AVMS but has not announced any such modifications or if any modifications will be made.

AVMS also establishes quotas for the transmission of European-produced programming and programs made by European producers who are independent of broadcasters.

 

I-25


Table of Contents

Other European Level Regulation

In addition to the industry-specific regimes discussed above, our European operating companies must comply with both specific and general legislation concerning, among other matters, data protection, data retention and electronic commerce. Many of these regimes are, or will be, reviewed at the EU level.

Our European operating companies are also subject to both national and European level regulations on competition and on consumer protection, which are broadly harmonized at the EU level. For example, while our operating companies may offer their services in bundled packages in European markets, they are sometimes not permitted to make a subscription to one service, such as cable television, conditional upon a subscription to another service, such as telephony. They may also face restrictions on the degree to which they may discount certain products included in the bundled packages.

Currently the telecommunications equipment we provide our customers, such as digital set-top boxes, is not subject to regulation regarding energy consumption in the EU, except as discussed below. The EU Commission is, however, considering the need for mandatory requirements regarding energy consumption of such equipment. We have been participating in discussions and studies regarding energy consumption with various parts of the EU Commission and with experts working on their behalf. In addition, we are working with suppliers of our digital set-top boxes to lower power consumption, as well as looking at possibilities through software to lower the power consumption of the existing fleet of digital set-top boxes. Finally, we are working with a large group of companies to promote the possibility of a voluntary agreement on set-top box power consumption as an alternative to regulation. Nevertheless, legislation in this area may be adopted in the near future and could adversely affect the cost and/or the functionality of equipment we deploy in customer homes.

Pursuant to an EU regulation on standby power effective January 7, 2010, many devices are required to have either a low power standby mode or off mode unless it is inappropriate to have either such mode on the device. For this purpose, our set-top boxes and certain other equipment are equipped with an off switch.

Digital Dividend. Uses for the spectrum to be made available as part of the switch off of analog television is currently under review both at EU level and in the Member States. This spectrum, known as the “digital dividend”, is in the 700 – 862 MHz band. Whether this spectrum is available for uses other than broadcasting, such as long-term evolution mobile services, will be voted on by Member States in March 2011. Also, the terms under which this spectrum will become available will vary among the European countries in which we operate. Certain uses of this spectrum may interfere with services carried on our cable networks. If this occurs, we may need to: (1) avoid using certain frequencies on our cable networks for certain or all of our services, (2) make some changes to our networks, or (3) change the equipment which we deploy. As a result, we are taking steps to be part of the Member States’ long-term evolution mobile trials in order to develop mitigation techniques and to engage NRAs to launch regulatory dialogues with equipment manufacturers and mobile operators to develop co-existing networks.

Germany

Germany has transposed the EU laws into national laws although under the German legal system competency is split between the Federal State (telecommunication law) and the German federal states (media law). The German Telecommunications Act broadly implemented the Regulatory Framework and covers the distribution of any signal by telecommunications networks encompassing television signals, internet data and telephony. The recent revisions to the Regulatory Framework must be transposed in Germany before June 19, 2011. Notwithstanding, Germany has various unusual features with respect to media regulation as described below. Moreover, the Federal Cartel Office, the national competition authority, plays an important role with respect to infrastructure and media regulation. The Federal Cartel Office has powers to address competition issues in all markets. Also, the German Federal Network Agency is responsible for the regulation of the German telecommunications market.

Regulation of the media falls within the legislative competence of the German federal states (Bundesländer). The media laws of all 16 federal states have been partially harmonized by the State Broadcasting Treaty

 

I-26


Table of Contents

(Rundfunkstaatsvertrag). The State Broadcasting Treaty establishes the main framework of the German regulation of broadcast. Each German state has established its own independent regulatory body, the state media authority (Landesmedienanstalt). The state media authorities are primarily responsible for licensing and supervision of commercial broadcasters and the allocation of transmission capacities for radio and television channels. They are also in charge of the regulation of conditional access systems, interfaces, navigators and the bundling of programs.

The allocation and use of analog cable transmission capacities for both radio and television channels are governed by the “must carry” rules of the respective states. The allocation of digital transmission capacities for digital television and radio channels are, however, primarily governed by the “must carry” rules of the State Broadcasting Treaty. The media law in the states of North-Rhine-Westphalia and Hesse require Unitymedia to carry 25 and 31 analog channels, respectively, and also limits the possibility to convert these analog cable channels into digital channels.

The operation of conditional access systems for television services is governed by both the State Broadcasting Treaty and the German Telecommunications Act. Generally, operators must not unfairly obstruct or discriminate against broadcasters and other content providers through conditional access systems. Sky Deutschland AG (Sky Deutschland) made a claim against Unitymedia alleging discriminatory treatment as to the provision of bandwidth and conditional access services. The Federal Network Agency, however, rejected Sky Deutschland’s claim with respect to the bandwidth usage and it has not yet considered Sky Deutschland’s claim on conditional access service.

The Federal Cartel Office had initiated an abuse procedure against Unitymedia and other market participants with the intention to impose an obligation on them to implement a CI+ card slot in every set-top box provided to their respective customers. In 2010, the Federal Cartel Office put on hold this procedure due to the accelerated proliferation of television sets, which already include digital video broadcasting terrestrial tuners and CI+ card slots.

The Netherlands

The Netherlands has an electronic communications law that broadly transposes the Regulatory Framework. According to this electronic communications law, Onafhankelijke Post en Telecommunicatie Autoriteit (OPTA), the Netherlands NRA, should perform a market analysis to determine which, if any, operator or service provider has Significant Market Power. OPTA has completed its first and second round of market analysis and, in November 2010, commenced its third round of market analysis.

During 2008, OPTA conducted a second round analysis of certain markets to determine if any operator or service provider had Significant Market Power within the meaning of certain directives originally promulgated by the EU in 2008. With respect to television services, OPTA issued a draft decision on August 5, 2008, again finding UPC Netherlands, as well as other cable operators, to have Significant Market Power in the market for wholesale broadcasting transmission services and imposed new obligations. The decision became effective on March 17, 2009. UPC Netherlands filed an appeal against the decision on April 15, 2009, with College van Beroep voor het bedrijfsleven (CBb), the Dutch Supreme Administrative Court. Pending the outcome of this appeal, UPC Netherlands complied with the decision. On August 18, 2010, CBb annulled the decision, which lifted all imposed obligations. Consequently, OPTA withdrew the related implementation and tariff decision on resale of analog services and rejected pending dispute procedures.

OPTA’s market analysis decision on call termination, which combines both the fixed termination market and the mobile termination market, became effective July 7, 2010. All providers of call termination on fixed and mobile networks in the Netherlands have been found to have Significant Market Power. As a result, UPC Netherlands is subject to obligations regarding access, transparency and tariff regulation. The decision requires UPC Netherlands to further reduce its fixed termination tariffs as of January 1, 2012. UPC Netherlands filed an appeal with CBb, which is still pending.

As part of OPTA’s third round of market analysis, UPC Netherlands, as well as other providers, received questionnaires regarding broadcast transmission services and, for the first time, regarding bundling of television services with other services, including broadband internet and telephony services. UPC Netherlands has completed the questionnaire and OPTA is expected to release a consultation paper in the first half of 2011.

 

I-27


Table of Contents

The Netherlands transposed the AVMS directive in the Media Act on December 18, 2009.

Switzerland

Switzerland has a regulatory system which partially reflects the principles of the EU, but otherwise is distinct from the European regulatory system of telecommunications. The Telecommunications Act (Fernmeldegesetz) regulates, in general, the transmission of information, including the transmission of radio and television signals. Most aspects of the distribution of radio and television, however, are regulated under the Radio and Television Act (Radio und Fernsehgesetz). In addition, the Competition Act and the Act on Price Surveillance are potentially relevant to our business. With respect to energy consumption of electronic home devices, the Energy Act and the revised Energy Ordinance have been applicable since January 2010, to television set-top boxes as described below.

Under the Telecommunications Act, any provider of telecommunications services needs to register with the Federal Office of Communications. Dominant providers have to grant access to third parties, including unbundled access to the local loop and, for four years from April 1, 2007, bitstream access. But this access regulation is restricted to the copper wire network of the incumbent, Swisscom AG (Swisscom). Therefore, such unbundling obligations do not apply to Cablecom and other cable operators. Also, any dominant provider has to grant access to its ducts, subject to sufficient capacity being available in the relevant duct. At this time, only Swisscom has been determined to be dominant in this regard. All operators are obliged to provide interconnection and have to ensure interoperability of services.

In 2008, Swisscom announced its intention to roll out a national fiber-to-the-home network following the completion of its fiber-to-the-building and fiber-to-the-node networks (fiber-to-the-home/-building/-node is referred to herein as FTTx) in Switzerland. Whether this will require legislative action on regulating access to such new network by third parties is under discussion. In addition, several municipality-owned utility companies have announced or started to roll out local fiber networks, some in cooperation with Swisscom. Currently, the Swiss Competition Commission is reviewing the proposed cooperation agreements. As no general state aid regulation exists in Switzerland, such initiatives could only be deemed illegal if a clear case of cross subsidization could be made. Any such fiber roll out could lead to increased competition for Cablecom.

Under the Radio and Television Act and the corresponding ordinance, cable network operators are obliged to distribute certain programs that contribute in a particular manner to media diversity (must carry programs). The Federal government and the Federal Office of Communications can select up to 25 programs that have to be distributed in analog without the cable operator being entitled to compensation. Currently, 17 programs have must carry status.

Encryption of Cablecom’s digital offering and its exclusive offering of proprietary set-top boxes are permissible under the Radio and Television Act. There is, however, an initiative, adopted by the Swiss Parliament in June 2009, which demands (1) a ban on encryption of the digital basic offering or, alternatively, (2) the introduction of a conditional access module. In order to implement this initiative, the Federal Council has issued a draft for the necessary modification of the Radio and Television Act, according to which the Federal Council would be granted the power to impose an obligation to provide for a conditional access module. In December 2010, the Council of States rejected the proposed change in the law. The vote of the National Council will take place in early 2011. The amended Act will not, however, become effective before 2012. In 2010, Cablecom introduced its digicard, which should satisfy the alternative of offering a conditional access module.

Cablecom’s retail customer prices have been subject to review by the Swiss Price Regulator. Effective June 1, 2010, Cablecom entered into an agreement with the Swiss Price Regulator, which defines prices for analog and a basic digital offer until the end of 2012. Whether Cablecom will continue to be subject to price regulation going forward will depend on the assessment of its market position.

 

I-28


Table of Contents

Belgium (Telenet)

Belgium has broadly transposed the Regulatory Framework into law. According to the electronic communications law of June 13, 2005, the Belgisch Instituut voor Post en Telecommunicatie (BIPT), the Belgian NRA, should perform the market analysis to determine which, if any, operator or service provider has Significant Market Power.

Telenet has been declared an operator with Significant Market Power on the market for call termination on an individual fixed public telephone network. With respect to the market for call termination on individual fixed networks, an on-going three year reduction of termination rates was imposed on Telenet beginning January 1, 2007. The final rate reduction in January 2009 resulted in near reciprocal termination tariffs (Telenet charges the interconnection rate of the incumbent telecommunications operator, Belgacom NV/SA (Belgacom), plus 15%).

Although no determination has been made on whether Telenet has Significant Market Power on the market for call termination on individual mobile networks, its rates will be affected by rate limitations implemented by BIPT. In June 2010, BIPT imposed a steep rate reduction over the next two years resulting in (1) an initial 45% decline effective August 1, 2010, over the then average rate and (2) further declines to a rate in January 2013 that will be approximately 79% less than the average rate implemented on August 1, 2010. Also, BIPT indicated the rates of mobile operators, such as Telenet, using a host network to provide service may be capped by the termination rates of their host network.

In Belgium, both the BIPT and the regional media regulators (the Vlaamse Media Regulator for Flanders, Conseil Supérieur de l’Audiovisuel (Wallonia), and Medienrat (in the German speaking community)) have worked together in order to approve the wholesale broadband and broadcasting analysis.

In December 2010, the BIPT and the regional regulators for the telecommunications and media sectors published their respective draft decisions reflecting the results of their joint analysis of the retail television market in Belgium. In addition, the BIPT published an analysis of the wholesale broadband market in Belgium. These draft decisions would impose regulatory obligations on both cable, based on the retail television market analysis, and the incumbent telecom operator, Belgacom, based on the wholesale broadband market analysis. For cable operators, the remedies in their respective footprints would include (1) an obligation to make a resale offer at “retail minus” of the cable analog package available to third party operators, (2) an obligation to grant third party operators access to the digital television platforms and (3) an obligation to make a resale offer at “retail minus” of broadband internet access available to beneficiaries of a resale television or digital television access obligation that wish to offer bundles to their customers. For Belgacom the remedies would include (1) an obligation to provide wholesale access to the local loop, (2) an obligation to provide wholesale internet access at bitstream level and (3) an obligation to provide wholesale multicast access for distribution of television channels. If these draft decisions are adopted and implemented in their current form, they would imply that access must be granted against a wholesale tariff, capped at the tariff computed on the basis of the “retail-minus” method. The “retail minus” method is calculated as the retail price for the offered service, excluding value-added taxes and copyrights, and further deducting the retail costs avoided by offering the wholesale service (such as, costs for billing, franchise, consumer service, marketing, and sales).

The national and regional regulators are currently holding a public consultation on the proposed measures. The draft decisions are subject to a number of subsequent steps before becoming final, including coordination of the decisions between the national and federal regulators, non-binding advice by the Belgian Competition Council and subsequent binding input from the European Commission, as well as consultation with all market players, including Telenet. Telenet believes that there are serious grounds to challenge the findings of the regulators’ retail television market analysis and the resulting regulatory remedies. It cannot be excluded, however, that this process will eventually lead to one or more regulatory obligations being imposed upon Telenet. The draft decisions aim to, and in their potential application may, strengthen Telenet’s competitors by granting them access to Telenet’s network to offer competing products and services. In addition, any access granted to competitors could (1) limit the bandwidth available to Telenet to provide new or expanded products and services to the customers served by its network and (2) adversely impact Telenet’s ability to maintain or increase its revenue and cash flows. It is presently unclear whether these draft decisions, or any variations thereof, will be adopted and implemented.

 

I-29


Table of Contents

With regard to the transposition of AVMS, a decree has been adopted by the Flemish Parliament in March 2009. Because VoD services were already regulated by Belgium media law, especially in Flanders, the transposition of AVMS has not caused a significant change in the regulation of VoD services.

Asia/Pacific

Australia

Overview. Subscription television, internet and broadband access and mobile telephony services are regulated in Australia by a number of Australian Commonwealth statutes. In addition, state and territory laws, including environmental and consumer protection legislation, influence aspects of Austar’s business.

Broadly speaking, the regulatory framework in Australia distinguishes between the regulation of content services and the regulation of facilities used to transmit those services. The Australian Broadcasting Services Act 1992 (C’th) (BSA) regulates the ownership and operation of all categories of television and radio services in Australia and also aspects of internet and mobile content. The technical delivery of Austar internet and mobile services are separately licensed under the Radiocommunications Act 1992 (C’th) (Radiocommunications Act) or the Telecommunications Act 1997 (C’th) (Telecommunications Act), depending on the delivery technology utilized. Other legislation of key relevance to Austar is the Competition and Consumer Act 2010 (C’th) (formerly the Trade Practices Act 1974 (C’th), which incorporates a new national consumer protection law, the Privacy Act 1988 (C’th) and the Do Not Call Register Act 2006 (C’th).

Licensing of Television Broadcasting. The BSA regulates subscription television broadcasting services through a licensing regime managed by the Australian Communications and Media Authority (Media Authority). Austar and its related companies hold subscription television broadcasting licenses under the BSA. These licenses are for an indefinite period and are issued subject to general license conditions, which may be revoked or varied by the Australian Government and which may include specific additional conditions. License conditions include a prohibition on cigarette or other tobacco advertising; a requirement that subscription fees must be the predominant source of revenue for the service (over, for example, advertising); a requirement that the licensee must remain a “suitable” licensee under the BSA; a requirement that customers must have the option to rent domestic reception equipment; and a requirement to comply with provisions relating to anti-siphoning (as described below) and the broadcast of R-rated material. An additional obligation on subscription television licensees, who provide a service predominantly devoted to drama programs, is to spend at least 10% of their annual program expenditure on new Australian drama programs. Austar makes the required investments in such programming.

Sports Rights Regulation — Anti-siphoning. The BSA prohibits subscription television broadcasting licensees from obtaining exclusive rights to certain events that the Australian Government considers should be freely available to the public. These events, which are specified on an “anti-siphoning list”, include a number of highly popular sporting events in Australia. The Australian Government revised the anti-siphoning scheme at the end of 2010 to consist of two lists, Tier A and Tier B. Tier A events are considered iconic, are relatively limited in number and must be broadcast live by FTA service providers on their primary, or core, channels. Tier B events may be broadcast on FTA service providers’ secondary or multi-channel live or on a delay of up to four hours. In addition, the revised scheme has removed several sporting events, which will allow subscription television operators, in addition to FTA networks, to bid for broadcast rights for these events. The Tier A and Tier B lists are expected to be further revised in 2011 to give subscription television operators more rights with respect to certain sporting events.

Digital Switchover. The Australian Government has confirmed that the switch off of analog broadcasting will be complete by the end of 2013. The Australian Government is implementing a staggered region by region approach to the analog switch off. Under this approach, Austar’s regional markets are being switched earlier than the metropolitan markets, starting in 2010 and finishing by the end of 2013. The switch off in two areas within Austar’s service area was successfully completed in 2010. Subscription television subscribers with access to digital FTA channels via Austar will be counted in the penetration of digital ready households. Austar has an agreement with the Australian Government that Austar’s hybrid satellite and digital FTA box will be presented as a valid option for

 

I-30


Table of Contents

consumers to convert to digital television in Austar’s service areas. FTA multi-channels will not be required to provide minimum levels of Australian content or caption a minimum number of hours until switch off is complete in 2013. The primary FTA channel provided by a FTA broadcaster must continue to comply with minimum Australian content and captioning requirements.

FTA Multi-channeling. Each FTA commercial network must provide an SD version of its primary, or core, analog channel, and is entitled to broadcast a second SD channel and one HD channel in the digital spectrum given to it by the Federal Government to support the digital switchover. The three major FTA commercial networks will be entitled to use their digital spectrum however they want once digital switchover is complete. The two national public broadcasters in Australia, the ABC and the SBS, currently broadcast four and three digital channels, respectively, and have no restrictions on the number of digital channels that they can broadcast.

Digital Dividend. Uses for the spectrum to be made available as part of the switch off of analog television is currently under review by the Australian Government. This spectrum, known as the “digital dividend”, is in the 700 MHz band. The Australian Government commenced a second stage of industry consultation addressing issues surrounding use of the digital dividend. Issues for discussion include the restacking of the current digital broadcasting service bands used by FTA broadcasters and potential uses for the spectrum, such as mobile and wireless broadband, additional FTA services and 3D television.

Foreign Media Ownership and Cross Media Ownership. Foreign media ownership rules in Australia have been relaxed, although media has been retained as a “sensitive” sector and foreign investment in the media sector remains subject to the approval of the Treasurer of the Commonwealth of Australia. Cross media ownership rules provide that an operator may own two of three types of media assets (newspapers, television and radio) in a market, subject to there being at least five commercial media groups in metropolitan markets and four commercial media groups in regional markets.

Energy Efficiency. Mandatory limits on the emission levels of basic set-top boxes (excluding DVRs) sold in Australia came into effect on December 1, 2008. Austar agreed with the Australian Government and Foxtel to implement a voluntary scheme (Code) to reduce the energy consumption of complex set-top boxes in the subscription television industry. The Code was signed by Austar and Foxtel in December 2009, and endorsed by the Australian Government. The Code will exempt Austar from mandatory energy regulation in the sector.

Communications. Prior to the Spectrum Sale, Austar held certain spectrum licenses issued under and regulated by the Radio Communications Act. Following the Spectrum Sale, a subsidiary of Austar continues to hold a carrier license issued under the Telecommunications Act. This license authorizes Austar to operate its trial Worldwide Interoperability for Microwave Access (WiMax) broadband network in radiofrequency spectrum that Austar has licensed from the Government-owned broadband company, NBN Co, until June 2011. The carrier license requires Austar’s compliance with a set of carrier obligations under the Telecommunications Act. Other Austar subsidiaries provide dial-up internet services, mobile telephony services, and broadband services operated as carriage service providers and are required to comply with certain aspects of Australian telecommunications legislation. These service providers must observe statutory obligations in relation to access, law enforcement and national security and interception, and must become members of the Telecommunications Industry Ombudsman scheme, which manages complaints.

National Broadband Network. In April 2009, the Australian Government announced that it would establish a new company, NBN Co, which will invest up to $41 billion over 10 years to build and operate a national broadband network (NBN). Under the plan, FTTx networks will be built to serve approximately 93% of homes and workplaces with speeds up to 1000 Mbps. Next generation wireless and satellite technologies will supplement the FTTx build in regional and remote areas of Australia with speeds from 12 Mbps. NBN Co has been established and will be wholly-owned by the Australian Government pending completion of the roll out of the NBN. Full privatization is expected five years after the build is complete. NBN Co will be wholesale only and operate on an open access basis. The Australian Government has embarked on legislative changes that will set out the governance arrangements for

 

I-31


Table of Contents

NBN Co and will facilitate the roll out of FTTx networks, including requiring use of fiber optic technology in greenfield developments and improving access to existing infrastructure for roll out. On November 29, 2010, the Australian Government secured passage of the first of these legislative changes, a Competition and Consumer Safeguards Bill, which provides for the future separation of the wholesale and retail businesses of the incumbent telecommunications provider, Telstra Corporation Limited (Telstra), and defines the principles surrounding the progressive migration of Telstra’s customers onto the NBN. The remaining pieces of proposed legislation are an NBN Companies Bill, addressing the governance, ownership and operating arrangements for NBN Co, and an NBN Access Arrangements Bill, containing rules for the supply of NBN Co’s wholesale-only services. These Bills are scheduled to be debated by the legislature in February 2011.

The Americas

Chile

In addition to the regulations described below, VTR was subject to certain regulatory conditions as a result of its combination with Metrópolis Intercom SA in April 2005 until mid-2010. On December 12, 2006, Liberty Media Corporation (Liberty Media), the former parent company of our predecessor, announced publicly that it had agreed to acquire an approximate 39% interest in The DirecTV Group, Inc. (DirecTV). On August 1, 2007, VTR received formal written notice from the Chilean Federal Economic Prosecutor (FNE) stating that Liberty Media’s acquisition of the DirecTV interest would violate one of the regulatory conditions imposed by the Chilean Antitrust Court on VTR’s 2005 combination with Metrópolis Intercom SA prohibiting VTR and its control group from participating, directly or indirectly through a related person, in Chilean satellite or microwave television businesses through April 2010. On March 19, 2008, following the closing of Liberty Media’s investment in DirecTV, the FNE commenced an action before the Chilean Antitrust Court against John C. Malone, the chairman of our board of directors and of Liberty Media’s board of directors. In this action, the FNE alleged that Mr. Malone is a controller of VTR and either controls or indirectly participates in DirecTV’s satellite operations in Chile, thus violating the condition. The FNE requested the Antitrust Court to impose a fine on Mr. Malone and order him to effect the transfer of the shares, interests or other assets that are necessary to restore the independence, in ownership and administration, of VTR and DirecTV. Although Liberty Media no longer owns an interest in DirecTV and Mr. Malone’s voting interest in DirecTV has been reduced to less than 5%, the matter is still pending. We do not expect the ultimate resolution of this matter to have a material impact on our operations.

Video. Cable television services are regulated in Chile by the Ministry of Transportation and Telecommunications (the Ministry). VTR has permits to provide wireline cable television services in the major cities, including Santiago, and in most of the medium-sized markets in Chile. Wireline cable television permits are granted for an indefinite term and are non-exclusive. As a result, more than one operator may be in the same geographic area. As these permits do not use the radio-electric spectrum, they are granted without ongoing duties or royalties. Wireless cable television services are also regulated by the Ministry and similar permits are granted for these services. Wireless cable permits have a 10-year term and are renewable for additional 10-year terms at the request of the permit holder.

With respect to digital terrestrial television (DTT) services, the Chilean Government adopted the Integrated Services Digital Broadcasting — Terrestrial (ISDB-T) standard in September 2009. Prior to such action, in November 2008, the Chilean Government introduced two bills related to DTT regarding stricter content standards and new rules for granting and operating DTT concessions (among other matters), which are still pending. Must carry and retransmission consent obligations have been added to these bills. We are currently unable to predict the outcome of this matter or its impact on VTR.

Cable television service providers in Chile are not required to carry any specific programming, but some restrictions may apply with respect to allowable programming. The National Television Council has authority over programming content, and it may impose sanctions on providers who are found to have run programming containing excessive violence, pornography or other objectionable content. A bill is pending before the Chilean Congress, which may result in additional controls on broadcasters that provide programming not suitable for children.

 

I-32


Table of Contents

Cable television providers have historically retransmitted programming from broadcast television, without paying any compensation to the broadcasters. Certain broadcasters, however, have filed lawsuits against VTR claiming that by retransmitting their signals VTR has breached either their intellectual property rights or the Chilean antitrust laws. These lawsuits are still pending, with decisions expected in 2011.

Internet. Internet services are considered complementary telecommunication services and, therefore, do not require concessions, permits, or licenses. Pursuant to a condition imposed on VTR as a result of its combination with Metrópolis Intercom SA, VTR offers its broadband capacity for resale of internet services on a wholesale basis. After a three-year long discussion, Chilean Law on Intellectual Property was amended in May 2010. The amendment included a new chapter limiting the liability of ISPs for copyright infringements over their networks, provided the ISPs fulfill certain conditions, which vary depending on the service provided. In general, the limitation of liability of ISPs will require the ISPs to fulfill the following conditions: (1) establish public and general terms upon which the ISP may exercise its right to terminate its agreements with content providers that are judicially qualified as repeat offenders against intellectual property rights protected by law; (2) not interfere with the technological measures of protection and rights management of protected works; and (3) not generate nor select the content or its addressees. Since its enactment in May 2010, these rules apply without prejudice to the application of the general civil rules of liability.

In order to protect the constitutional rights of privacy and safety of communications, ISPs are prohibited from undertaking surveillance measures over data content on their networks. Also, special summary proceedings have been created in order to safeguard intellectual property rights against violations committed through networks or digital systems. These proceedings include measures designed to withdraw, disqualify or block infringing content in the ISP’s network or systems. The law also provides for the right of intellectual property owners to judicially request from ISPs the delivery of necessary information to identify the provider of infringing content.

On June 13, 2010, the Chilean Senate approved a Bill on Net Neutrality, which became effective in August 2010. This Bill prohibits “arbitrary blockings” and the provision of differentiated service conditions according to the origin or ownership of the content or service provided through the internet. The Bill authorizes ISPs to take measures to ensure the privacy of their users, virus protection and safety of the net, as long as these measures do not entail traffic shaping with anticompetitive means. Certain consumer information obligations related to the characteristics of each internet access plan and the traffic management policies applied by each ISP are expected to be imposed on ISPs during the first quarter of 2011.

Telephony. The Ministry also regulates telephony services. The provision of telephony services (both fixed and mobile) requires a public telecommunication service concession. VTR has telecommunications concessions to provide wireline fixed telephony in most major and medium-sized markets in Chile. Telephony concessions are non-exclusive and have renewable 30-year terms. The original term of VTR’s wireline fixed telephony concessions expires in November 2025. Long distance telephony services are considered intermediate telecommunications services and, as such, are also regulated by the Ministry. VTR has concessions to provide this service, which is non-exclusive, for a 30-year renewable term expiring in September 2025.

Local service concessionaires are obligated to provide telephony service to all customers that are within their service area or are willing to pay for an extension to receive service. All local service providers, including VTR, must give long distance telephony service providers equal access to their network connections at regulated prices and must interconnect with all other public services concessionaires whose systems are technically compatible.

In January 2008, the Ministry requested the Chilean Antitrust Tribunal to review the telephony market. In January 2009, the Antitrust Tribunal concluded that, although the local service telephony market cannot be characterized as competitive, it has enhanced its level of competition since it was reviewed in 2003. As a result, the Antitrust Tribunal determined that incumbent local telephone operators will no longer be subject to price regulation for most services at a retail level. The Antitrust Tribunal recommended that the Ministry, for the incumbent operators only, take measures avoiding fixed/mobile bundles and differential prices for on net and off net traffic. The Antitrust Tribunal also recommended that the Ministry set forth rules, for all operators, forbidding tied sales of

 

I-33


Table of Contents

telecommunication services included in a bundle, and imposing effective network unbundling and number portability. The Antitrust Tribunal also declared some ancillary services and network unbundling services to be subject to price regulation for all companies, including VTR.

Interconnect charges (including access charges and charges for network unbundling services) are determined by the regulatory authorities, which establish the maximum rates that may be charged by each operator for each type of service. This rate regulation is applicable to incumbent operators and all local and mobile telephony companies, including VTR. The maximum rates that may be charged by each operator for the corresponding service are made on a case-by-case basis and are effective for five years. VTR’s current interconnection and unbundling rates are effective until June 2012.

In August 2009, SubTel started a new tariff process on VTR related to certain ancillary telephone services (provided to end users) and additional network unbundling services (bitstream). The final tariff decree is still pending and we expect it will be delivered during the first half of 2011.

During 2009, SubTel awarded a wholly-owned subsidiary of VTR a license for 30 MHz of spectrum in the 1700/2100 MHz frequency band. The license has a 30-year renewable term.

In April 2007, a bill regarding Telecommunications Antennas Towers was introduced in the Chilean House of Representatives. It includes stricter restrictions on the construction of new telecommunications towers, including (1) the requirement to obtain prior authorization from local authorities and certain neighbors (as defined) to build antennas in new sites and (2) prohibiting the placement of antennas in sites smaller than 400 square meters. The bill also includes provisions about co-localization of telecommunications antennas. A strong opposition to this Bill has been raised by the incumbent mobile operators on constitutional grounds. The government’s position about co-localization is unclear. Based on public statements by Ministry officials, we expect this Bill to be approved by the House of Representatives during 2011.

Rate Adjustments. With respect to VTR’s ability to increase the price of its different telecommunication services to its subscribers, the General Consumer Protection Laws contain provisions that may be interpreted by the National Consumer’s Service (Sernac) to require that any increase in rates — over the inflation rate — to existing subscribers must be previously accepted and agreed to by those subscribers, impairing VTR’s capacity to rationalize its pricing policy over current customers. VTR disagrees with this interpretation and is evaluating its options for adjusting or increasing its subscriber rates in compliance with applicable laws.

Channel Lineup. With respect to VTR’s ability to modify its channel lineup without the previous consent of the subscribers, Sernac expressed that such action may be against certain provisions of the applicable Consumer Protection Law, including those provisions prohibiting misleading advertisement, unilateral modification of the clients’ contracts and abusive clauses. Sernac filed several lawsuits against VTR. In June 2008, the Court of Appeals of Santiago ruled against VTR in one of these lawsuits, and the Supreme Court rejected an appeal of this decision. Based on nine favorable rulings recently obtained by VTR, granting the company the right to modify its channel lineup, VTR disagrees with Sernac’s interpretation. To prevent future conflicts with Sernac, VTR is negotiating with Sernac to establish common acceptable criteria to enable modifications of VTR’s channel lineup.

Competition

The markets for video, broadband internet and telephony services, and for video programming, are highly competitive and rapidly evolving. Consequently, our businesses have faced and are expected to continue to face increased competition in these markets in the countries in which they operate and specifically, as a result of deregulation, in the EU. The percentage information in this section is as of the date of the relevant sources listed in the following sentences. The percentage information provided below for the various countries in Europe is based on information from the subscription based website DataXis for the third quarter of 2010. For Chile, the percentage information is based on information from DataXis for the third quarter of 2010 and information provided by SubTel as of September 30, 2010. The competition in certain countries in which we operate is described more specifically after the respective competition overview on video, broadband internet and telephony.

 

I-34


Table of Contents

Broadband Communications

Video Distribution

Our businesses compete directly with a wide range of providers of news, information and entertainment programming to consumers. Depending upon the country and market, these may include: (1) traditional over-the-air broadcast television services; (2) DTH satellite service providers; (3) DTT broadcasters, which transmit digital signals over the air providing a greater number of channels and better quality than traditional analog broadcasting; (4) other cable operators in the same communities that we serve; (5) other fixed-line telecommunications carriers and broadband providers, including the incumbent telephony operators, offering (a) DTH satellite services, (b) internet protocol television (IPTV) through broadband internet connections using DSL, ADSL or very high-speed DSL technology (which we refer to as DSL-TV), or (c) IPTV over fiber optic lines of FTTx networks; (6) satellite master antenna television systems, commonly known as SMATVs, which generally serve condominiums, apartment and office complexes and residential developments; (7) MMDS operators; (8) over-the-top video content providers utilizing our or our competitors’ high-speed internet connections; and (9) movie theaters, video stores, video websites and home video products. Our businesses also compete to varying degrees with other sources of information and entertainment, such as online entertainment, newspapers, magazines, books, live entertainment/concerts and sporting events.

 

   

Europe. In the European countries in which we operate, over 90% of the households own at least one television set. Our principal competition in the provision of video services in our European markets has historically been from traditional FTA broadcasters; DTH satellite providers in many markets, such as Austria and Ireland where we compete with long-established satellite platforms; and cable operators in various markets where portions of our systems have been overbuilt. In some markets, mobile broadband is gaining in popularity and competition from SMATV or MMDS could be a factor. Also, as accessibility to video content on the internet increases, over-the-top viewing is becoming a competitive factor. Our operations in Hungary, Poland, Romania and Slovakia are significantly overbuilt by other cable operators. Based on research of various telecommunication publications, including the Organization for Economic Cooperation and Development, and internal estimates, approximately 51%, 30% and 46%, respectively, of our operations in Hungary, Romania and Slovakia are overbuilt. In Poland, assuming the completion of the acquisition of Aster, approximately 36% of our operations are overbuilt. In all these areas competition is particularly intense.

Over the last several years, competition has increased significantly from both new entrants and established competitors using advanced technologies, aggressively priced services and exclusive channel offerings. DTT is a significant part of the competitive market in Europe as a result of a number of different business models that range from full blown encrypted pay television to FTA television. Similarly DSL-TV, which is either provided directly by the owner of the network or by a third party, is fast becoming a significant part of the competitive environment. Also FTTx networks are becoming more prevalent and the number of providers of DTH satellite services has grown, particularly in the Central and Eastern European markets. Some competitors, such as British Sky Broadcasting Group plc in Ireland and Swisscom in Switzerland, have obtained long-term exclusive contracts for certain popular programs, which limits the opportunities for other providers, including our operations, to offer such channels. If exclusive channel offerings increase through other providers, programming options could be a deciding factor for subscribers on selecting a video service.

Portions of our systems have been overbuilt by FTTx networks, primarily in the Czech Republic, Romania and Slovakia and to a lesser extent, in the Netherlands and Switzerland. Based on research of various telecommunication publications, including by the Organization for Economic Cooperation and Development, and internal estimates, approximately 48%, 40% and 67%, respectively, of our cable networks in the Czech Republic, Romania and Slovakia have been overbuilt by FTTx networks. Also, 11% of our footprint in the Netherlands and 8% of our footprint in Switzerland are overbuilt by FTTx networks. In addition, there is increasing willingness from government and quasi-government entities in Europe to invest in such networks, creating a new source of competition.

 

I-35


Table of Contents

In most of our Central and Eastern European markets, we are also experiencing significant competition from Digi TV, the DTH platform of RCS & RDS S.A. (Digi TV), a Romanian cable, telephony and internet service provider that is targeting our analog cable, MMDS and DTH customers with aggressively priced DTH packages, in addition to overbuilding portions of our cable network in Hungary, Romania and Slovakia. In the Czech Republic, CSLink, the brand name of Media Vision s.r.o., and in Slovakia, Skylink, a joint venture between Towercom, a.s. and Trade Tec, a.s., are also aggressive DTH competitors providing a substantial package of video content for a one-time upfront fee. The incumbent telecommunications operator in Romania also operates a competing DTH platform. UPC DTH offers advanced services and functionality, including DVR and premium content, to most of our Central and Eastern Europe markets. UPC DTH’s share of the subscription-based television market is 5% for Hungary, 7% for the Czech Republic, 3% for Slovakia, and through FocusSat, 3% for Romania.

In most of our European markets, competitive video services are now being offered by the incumbent telecommunications operator, whose video strategies include DSL-TV, DTH, DTT and IPTV over FTTx networks. The ability of incumbent operators to offer the so-called “triple-play” of video, broadband internet and telephony services is exerting growing competitive pressure on our operations, including the pricing and bundling of our video products. In order to gain video market share, the incumbent operators and alternative service providers in a number of our larger markets have been pricing their DTT and DSL-TV video packages at a discount to the retail price of the comparable digital cable service and, in the case of DSL-TV, including DVRs as a standard feature.

To meet the challenges in this competitive environment, we tailor our packages in each country in line with one or more of three general strategies: channel offerings, recurring discounts for bundled services and loyalty contracts. Generally, discounts for bundled services are available in all our Europe operations. In addition, we seek to compete by accelerating the migration of our customers from analog to digital services, using advanced digital features such as VoD, HD, DVRs, catch-up television and offering attractive content packages and bundles of services at reasonable prices. HD and DVRs are an integral part of our digital services in all of our markets and VoD and catch-up television are an integral part of our digital services in most of our markets. In addition, from time to time, digital channel offerings are modified by our operations. Also, in Europe, the triple-play bundle is used as a means of driving video, as well as other products where convenience and price can be leveraged across the portfolio of services. We also continue to explore new technologies that will enhance our customers’ television experience. In this regard, we announced in May 2010, our plans to develop a multimedia home gateway in collaboration with Samsung Group, Intel Corporation, NDS Group Ltd. and Nagravision SA. As envisioned, this next generation internet protocol-based platform would be capable of distributing video, voice and data content throughout the home and to multiple devices, such as tablets and smartphones, certified by the Digital Living Network Alliance®, a collaborative organization on setting technology standards, and would provide customers with a seamless intuitive way to access their live, time-shifted, on-demand and web-based content on the television. The multimedia home gateway, which is still in development, is anticipated to be launched in the Netherlands in late 2011, with a phased expansion to other operations thereafter.

Germany. We are the largest cable television provider in the federal states of North Rhine-Westphalia and Hesse based on the number of video cable subscribers. Unitymedia’s video cable services are available to approximately 23% of the video households in Germany and it serves 12% of the total market. Unitymedia’s primary competition is from traditional FTA broadcast television services. Unitymedia also competes with the services of Sky Deutschland, which offers a digital premium subscription service to households that receive their basic television service via FTA, cable or other technologies. Sky Deutschland serves its subscribers through either its DTH system or the distribution networks of cable operators, including Unitymedia, and other network operators. Its DTH services include HD channels and DVR functionality. Of the video households in Germany, Sky Deutschland serves 7% of the total market with its DTH and cable services. Professional Operators compete with Unitymedia for housing association contracts. They typically procure the broadcast signals they distribute from Unitymedia or from DTH providers. Certain Professional Operators may

 

I-36


Table of Contents

also use such opportunities to build their own distribution networks or to install their own head-ends for receiving satellite signals. DSL-TV operators and other alternative distributors of television services are an increasing threat as well. The incumbent telecommunications operator, Deutsche Telekom, has approximately 1.1 million video subscribers in Germany, or 3% of the total television market, for its IPTV services and has announced plans to target a total of 5 million customers with its IPTV services by 2015. Other DSL companies also have IPTV offers or plan to launch these shortly. We also compete with the FTTx network of Net Cologne GmbH in Cologne and Bonn. In addition, there is a risk of competition for video services from commercial broadcasters and other content providers that currently pay Unitymedia fees for transmitting their signals, but may seek to diversify their distribution on alternative platforms such as DTT or over-the-top video through high-speed internet connections. To stay competitive, Unitymedia has enhanced its digital service with the rollout of DVR functionality in 2009, HD services in 2010 and starting in 2011, a digicard. It has also introduced new program options and promotion packages for bundle options from which subscribers can select various combinations of services to meet their needs. Unitymedia plans to launch VoD services in late 2011.

The Netherlands. We are the second largest cable television provider in the Netherlands based on the number of video cable subscribers. UPC Netherland’s video cable services are available to approximately 38% of the video households in the Netherlands and it serves 26% of the total market. Historically, satellite television has been the main source of competition for UPC Netherlands. Competition from the DTT and DSL-TV services offered by the incumbent telecommunications provider, Royal KPN NV (KPN), is also strong with KPN providing subscription video services to 16% of the total video households. KPN is the majority owner of the Netherlands DTT service, Digitenne. It also offers a DSL-TV service that includes VoD, an electronic program guide and DVR functionality. KPN continues to target our price sensitive analog and digital customers with discounted Digitenne offers and, to a lesser extent, DSL-TV video packages. In addition, the FTTx networks of Reggefiber TTH Company Ltd. (a partnership between Reggefiber BV and KPN) have become a serious competitive factor in a number of cities and future expansion of these networks is expected within our service area. KPN offers IPTV services over a portion of such FTTx network. With its nationwide telecommunications network and ability to offer bundled triple-play services, KPN is a significant competitor. To enhance its competitive position, UPC Netherlands offers VoD services, DVR functionality and HD set-top boxes to all UPC Netherlands digital cable customers. Such services allow UPC Netherlands subscribers to personalize their programming. Also, UPC Netherlands continues to improve the quality of its programming through the type of programs available and by increasing the number of HD channels. These enhancements, plus the variety of bundle options from which subscribers can select various combinations of services, including internet and telephony options, to meet their needs, allows UPC Netherlands to compete effectively.

Switzerland. We are the largest cable television provider in Switzerland based on the number of video cable subscribers and are the sole provider in substantially all of our network area. Cablecom’s video cable services are available to approximately 63% of the video households in Switzerland and it serves 47% of the total market. Due to a small program offering, competition from terrestrial television in Switzerland is limited, although DTT is now available in most parts of Switzerland. DTH satellite services are also limited due to various legal restrictions such as construction and zoning regulations or rental agreements that prohibit or impede installation of satellite dishes. Given technical improvements, such as the availability of smaller satellite antennae, as well as the continuous improvements of DTH offerings, increased competition is expected from the satellite television operators. Our main competitor is Swisscom, the incumbent telecommunications operator, which provides IPTV services over DSL or FTTx networks to approximately 11% of all video households in Switzerland. Swisscom offers VoD services as well as DVR functionality and HD services and has exclusive rights to distribute certain programming. Swisscom also plans to further extend its FTTx network. Based on internal estimates, the Swisscom FTTx network reached 164,000 households in our network area at year-end 2010. To effectively compete, Cablecom offers DVR functionality, VoD, catch-up television

 

I-37


Table of Contents

and several HD channels. Cablecom has also expanded its program options and continues to market promotional packages for its bundled services, offering triple-play services for the price of two and double-play services at a discount.

Other Western Europe. In Austria, we are the largest cable television provider based on the number of video cable subscribers. UPC Austria’s video cable service is available to approximately 33% of the video households in Austria and it serves 15% of the total market. UPC Austria’s primary competition is from FTA television received via satellite. Approximately half of the Austrian video households receive only FTA television. Competition from the DSL-TV services provided by the incumbent telecommunications operator, Telekom Austria AG (Telekom Austria), and from DTH satellite services offered by Sky Deutschland also continue to increase. Telekom Austria offers its DSL-TV service, which includes advance features such as VoD, at a heavy discount to the video cable subscription price within the market. In addition, Telekom Austria is implementing a FTTx network on a trial basis in parts of our footprint. To stay competitive, UPC Austria offers HD DVR functionality and VoD service. Also, UPC Austria markets competitively priced bundles of services, which may include certain free services, depending on the bundle selected.

Based on the number of video cable subscribers, we are the largest cable operator in Ireland. UPC Ireland’s video cable service is available to approximately 56% of the video households in Ireland and it serves 31% of the total market. UPC Ireland’s primary competition for video customers is from British Sky Broadcasting Group plc, which provides DTH satellite services to 39% of the video households in Ireland. We also face potential competition from smaller video providers, including providers using FTTx networks. Although DTT is now available in most of Ireland, primarily through Ireland’s national public broadcaster, Raidió Teilifís Éireann, competition is limited due to its small programming offering. To stay competitive, UPC Ireland continues to expand its channel offerings, including additional HD channels, and its digital packages to include certain popular premium channels at no additional charge. It also markets a variety of bundle options from which subscribers can select various combinations of services to meet their needs.

Central and Eastern Europe. We are the largest cable television provider in Hungary based on the number of video cable subscribers. UPC Hungary’s video cable service is available to approximately 32% of the video households in Hungary and it serves 15% of the total market. Our subsidiary, UPC DTH, also provides satellite services in Hungary, in competition with other DTH providers. One of these, Digi TV, is an aggressive competitor. Digi TV’s DTH services can reach up to 100% of our DTH and cable service areas and it has overbuilt over half of UPC Hungary’s cable service areas with its own cable network. Digi TV is targeting UPC Hungary’s video cable subscribers and UPC DTH’s subscribers with low-priced triple-play packages. To meet the competition, UPC Hungary has an aggressive price plan and targeted bundle offers for the areas in which Digi TV is operating its cable service. UPC Hungary also faces competition from the incumbent telecommunications company Magyar Telekom Rt (Magyar Telekom), in which Deutsche Telekom has a majority stake. Magyar Telekom offers a DSL-TV service, including a VoD service, to internet subscribers of its ISP subsidiary and triple-play and, with mobile, quadruple-play packages, as well as a DTH service with bundled options. Both Magyar Telekom and Digi TV also provide IPTV services over FTTx networks. Magyar Telekom continues to expand its FTTx network, reaching approximately 135,000 homes in our network area by year-end 2010. To meet such competition, UPC Hungary offers a digital television platform with DVR functionality and HD and VoD services. Of the video households in Hungary, 9% subscribe to Digi TV’s DTH service, 6% subscribe to Digi TV’s cable service and 9% subscribe to Magyar Telekom’s DTH or DSL-TV service. UPC DTH serves 5% of the video households in Hungary with its DTH service.

As in Hungary, Digi TV is also an aggressive DTH competitor in Romania, Czech Republic and Slovakia. Digi TV provides DTH services to 12%, 6% and 17% of the video households in Romania, Czech Republic and Slovakia, , respectively. UPC DTH provides DTH services to 3%, 2% and 2% of the video households in Romania, Czech Republic and Slovakia, respectively. Of the video households in such countries, 12% in Romania, 12% in Czech Republic and 10% in Slovakia subscribe to our

 

I-38


Table of Contents

video cable service. Our cable services are available to the video households in each of these countries as follows: 27% in Romania, 31% in the Czech Republic and 22% in Slovakia. In Romania, competition also comes from DTH services offered by Rom Telecom SA, the incumbent telecommunications company, as well as other DTH providers and alternative distributors of television signals. Digi TV has also overbuilt portions of our cable network in Romania and, in 2010, launched a digital video service on its cable network to compete with UPC Romania’s services. Of the video households in Romania, 18% subscribe to Digi TV’s cable service. Digi TV also plans to overbuild our cable service area in Slovakia and offer a triple-play package of video, broadband internet and telephony services. In the Czech Republic, 3% of video households use the incumbent telephone company’s DSL-TV service. Also, several other operators provide DTH services and a number of local ISPs provide IPTV services over FTTx networks. Providers of IPTV services over FTTx networks can reach approximately 635,000 of the households passed by our cable network in the Czech Republic. In Slovakia, a number of ISPs make such services available to a majority of the homes passed by our cable networks. In particular, Slovak Telekom a.s., a subsidiary of Deutsche Telekom, and Orange Slovensko a.s., a subsidiary of France Telecom S.A., have overbuilt at least 50% of the homes passed by our cable network with their FTTx networks and offer triple-play packages through these networks. FTA broadcasters are also significant competitors in the Czech Republic and in Slovakia. In addition, over 95% of the Czech Republic can receive DTT services for free. This makes the market for television subscribers in the Czech Republic extremely competitive with price often the deciding factor. Pre-paid DTH services are also increasing in popularity in the Czech Republic and Slovakia. UPC DTH has launched a prepaid product in the Czech Republic and, through FocusSat, in Romania.

UPC Poland’s video cable services are available to approximately 14% of the video households in Poland and it serves 7% of the total market. In providing video services, UPC Poland competes primarily with four DTH service providers, including the incumbent telecommunications company, Telekomunikacja Polska SA (TPSA). TPSA also offers a mobile broadband service. The largest DTH provider, Cyfrowy Polsat SA, serves 23% of the video households in Poland. In addition, UPC Poland competes with other major cable operators with triple-play services, who have overbuilt portions of UPC Poland’s operations. In December 2010, UPC Poland announced that it has reached an agreement to acquire 100% of Aster, which provides cable services in areas adjacent to or overlapping UPC Poland’s service area.

In Central and Eastern Europe, competition from DTT providers has also increased significantly. Subscribers in these countries tend to be more price sensitive than in other European markets. To address such sensitivity and meet competition, our operations in Central and Eastern Europe offer a variety of bundled service packages and enhanced digital services, such as VoD and DVR, and channel offerings that include certain premium channels at no additional charge.

Belgium. Telenet is the sole provider of video cable services in its network area. Its video cable service is available to approximately 62% of the video households in Belgium and it serves 50% of the total market. It is the largest subscription television provider in Belgium based on the number of pay video subscribers. Telenet’s principal competitor is Belgacom, the incumbent telecommunications operator, which has interactive digital television, VoD and HD service as part of its video offer. Belgacom also offers double-play and triple-play packages, with its digital video service offered for free when a customer subscribes to two other services. Approximately 17% of total video households in Belgium subscribe to Belgacom’s DSL-TV services. Telenet also faces competition from M7 Group SA, branded TV Vlaanderen Digitaal, which is the largest DTH service provider in Telenet’s network area. Also, in 2010, Mobistar SA launched a new hybrid video service that combines DSL and DTH reception, which allows it to offer a quadruple-play bundle of video, broadband internet and fixed and mobile telephony. We believe that Telenet’s multimedia platform Yelo, together with its extensive cable network, the broad acceptance of its basic cable television services and its extensive additional features, such as HD and DVR functionality and VoD offerings, allow Telenet to compete effectively. Telenet also markets a variety of bundle options branded “Shakes” to meet the needs of its customers.

 

I-39


Table of Contents
   

Asia/Pacific. Austar is the leading provider of subscription television services in substantially all of its broadcast areas, where its primary competitors are FTA broadcasters.

 

   

The Americas. In Chile, we are the largest cable television provider based on number of video cable subscribers. VTR’s video cable services are available to approximately 58% of the Chilean video households and it serves 20% of the total market. VTR competes primarily with DTH service providers in Chile, including the incumbent Chilean telecommunications operator Compañia de Telecomunicaciones de Chile SA using the brand name Movistar (Telefónica), Claro Chile S.A., a subsidiary of América Móvil, S.A.B. de C.V. (Claro), and DirecTV Chile. Telefónica offers double-play and triple-play packages using DTH for video and ADSL for internet and telephony. Claro is offering triple-play packages using DTH and, in certain areas of Santiago, through a hybrid fiber coaxial cable network. Claro is also expanding its hybrid fiber coaxial cable network in certain regional cities of Chile. Claro is an aggressive competitor targeting video subscribers, including VTR subscribers, with low price video packages. Other competition comes from video services offered by or over the networks of fixed-line telecommunications operators using DSL or ADSL technology. Of the Chilean video households, 7%, 6% and 4% subscribe to the DTH services of Telefónica, Claro and DirecTV Chile, respectively. To effectively compete, VTR makes VoD, catch-up television, DVR and HD services an integral part of its video packages. These enhancements, plus expanded program options and the marketing of a variety of bundle options, including internet and telephony, should also enhance VTR’s competitive position.

Internet

With respect to broadband internet services and online content, our businesses face competition in a rapidly evolving marketplace from incumbent and non-incumbent telecommunications companies, mobile operators and cable-based ISPs, many of which have substantial resources. The internet services offered by these competitors include both fixed-line broadband internet services using DSL or FTTx, and wireless broadband internet services, in a range of product offerings with varying speeds and pricing, as well as interactive computer-based services, data and other non-video services offered to homes and businesses. As the technology develops, competition from wireless services using various advanced technologies may become significant. We are seeing intense competition in Europe from mobile carriers that offer mobile data cards allowing a laptop user to access the carrier’s broadband wireless data network with varying speeds and pricing.

Our strategy is speed leadership and we seek to outperform on speed, including increasing the maximum speed of our connections and offering varying tiers of service and varying prices, as well as a bundled product offering and a range of value added services. In most of our operations we have launched new bundling strategies, including speeds of 25 Mbps or more at mass market price points and ultra high-speed internet with speeds of up to 128 Mbps to compete with FTTx initiatives. The focus is to launch high-end internet products to safeguard our high-end customer base and allow us to become more aggressive at the low and medium-end of the internet market. By fully utilizing the technical capabilities of Euro DOCSIS 3.0 technology, we can compete with local FTTx initiatives and create a competitive advantage compared to DSL infrastructures on a national level.

 

   

Europe. Across Europe, our key competition in this product market is from the offering of broadband internet products using various DSL-based technologies both by the incumbent phone companies and third parties. The introduction of cheaper and ever faster fixed-line broadband offerings is further increasing the competitive pressure in this market. Wireless broadband services, however, are also taking a foothold in a number of countries using high-speed mobile networks and high-speed downlink packet access developments.

In Germany, the largest broadband internet service provider is Deutsche Telekom, which provides services to 44% of the broadband internet subscribers through its DSL network. Our next significant competitor is Vodafone Germany, a subsidiary of Vodafone Group Plc, which provides services to 15% of broadband internet subscribers. We also face increased competition from mobile broadband

 

I-40


Table of Contents

operators. Unitymedia serves 3% of the total broadband internet market in Germany. To effectively compete, Unitymedia launched its ultra high-speed internet services in 2010 and offers such services at attractive rates and through bundled offerings, including digital video and telephony services.

In the Netherlands, we face competition from KPN, the largest broadband internet provider, with 43% of the broadband internet market, the telecommunications company, Tele2 Netherlands Holding NV, and operators using the unbundled local loop. UPC Netherlands serves 14% of the total broadband internet market in the Netherlands. With its Euro DOCSIS 3.0 network providing ultra high-speed internet services, UPC Netherlands offers significantly faster speeds than its DSL competitors at competitive prices. It also includes its high-speed internet in bundle options with digital video and telephony.

In Switzerland, Swisscom is the largest provider of broadband internet services, with an estimated market share of 54% of all broadband internet customers. The next significant competitor is Sunrise Communications AG with 12% of broadband internet customers. Cablecom serves 18% of broadband internet subscribers. Cablecom seeks to distinguish itself through bundled offerings, including digital video and telephony services, and its ultra high-speed internet services.

UPC Austria’s largest competitor with respect to broadband internet services is the incumbent telecommunications company, Telekom Austria, with approximately 56% of the broadband internet subscribers in Austria. UPC Austria’s share of such market is 27%. The mobile broadband services of Telekom Austria are also a competitive factor. It is estimated that approximately 33% of broadband households in Austria use mobile broadband as their primary internet connection. Telekom Austria is the largest mobile broadband provider with 43% of the mobile broadband subscribers. In addition, UPC Austria faces competition from unbundled local loop access and other mobile broadband operators. As a result, the competition in the broadband internet market has increased significantly. Competitors in the Austrian broadband internet market are focusing on speed and pricing to attract customers. To compete, UPC Austria has launched bundled offers specifically aimed at these market segments. UPC Austria uses its ultra high-speed internet services and triple-play bundling capabilities across all market segments to encourage customers from other providers to switch to UPC Austria’s services and to reduce churn in the existing customer base.

Mobile data card providers are gaining market share throughout Europe. For example, in Ireland, Telefónica O2 Ireland Limited, a leading mobile telephony provider, offers a range of mobile internet products at competitive prices. The trend towards mobile internet is visible throughout Europe, where market developments in Austria and Ireland (driven by “3”, a brand name of Hutchison 3G Austria GmbH and Hutchison 3G Ireland Ltd.) are most significant. Outside of mobile internet, UPC Ireland’s most significant competitor is the fixed-line incumbent, Eircom Limited, with 56% of the broadband internet market. UPC Ireland’s share of total broadband internet subscribers is 21%.

In Central and Eastern Europe, our principal competitors are DSL operators and cable companies that are overbuilding our cable network. FTTx networks are also being built. In Hungary, the primary competitors are the incumbent telecommunications company, Magyar Telekom under the brand T:Home, Digi TV and Invitel Holdings A/S. In Poland, our principal competitors are TPSA and Netia SA. In addition, in these countries, as well as in our other Central and Eastern Europe operations, we face increased competition from mobile broadband operators. Intense competition coupled with challenging economics has caused existing low-end options to be more prominent in these markets. In all of our Central and Eastern European markets, except for Romania, we are using our ultra high-speed internet service to attract and retain customers. In November 2010, we launched an ultra high-speed internet service in Cluj-Napoca, Romania, as well.

In Belgium, internet access penetration is higher than in most European markets causing intense competition between the two primary broadband internet technologies, cable and DSL. Telenet’s primary competitor is the DSL service provider Belgacom and other DSL service providers. Approximately 48% of Belgium’s broadband internet subscribers use Belgacom’s DSL service with download speeds up to 30 Mbps. Also, mobile internet use is increasing. To compete, Telenet is

 

I-41


Table of Contents

expanding its internet product range through Euro DOCSIS 3.0 technology and currently provides customers who switch to one of its new high-speed products a Euro DOCSIS 3.0 modem free of charge. Such high speed products provide customers a wide range of applications, including Telenet’s multimedia platform Yelo, to meet their needs. Telenet’s high-speed internet service, coupled with product features, enhances its competitive position. Telenet provides broadband internet service to 37% of the broadband internet market in Belgium.

 

   

The Americas. In Chile, VTR faces competition primarily from non-cable-based internet service providers such as Telefónica (under the brand name Movistar), Claro and CNT Telefónica del Sur S.A. (Telsur). VTR is experiencing increased pricing and download speed pressure from Telefónica, Claro and Telsur and more effective competition from these companies with the bundle of their internet service with other services. Mobile broadband competition has become stronger as well. In response to the availability of mobile data in Chile, VTR has more than doubled its internet speeds for customers as a differentiation strategy. VTR’s share of the residential high-speed (300 kbps and greater) broadband internet market in Chile is 41%, compared to 47% for Telefónica. To effectively compete, VTR is expanding its two-way coverage and offering attractive bundling with telephony and digital video service.

Telephony

With respect to telephony services, our businesses continue to compete against the incumbent telecommunications operator in each country. These operators have substantially more experience in providing telephony services, greater resources to devote to the provision of telephony services and long-standing customer relationships. In many countries, our businesses also face competition from other cable telephony providers, wireless telephony providers, FTTx-based providers or other indirect access providers. Competition in both the residential and business telephony markets will increase with certain market trends and regulatory changes, such as general price competition, the offering of carrier pre-select services, number portability, continued deregulation of telephony markets, the replacement of fixed-line with mobile telephony, and the growth of VoIP services. Carrier pre-select allows the end user to choose the voice services of operators other than the incumbent while using the incumbent’s network. If competition in the telephony market continues to intensify, we may lose existing or potential subscribers to our competitors. We seek to compete on pricing as well as product innovation, such as personal call manager and unified messaging. We also offer varying plans to meet customer needs and various bundle options with our digital video and internet services.

 

   

Europe. Across Europe our telephony businesses are generally small compared to the existing business of the incumbent phone company. The incumbent telephone companies remain our key competitors but mobile operators and new entrant VoIP operators offering service across broadband lines are also important in these markets. Generally, we expect telephony markets to remain extremely competitive.

Our telephony strategy in Europe is focused around value leadership, and we position our services as “anytime” or “any destination”. Our portfolio includes a basic telephony product for line rental (which includes unlimited network calling in some countries, like Romania) and, in most of our markets, unlimited national off peak calling branded “Freetime”, unlimited national 24/7 calling branded “Anytime” and minute packs, including calls to mobile phones. Our price plans also include unlimited international calls within the EU, in most of our markets. We also use our bundled offerings to help promote telephony services.

Deutsche Telekom is the dominant fixed-line telephony provider in Germany; however, competition from telephony services provided through alternative technologies and mobile telephony services has caused competition in the telephony market to be intense. As a result, customers are price sensitive. To address this competitive market, we use innovative bundling options to encourage customers to switch to Unitymedia services. In the Netherlands, KPN is the dominant telephony provider, but all of the large MSOs, including UPC Netherlands, as well as ISPs, offer VoIP services and continue to gain market share from KPN. In Switzerland, we are the largest VoIP service provider, but Swisscom is the

 

I-42


Table of Contents

dominant fixed-line telephony service provider followed by Sunrise Communications AG, which also offers carrier pre-select services. To meet the competition, Cablecom enhanced its portfolio with attractive bundle options. The market share of the fixed-line telephony market for Unitymedia is 2%, UPC Netherlands is 10% and Cablecom is 9%.

In Austria and in our Central and Eastern European markets, the incumbent telephone companies dominate the telephony market. Most of the fixed-line competition to the incumbent telephone operators in these countries is from entities that provide carrier pre-select or wholesale line rental services. We also compete with ISPs that offer VoIP services and mobile operators. In Austria, we serve our subscribers with circuit-switched telephony services, VoIP over our cable network, and DSL technology service over an unbundled loop. In Hungary, we provide circuit-switched telephony services over our copper wire telephony network and VoIP telephony services over our cable network. We continue to gain market share with our VoIP telephony service offerings in almost all of our European markets and in some markets we have enhanced our telephony services through unlimited calling options.

In Belgium, Belgacom is the dominant telephony provider with 77% of the telephony market. To gain market share, we emphasize customer service and provide innovative plans to meet the needs of our customers, such as the new “Free Phone Europe” flat fee plan offered in the “shake” bundles (free off-peak calls to fixed-lines in Belgium and 35 European countries). We also compete with mobile operators, including Belgacom, in the provision of telephony service in Belgium. Telenet’s share of the fixed-line telephony market is 18%.

 

   

The Americas. In Chile, VTR faces competition from the incumbent telecommunications operator, Telefónica, and other telecommunications operators. Telefónica has substantial experience in providing telephony services, resources to devote to the provision of telephony services and longstanding customer relationships. Competition in both the residential and business telephony markets is increasing as a result of market trends and regulatory changes affecting general price competition, number portability, and the growth of VoIP services. Also, use of mobile telephony is increasing and competitors are enhancing their competitive position by including mobile services in their bundle offers. Claro, Telefónica Moviles Chile SA and Entel PCS Telecomunicaciones SA are the primary companies that offer mobile telephony in Chile. VTR offers circuit-switched and VoIP telephony services over its cable network. Although mobile phone use has increased, VTR’s fixed-line telephony subscribers have continued to increase because of the flat fee offer by VTR. In the residential market, VTR’s share of the fixed-line telephony market in Chile is 30%.

Programming Services

The business of providing programming for cable and satellite television distribution is highly competitive. Our programming businesses directly compete with other programmers for distribution on a limited number of channels. Once distribution is obtained, these programming services compete, to varying degrees, for viewers and advertisers with other cable and over-the-air broadcast television programming services as well as with other entertainment media, including home video (generally video rentals), online activities, movies and other forms of news, information and entertainment.

Employees

As of December 31, 2010, we, including our consolidated subsidiaries, had an aggregate of approximately 20,000 employees, certain of whom belong to organized unions and works councils. Certain of our subsidiaries also use contract and temporary employees, which are not included in this number, for various projects. We believe that our employee relations are good.

Financial Information About Geographic Areas

Financial information related to the geographic areas in which we do business appears in note 19 to our consolidated financial statements included in Part II of this report.

 

I-43


Table of Contents

Available Information

All our filings with the Securities and Exchange Commission (SEC) as well as amendments to such filings are available on our internet website free of charge generally within 24 hours after we file such material with the SEC. Our website address is www.lgi.com. The information on our website is not incorporated by reference herein.

 

Item 1A. RISK FACTORS

In addition to the other information contained in this Annual Report on Form 10-K, you should consider the following risk factors in evaluating our results of operations, financial condition, business and operations or an investment in our stock.

The risk factors described in this section have been separated into four groups:

 

   

risks that relate to the competition we face and the technology used in our business;

 

   

risks that relate to our operating in overseas markets and being subject to foreign regulation;

 

   

risks that relate to certain financial matters; and

 

   

other risks, including risks that relate to our capitalization and the obstacles faced by anyone who may seek to acquire us.

Although we describe below and elsewhere in this Annual Report on Form 10-K the risks we consider to be the most material, there may be other unknown or unpredictable economic, business, competitive, regulatory or other factors that also could have material adverse effects on our results of operations, financial condition, business or operations in the future. In addition, past financial performance may not be a reliable indicator of future performance and historical trends should not be used to anticipate results or trends in future periods.

If any of the events described below, individually or in combination, were to occur, our businesses, prospects, financial condition, results of operations and/or cash flows could be materially adversely affected.

Factors Relating to Competition and Technology

We operate in increasingly competitive markets, and there is a risk that we will not be able to effectively compete with other service providers. The markets for cable television, broadband internet and telephony in many of the regions in which we operate are highly competitive. In the provision of video services we face competition from DTT broadcasters, video provided over satellite platforms, networks using DSL technology, FTTx networks and, in some countries where parts of our systems are overbuilt, cable networks, among others. Our operating businesses are facing increasing competition from video services provided by or over the networks of incumbent telecommunications operators and other service providers. As the availability and speed of broadband internet increases, we may also face competition from over-the-top video content providers utilizing our or our competitors’ high-speed internet connections. In the provision of telephony and broadband internet services, we are experiencing increasing competition from the incumbent telecommunications operators and other service providers in each country in which we operate. The incumbent telecommunication operators typically dominate the market for these services and have the advantage of nationwide networks and greater resources than we have to devote to the provision of these services. Many of the incumbent operators are now offering double-play and triple-play bundles of services. In many countries, we also compete with other operators using the unbundled local loop of the incumbent telecommunications operator to provide these services, other facilities-based operators and wireless providers. Developments in the DSL technology used by the incumbent telecommunications operators and alternative providers have improved the attractiveness of our competitor’s products and services and strengthened their competitive position. Developments in wireless technology, such as WiMax and long-term evolution (the next generation of ultra high-speed mobile data), may lead to additional competitive challenges.

In some European markets, national and local government agencies may seek to become involved, either directly or indirectly, in the establishment of FTTx networks, DTT systems or other communications systems. We

 

I-44


Table of Contents

intend to pursue available options to restrict such involvement or to ensure that such involvement is on commercially reasonable terms. There can be no assurance, however, that we will be successful in these pursuits. As a result, we may face competition from entities not requiring a normal commercial return on their investments. In addition, we may face more vigorous competition than would have been the case if there were no government involvement.

The market for programming services is also highly competitive. Programming businesses compete with other programmers for distribution on a limited number of channels. Once distribution is obtained, program offerings must then compete for viewers and advertisers with other programming services as well as with other entertainment media, such as home video, online activities, movies, live events, radio broadcasts and print media. Technology advances, such as download speeds, VoD, interactive and mobile broadband services, have increased audience fragmentation through the number of entertainment and information delivery choices. Such increased choices could adversely affect consumer demand for services and viewing preferences. At the same time, these advances have beneficial effects for our programming businesses by increasing the available platforms for distribution of our services.

We expect the level and intensity of competition to continue to increase from both existing competitors and new market entrants as a result of changes in the regulatory framework of the industries in which we operate, advances in technology, the influx of new market entrants and strategic alliances and cooperative relationships among industry participants. Increased competition has resulted in increased customer churn, reductions of customer acquisition rates for some services and significant price competition in most of our markets. In combination with difficult economic environments, these competitive pressures could adversely impact our ability to increase or, in certain cases, maintain the revenue, average monthly subscription revenue per average RGU (ARPU), RGUs, operating cash flows, operating cash flow margins and liquidity of our operating segments.

Changes in technology may limit the competitiveness of and demand for our services. Technology in the video, telecommunications and data services industries is changing rapidly. This significantly influences the demand for the products and services that are offered by our businesses. The ability to anticipate changes in technology and consumer tastes and to develop and introduce new and enhanced products on a timely basis will affect our ability to continue to grow, increase our revenue and number of subscribers and remain competitive. New products, once marketed, may not meet consumer expectations or demand, can be subject to delays in development and may fail to operate as intended. A lack of market acceptance of new products and services which we may offer, or the development of significant competitive products or services by others, could have a material adverse impact on our revenue and operating cash flow.

Our capital expenditures may not generate a positive return. The video, broadband internet and telephony businesses in which we operate are capital intensive. Significant capital expenditures are required to add customers to our networks and to upgrade our networks to enhance our service offerings and improve the customer experience, including expenditures for equipment and labor costs. No assurance can be given that our future capital expenditures will generate a positive return or that we will have adequate capital available to finance such future upgrades. If we are unable to, or elect not to, pay for costs associated with adding new customers, expanding or upgrading our networks or making our other planned or unplanned capital expenditures, our growth could be limited and our competitive position could be harmed.

If we are unable to obtain attractive programming or necessary equipment and software on satisfactory terms for our digital cable services, the demand for our services could be reduced, thereby lowering revenue and profitability. We rely on digital programming suppliers for the bulk of our programming content. We may not be able to obtain sufficient high-quality programming for our digital cable services on satisfactory terms or at all in order to offer compelling digital cable services. This may also limit our ability to migrate customers from lower tier programming to higher tier programming, thereby inhibiting our ability to execute our business plans. Furthermore, we may not be able to obtain attractive country-specific programming for video services. In addition, must carry requirements may consume channel capacity otherwise available for other services. Any or all of these factors could result in reduced demand for, and lower revenue and profitability from, our digital video services. Further, we may

 

I-45


Table of Contents

not be able to obtain the equipment, software and services required for our businesses on a timely basis or on satisfactory terms. We depend on third-party suppliers and licensors to supply our equipment, software and certain services. If demand exceeds these suppliers’ and licensors’ capacity or if they experience financial difficulties, the ability of our businesses to provide some services may be materially adversely affected, which in turn could affect our businesses’ ability to attract and retain customers. Although we actively monitor the creditworthiness of our key third party suppliers and licensors, the financial failure of a key third party supplier or licensor could disrupt our operations and have an adverse impact on our cash flows.

Failure in our technology or telecommunications systems could significantly disrupt our operations, which could reduce our customer base and result in lost revenue. Our success depends, in part, on the continued and uninterrupted performance of our information technology and network systems as well as our customer service centers. The hardware supporting a large number of critical systems for our cable network in a particular country or geographic region is housed in a relatively small number of locations. Our systems are vulnerable to damage from a variety of sources, including telecommunications failures, power loss, malicious human acts and natural disasters. Moreover, despite security measures, our servers are potentially vulnerable to physical or electronic break-ins, computer viruses and similar disruptive problems. Despite the precautions we have taken, unanticipated problems affecting our systems could cause failures in our information technology systems or disruption in the transmission of signals over our networks. Sustained or repeated system failures that interrupt our ability to provide service to our customers or otherwise meet our business obligations in a timely manner would adversely affect our reputation and result in a loss of customers and net revenue.

Factors Relating to Overseas Operations and Foreign Regulation

Our businesses are conducted almost exclusively outside of the United States, which gives rise to numerous operational risks. Our businesses operate almost exclusively in countries outside the United States and are thereby subject to the following inherent risks:

 

   

fluctuations in foreign currency exchange rates;

 

   

difficulties in staffing and managing international operations;

 

   

potentially adverse tax consequences;

 

   

export and import restrictions, custom duties, tariffs and other trade barriers;

 

   

increases in taxes and governmental fees;

 

   

economic and political instability; and

 

   

changes in foreign and domestic laws and policies that govern operations of foreign-based companies.

Operational risks that we may experience in certain countries include disruptions of services or loss of property or equipment that are critical to overseas businesses due to expropriation, nationalization, war, insurrection, terrorism or general social or political unrest.

We are exposed to various foreign currency exchange rate risks. We are exposed to foreign currency exchange rate risk with respect to our consolidated debt in situations where our debt is denominated in a currency other than the functional currency of the operations whose cash flows support our ability to repay or refinance such debt. Although we generally seek to match the denomination of our and our subsidiaries’ borrowings with the functional currency of the operations that are supporting the respective borrowings, market conditions or other factors may cause us to enter into borrowing arrangements that are not denominated in the functional currency of the underlying operations (unmatched debt). In these cases, our policy is to provide for an economic hedge against foreign currency exchange rate movements by using cross-currency interest rate swaps to synthetically convert unmatched debt into the applicable underlying currency. At December 31, 2010, substantially all of our debt was either directly or synthetically matched to the applicable functional currencies of the underlying operations.

 

I-46


Table of Contents

In addition to the exposure that results from the mismatch of our borrowings and underlying functional currencies, we are exposed to foreign currency risk to the extent that we enter into transactions denominated in currencies other than our or our subsidiaries’ respective functional currencies (non-functional currency risk), such as investments in debt and equity securities of foreign subsidiaries, equipment purchases, programming contracts, notes payable and notes receivable (including intercompany amounts) that are denominated in a currency other than the applicable functional currency. Changes in exchange rates with respect to amounts recorded in our consolidated balance sheets related to these items will result in unrealized (based upon period-end exchange rates) or realized foreign currency transaction gains and losses upon settlement of the transactions. Moreover, to the extent that our revenue, costs and expenses are denominated in currencies other than our respective functional currencies, we will experience fluctuations in our revenue, costs and expenses solely as a result of changes in foreign currency exchange rates. In this regard, we expect that during 2011, (1) approximately 1% to 3% of our revenue, (2) approximately 4% to 6% of our aggregate operating and selling, general and administrative (SG&A) expenses (exclusive of stock-based compensation expense) and (3) approximately 14% to 16% of our capital expenditures (including capital lease additions) will be denominated in non-functional currencies, including amounts denominated in (a) U.S. dollars in Chile, Europe, Australia and Argentina and (b) euros in Switzerland, Hungary, Poland, Romania and the Czech Republic. Our expectations with respect to our non-functional currency transactions in 2011 may differ from actual results. Generally, we will consider hedging non-functional currency risks when the risks arise from agreements with third parties that involve the future payment or receipt of cash or other monetary items to the extent that we can reasonably predict the timing and amount of such payments or receipts and the payments or receipts are not otherwise hedged. In this regard, we have entered into foreign currency forward contracts covering the forward purchase of the U.S. dollar, euro and British pound sterling and the forward sale of the Hungarian forint, Polish zloty, Czech koruna, euro, Swiss Franc, Chilean peso and Australian dollar to hedge certain of these risks. Certain non-functional currency risks related to our revenue and operating and SG&A expenses and most of the non-functional currency risks related to our capital expenditures were not hedged as of December 31, 2010. For additional information concerning our foreign currency forward contracts, see note 7 to our consolidated financial statements included in Part II of this report.

We also are exposed to unfavorable and potentially volatile fluctuations of the U.S. dollar (our reporting currency) against the currencies of our operating subsidiaries and affiliates when their respective financial statements are translated into U.S. dollars for inclusion in our consolidated financial statements. Cumulative translation adjustments are recorded in accumulated other comprehensive earnings (loss) as a separate component of equity. Any increase (decrease) in the value of the U.S. dollar against any foreign currency that is the functional currency of one of our operating subsidiaries or affiliates will cause us to experience unrealized foreign currency translation losses (gains) with respect to amounts already invested in such foreign currencies. As a result of foreign currency risk, we may experience a negative impact on our comprehensive earnings (loss) and equity with respect to our holdings solely as a result of foreign currency translation. Our primary exposure to foreign currency risk from a foreign currency translation perspective is to the euro and, to a lesser extent, the Swiss franc, the Chilean peso, the Australian dollar and other local currencies in Europe. We generally do not hedge against the risk that we may incur non-cash losses upon the translation of the financial statements of our subsidiaries and affiliates into U.S. dollars.

Our businesses are subject to risks of adverse regulation by foreign governments. Our businesses are subject to the unique regulatory regimes of the countries in which they operate. Cable and telecommunications businesses are subject to licensing or registration eligibility rules and regulations, which vary by country. The provision of electronic communications networks and services require our licensing from, or registration with, the appropriate regulatory authorities and, for telephony services, entrance into interconnection arrangements with the incumbent phone companies. It is possible that countries in which we operate may adopt laws and regulations regarding electronic commerce, which could dampen the growth of the internet services being offered and developed by these businesses. In a number of countries, our ability to increase the prices we charge for our cable television service or make changes to the programming packages we offer is limited by regulation or conditions imposed by competition authorities or is subject to review by regulatory authorities.

In addition, regulatory authorities may grant new licenses to third parties and, in any event, in most of our markets new entry is possible without a license, resulting in greater competition in territories where our businesses

 

I-47


Table of Contents

may already be active. More significantly, regulatory authorities may require us to grant third parties access to our bandwidth, frequency capacity, facilities or services to distribute their own services or resell our services to end customers, as recently proposed in Belgium. Programming businesses are subject to regulation on a country by country basis, including programming content requirements, requirements to make programming available on non-discriminatory terms, and service quality standards. Consequently, our businesses must adapt their ownership and organizational structure as well as their pricing and service offerings to satisfy the rules and regulations to which they are subject. A failure to comply with applicable rules and regulations could result in penalties, restrictions on our business or loss of required licenses or other adverse conditions.

Adverse changes in rules and regulations could:

 

   

impair our ability to use our bandwidth in ways that would generate maximum revenue and operating cash flow;

 

   

create a shortage of capacity on our network, which could limit the types and variety of services we seek to provide our customers;

 

   

strengthen our competitors by granting them access and lowering their costs to enter into our markets; and

 

   

have a significant adverse impact on our profitability.

Businesses, including ours, that offer multiple services, such as video distribution as well as internet and telephony, or that are vertically integrated and offer both video distribution and programming content, often face close regulatory scrutiny from competition authorities in several countries in which we operate. This is particularly the case with respect to any proposed business combinations, which will often require clearance from national competition authorities. The regulatory authorities in several countries in which we do business have considered from time to time what access rights, if any, should be afforded to third parties for use of existing cable television networks and in certain countries have imposed access obligations. This has resulted, for example, in obligations of call termination in respect of our telephony business in Europe, video “must carry” obligations in many markets in which we operate, and a preliminary proposal in Belgium to require wholesale access to television and broadband services on cable networks.

When we acquire additional communications companies, these acquisitions may require the approval of governmental authorities (either at country or, in the case of the EU, European level), which can block, impose conditions on, or delay an acquisition; thus hampering our opportunities for growth.

New legislation may significantly alter the regulatory regime applicable to us, which could adversely affect our competitive position and profitability, and we may become subject to more extensive regulation if we are deemed to possess significant market power in any of the markets in which we operate. Significant changes to the existing regulatory regime applicable to the provision of cable television, telephony and internet services have been and are still being introduced. For example, in the EU a large element of regulation affecting our business derives from a number of Directives that are the basis of the regulatory regime concerning many of the services we offer across the EU. The various Directives require Member States to harmonize their laws on communications and cover such issues as access, user rights, privacy and competition. These Directives are reviewed by the EU from time to time and any changes to them could lead to substantial changes in the way in which our businesses are regulated and to which we would have to adapt. In addition, we are subject to review by competition authorities in certain countries concerning whether we exhibit significant market power. A finding of significant market power can result in our becoming subject to pricing, open access, unbundling and other requirements that could provide a more favorable operating environment for existing and potential competitors.

We cannot be certain that we will be successful in acquiring new businesses or integrating acquired businesses with our existing operations. Historically, our businesses have grown, in part, through selective acquisitions that enabled them to take advantage of existing networks, local service offerings and region-specific management expertise. We expect to seek to continue growing our businesses through acquisitions in selected

 

I-48


Table of Contents

markets. Our ability to acquire new businesses may be limited by many factors, including availability of financing, debt covenants, the prevalence of complex ownership structures among potential targets, government regulation and competition from other potential acquirers, primarily private equity funds. Even if we are successful in acquiring new businesses, the integration of such new businesses may present significant costs and challenges, including: realizing economies of scale in interconnection, programming and network operations; eliminating duplicative overheads; and integrating personnel, networks, financial systems and operational systems. We cannot assure you that we will be successful in acquiring new businesses or realizing the anticipated benefits of any completed acquisition, including, for example, the Unitymedia Acquisition completed in 2010.

In addition, we anticipate that most, if not all, companies acquired by us will be located outside the United States. Foreign companies may not have disclosure controls and procedures or internal controls over financial reporting that are as thorough or effective as those required by U.S. securities laws. While we intend to conduct appropriate due diligence and to implement appropriate controls and procedures as we integrate acquired companies, we may not be able to certify as to the effectiveness of these companies’ disclosure controls and procedures or internal controls over financial reporting until we have fully integrated them.

We may have exposure to additional tax liabilities. We are subject to income taxes as well as non-income based taxes, in both the United States and various foreign jurisdictions. Significant judgment is required in determining our worldwide provision for income taxes and other tax liabilities. In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain. Although we believe that our tax estimates are reasonable, there is no assurance that the final determination of tax audits or tax disputes will not be different from what is reflected in our historical income tax provisions and accruals. We are also subject to non-income based taxes, such as payroll, sales, use, value-added, net worth, property and goods and services taxes, in both the United States and various foreign jurisdictions. We are regularly under audit by tax authorities with respect to these non-income based taxes in various jurisdictions. The ultimate outcome of the income tax and non-income based taxes may differ from the amounts recorded in our financial statements and may materially affect our financial results in the period or periods for which determination is made.

Although substantially all of our revenue and operating income is generated outside the United States, we are subject to potential current U.S. income tax on this income due to our being a U.S. corporation. Our worldwide effective tax rate is reduced under a provision in U.S. tax law that defers the imposition of U.S. tax on certain foreign active income until that income is repatriated to the United States. Any repatriation of assets currently held in foreign jurisdictions or recognition of foreign income that fails to meet the U.S. tax requirements related to deferral of U.S. income tax may result in a higher effective tax rate for the company. This includes what is typically referred to as “Subpart F Income”, which generally includes, but is not limited to, such items as interest, dividends, royalties, gains from the disposition of certain property, certain currency exchange gains in excess of currency exchange losses, and certain related party sales and services income. While the company may mitigate this increase in its effective tax rate through claiming a foreign tax credit against its U.S. federal income taxes or potentially have foreign or U.S. taxes reduced under applicable income tax treaties, we are subject to various limitations on claiming foreign tax credits or we may lack treaty protections in certain jurisdictions that will potentially limit any reduction of the increased effective tax rate.

We are subject to changing tax laws, treaties and regulations in and between countries in which we operate, including treaties between the United States and other nations. A change in these tax laws, treaties or regulations, including those in and involving the United States, or in the interpretation thereof, could result in a materially higher income or non-income tax expense. For example, on October 20, 2010, the Hungarian government announced a new non-income tax on telecommunication companies applicable to our Hungarian operations that was established without any prior notice. Additionally, various income tax proposals in various countries, such as those relating to fundamental U.S. international tax reform, could result in changes to the existing tax laws on which our deferred taxes are calculated. We are unable to predict whether any of these or other proposals in the United States or foreign jurisdictions will ultimately be enacted. Any such material changes could negatively impact our business.

 

I-49


Table of Contents

Factors Relating to Certain Financial Matters

Our substantial leverage could limit our ability to obtain additional financing and have other adverse effects. We seek to maintain our debt at levels that provide for attractive equity returns without assuming undue risk. In this regard, we strive to cause our operating subsidiaries to maintain their debt at levels that result in a consolidated debt balance that is between four and five times our consolidated operating cash flow (as defined in note 19 to our consolidated financial statements included in Part II of this report). As a result, we are highly leveraged. At December 31, 2010, our outstanding consolidated debt and capital lease obligations was $22.5 billion, of which $631.7 million is due over the next 12 months and $21.1 billion is due in 2014 or thereafter. We believe that we have sufficient resources to repay or refinance the current portion of our debt and capital lease obligations and to fund our foreseeable liquidity requirements during the next 12 months. However, as our debt maturities grow in later years, we anticipate that we will seek to refinance or otherwise extend our debt maturities. In this regard, we completed refinancing transactions in 2010 and early 2011 that, among other matters, resulted in the extension of certain of our subsidiaries’ debt maturities. No assurance can be given that we will be able to complete additional refinancing transactions or otherwise extend our debt maturities. In this regard, it is difficult to predict how political, economic and regulatory developments will impact the credit and equity markets we access and our future financial position.

Our ability to service or refinance our debt and to maintain compliance with the financial covenants in the credit agreements and indentures of certain of our subsidiaries is dependent primarily on our ability to maintain or increase our cash provided by operations and to achieve adequate returns on our capital expenditures and acquisitions. In this regard, if the operating cash flow of our subsidiary, UPC Broadband Holding, were to decline, we could be required to partially repay or limit the borrowings under the UPC Broadband Holding Bank Facility in order to maintain compliance with applicable covenants. Accordingly, if our cash provided by operations declines or we encounter other material liquidity requirements, we may be required to seek additional debt or equity financing in order to meet our debt obligations and other liquidity requirements as they come due. In addition, our current debt levels may limit our ability to incur additional debt financing to fund working capital needs, acquisitions, capital expenditures, or other general corporate requirements. We can give no assurance that any additional debt or equity financing will be available on terms that are as favorable as the terms of our existing debt or at all. During 2010, we purchased $890.9 million (including direct acquisition costs) of LGI Series A and Series C common stock. Any cash used by our company in connection with any future purchases of our common stock would not be available for other purposes, including the repayment of debt.

Certain of our subsidiaries are subject to various debt instruments that contain restrictions on how we finance our operations and operate our businesses, which could impede our ability to engage in beneficial transactions. Certain of our subsidiaries are subject to significant financial and operating restrictions contained in outstanding credit agreements, indentures and similar instruments of indebtedness. These restrictions will affect, and in some cases significantly limit or prohibit, among other things, the ability of those subsidiaries to:

 

   

incur or guarantee additional indebtedness;

 

   

pay dividends or make other upstream distributions;

 

   

make investments;

 

   

transfer, sell or dispose of certain assets, including subsidiary stock;

 

   

merge or consolidate with other entities;

 

   

engage in transactions with us or other affiliates; or

 

   

create liens on their assets.

As a result of restrictions contained in these credit facilities, the companies party thereto, and their subsidiaries, could be unable to obtain additional capital in the future to:

 

   

fund capital expenditures or acquisitions that could improve their value;

 

   

meet their loan and capital commitments to their business affiliates;

 

I-50


Table of Contents
   

invest in companies in which they would otherwise invest;

 

   

fund any operating losses or future development of their business affiliates;

 

   

obtain lower borrowing costs that are available from secured lenders or engage in advantageous transactions that monetize their assets; or

 

   

conduct other necessary or prudent corporate activities.

In addition, most of the credit agreements to which these subsidiaries are parties include financial covenants that require them to maintain certain financial ratios, including ratios of total debt to operating cash flow and operating cash flow to interest expense. Their ability to meet these financial covenants may be affected by adverse economic, competitive, or regulatory developments and other events beyond their control, and we cannot assure you that these financial covenants will be met. In the event of a default under such subsidiaries’ credit agreements or indentures, the lenders may accelerate the maturity of the indebtedness under those agreements or indentures, which could result in a default under other outstanding credit facilities or indentures. We cannot assure you that any of these subsidiaries will have sufficient assets to pay indebtedness outstanding under their credit agreements and indentures. Any refinancing of this indebtedness is likely to contain similar restrictive covenants.

We are exposed to interest rate risks. Shifts in such rates may adversely affect the debt service obligation of our subsidiaries. We are exposed to the risk of fluctuations in interest rates, primarily through the credit facilities of certain of our subsidiaries, which are indexed to EURIBOR, LIBOR or other base rates. Although we enter into various derivative transactions to manage exposure to movements in interest rates, there can be no assurance that we will be able to continue to do so at a reasonable cost.

We are subject to increasing operating costs and inflation risks which may adversely affect our earnings. While our operations attempt to increase our subscription rates to offset increases in operating costs, there is no assurance that they will be able to do so. In some countries in which we operate, our ability to increase subscription rates is subject to regulatory controls. Therefore, operating costs may rise faster than associated revenue, resulting in a material negative impact on our cash flow and net earnings (loss). We are also impacted by inflationary increases in salaries, wages, benefits and other administrative costs in certain of our markets.

Adverse economic developments could reduce subscriber spending for our video, internet and telephony services and reduce our rate of growth of subscriber additions. A substantial portion of our revenue is derived from residential subscribers who could be impacted by adverse economic developments. Accordingly, unfavorable economic developments could adversely impact our ability to increase, or in certain cases, maintain the revenue, RGUs, operating cash flow, operating cash flow margins and liquidity of our operating subsidiaries. In addition, our operating results could be adversely affected by the sovereign debt crisis in Europe and related global economic conditions generally.

We may not freely access the cash of our operating companies. Our operations are conducted through our subsidiaries. Our current sources of corporate liquidity include (1) our cash and cash equivalents and (2) interest and dividend income received on our cash and cash equivalents and investments. From time to time, we also receive (1) proceeds in the form of distributions or loan repayments from our subsidiaries or affiliates, (2) proceeds upon the disposition of investments and other assets, (3) proceeds received in connection with the incurrence of debt or the issuance of equity securities and (4) proceeds received upon the exercise of stock options. The ability of our operating subsidiaries to pay dividends or to make other payments or advances to us depends on their individual operating results and any statutory, regulatory or contractual restrictions to which they may be or may become subject and in some cases our receipt of such payments or advances may be limited due to tax considerations or the presence of noncontrolling interests. Most of our operating subsidiaries are subject to credit agreements or indentures that restrict sales of assets and prohibit or limit the payment of dividends or the making of distributions, loans or advances to stockholders and partners, including us. In addition, because these subsidiaries are separate and distinct legal entities they have no obligation to provide us funds for payment obligations, whether by dividends, distributions, loans or other payments. With respect to those companies in which we have less than a majority voting interest, we do not have sufficient voting control to cause those companies to pay dividends or make other payments or advances to any of their partners or stockholders, including us.

 

I-51


Table of Contents

We are exposed to the risk of default by the counterparties to our financial instruments, undrawn debt facilities and cash investments. Although we seek to manage the credit risks associated with our financial instruments, cash and cash equivalents and undrawn debt facilities, we are exposed to the risk that our counterparties could default on their obligations to us. Also, even though we regularly review our credit exposures, defaults may arise from events or circumstances that are difficult to detect or foresee. At December 31, 2010, our exposure to credit risk included (1) derivative assets with a fair value of $861.3 million, (2) cash and cash equivalent and restricted cash balances of $3,893.5 million and (3) aggregate undrawn debt facilities of $1,451.1 million. While we currently have no specific concerns about the creditworthiness of any particular counterparty, we cannot rule out the possibility that one or more of our counterparties could fail or otherwise be unable to meet its obligations to us. Any such instance could have an adverse effect on our cash flows, results of operations and financial condition. It is not possible to predict whether recent improvements in the credit and equity markets will be sustained. In this regard, (1) additional financial institutions failures could (a) reduce amounts available under committed credit facilities, (b) adversely impact our ability to access cash deposited with any failed financial institution and (c) cause a default under one or more derivative contracts, and (2) tightening of the credit markets could adversely impact our ability to access debt financing on favorable terms, or at all.

The liquidity and value of our interests in our subsidiaries may be adversely affected by stockholder agreements and similar agreements to which we are a party. We own equity interests in a variety of international broadband communications and video programming businesses. Certain of these equity interests are held pursuant to stockholder agreements, partnership agreements and other instruments and agreements that contain provisions that affect the liquidity, and therefore the realizable value, of those interests. Most of these agreements subject the transfer of such equity interests to consent rights or rights of first refusal of the other stockholders or partners. In certain cases, a change in control of the company or the subsidiary holding the equity interest will give rise to rights or remedies exercisable by other stockholders or partners. Some of our subsidiaries are parties to loan agreements that restrict changes in ownership of the borrower without the consent of the lenders. All of these provisions will restrict the ability to sell those equity interests and may adversely affect the prices at which those interests may be sold.

We may not report net earnings. We reported losses from continuing operations of $876.0 million, $62.0 million and $763.6 million during 2010, 2009 and 2008, respectively. In light of our historical financial performance, we cannot assure you that we will report net earnings in the near future or ever.

Other Factors

The loss of certain key personnel could harm our business. We have experienced employees at both the corporate and operational levels who possess substantial knowledge of our business and operations. We cannot assure you that we will be successful in retaining their services or that we would be successful in hiring and training suitable replacements without undue costs or delays. As a result, the loss of any of these key employees could cause significant disruptions in our business operations, which could materially adversely affect our results of operations.

John C. Malone has significant voting power with respect to corporate matters considered by our stockholders. John C. Malone beneficially owns outstanding shares of our common stock representing 39.7% of our aggregate voting power as of February 17, 2011. By virtue of Mr. Malone’s voting power in our company, as well as his position as Chairman of our board of directors, Mr. Malone may have significant influence over the outcome of any corporate transaction or other matters submitted to our stockholders for approval. Mr. Malone’s rights to vote or dispose of his equity interests in our company are not subject to any restrictions in favor of us other than as may be required by applicable law and except for customary transfer restrictions pursuant to equity award agreements.

It may be difficult for a third-party to acquire us, even if doing so may be beneficial to our stockholders. Certain provisions of our restated certificate of incorporation and bylaws may discourage, delay, or prevent a change in control of our company that a stockholder may consider favorable. These provisions include the following:

 

   

authorizing a capital structure with multiple series of common stock: a Series B that entitles the holders to 10 votes per share; a Series A that entitles the holders to one vote per share; and a Series C that, except as otherwise required by applicable law, entitles the holder to no voting rights;

 

I-52


Table of Contents
   

authorizing the issuance of “blank check” preferred stock, which could be issued by our board of directors to increase the number of outstanding shares and thwart a takeover attempt;

 

   

classifying our board of directors with staggered three-year terms, which may lengthen the time required to gain control of our board of directors;

 

   

limiting who may call special meetings of stockholders;

 

   

prohibiting stockholder action by written consent, thereby requiring all stockholder actions to be taken at a meeting of the stockholders;

 

   

establishing advance notice requirements for nominations of candidates for election to our board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings;

 

   

requiring stockholder approval by holders of at least 80% of the voting power of our outstanding common stock or the approval by at least 75% of our board of directors with respect to certain extraordinary matters, such as a merger or consolidation of our company, a sale of all or substantially all of our assets, or an amendment to our restated certificate of incorporation or bylaws; and

 

   

the existence of authorized and unissued stock, which would allow our board of directors to issue shares to persons friendly to current management, thereby protecting the continuity of our management, or which could be used to dilute the stock ownership of persons seeking to obtain control of our company.

Change in control provisions in our incentive plan and our convertible notes indentures may also discourage, delay, or prevent a change in control of our company, even if such change of control would be in the best interests of our stockholders.

Our ability to exercise control over certain of our subsidiaries may be, in some cases, dependent upon the consent and co-operation of other equity participants who are not under our control. At December 31, 2010, we had operations in 14 countries through our subsidiaries. Our ownership participation in each of these subsidiaries varies from market to market, and in certain countries we have agreements with minority shareholders, which provide these minority shareholders with different rights and the ability to block transactions or decisions that we would otherwise undertake. Our ability to withdraw funds, including dividends, from our participation in, and to exercise management control over, certain of these subsidiaries and investments depends on the consent of the other equity participants in these subsidiaries. Although the terms of our investments vary, our operations may be affected if disagreements develop with other equity participants in our subsidiaries. Failure to resolve such disputes could restrict payments to us and have an adverse effect on our business operations.

 

Item 1.B. UNRESOLVED STAFF COMMENTS

None.

 

Item 2. PROPERTIES

During 2010, we leased our executive offices in Englewood, Colorado. All of our other real or personal property is owned or leased by our subsidiaries and affiliates.

Our subsidiaries and affiliates own or lease the fixed assets necessary for the operation of their respective businesses, including office space, transponder space, headend facilities, rights of way, cable television and telecommunications distribution equipment, telecommunications switches and customer premises equipment and other property necessary for their operations. The physical components of their broadband networks require maintenance and periodic upgrades to support the new services and products they introduce. Our management believes that our current facilities are suitable and adequate for our business operations for the foreseeable future.

 

I-53


Table of Contents
Item 3. LEGAL PROCEEDINGS

From time to time, our subsidiaries and affiliates have become involved in litigation relating to claims arising out of their operations in the normal course of business. The following is a description of legal proceedings to which certain of our subsidiaries are parties outside the normal course of business that were material at the time originally reported.

Cignal. On April 26, 2002, Liberty Global Europe received a notice that certain former shareholders of Cignal Global Communications (Cignal) filed a lawsuit (the 2002 Cignal Action) against Liberty Global Europe in the District Court in Amsterdam, the Netherlands, claiming damages for Liberty Global Europe’s alleged failure to honor certain option rights that were granted to those shareholders pursuant to a shareholders agreement entered into in connection with the acquisition of Cignal by Liberty Global Europe’s subsidiary, Priority Telecom NV (Priority Telecom). The shareholders agreement provided that in the absence of an initial public offering (IPO), as defined in the shareholders agreement, of shares of Priority Telecom by October 1, 2001, the Cignal shareholders would be entitled until October 30, 2001, to exchange their Priority Telecom shares into shares of Liberty Global Europe, with a cash equivalent value of $200 million in the aggregate, or cash at Liberty Global Europe’s discretion. Liberty Global Europe believes that it complied in full with its obligations to the Cignal shareholders through the successful completion of the IPO of Priority Telecom on September 27, 2001, and accordingly, the option rights were not exercisable.

On May 4, 2005, the District Court rendered its decision in the 2002 Cignal Action dismissing all claims of the former Cignal shareholders. On August 2, 2005, an appeal against the District Court decision was filed with the Court of Appeals in Amsterdam. Subsequently, when the grounds of appeal were filed in November 2005, nine individual plaintiffs, rather than all former Cignal shareholders, continued to pursue their claims. Based on the share ownership information provided by the nine plaintiffs, the damage claims remaining subject to the 2002 Cignal Action are approximately $28 million in the aggregate before statutory interest. On September 13, 2007, the Court of Appeals in Amsterdam rendered its decision that no IPO within the meaning of the shareholders agreement had been realized and accordingly the plaintiffs should have been allowed to exercise their option rights. The Court of Appeals gave the parties leave to appeal to the Dutch Supreme Court and deferred all further decisions and actions, including the calculation and substantiation of the damages claimed by the plaintiffs, pending such appeal. Liberty Global Europe filed the appeal with the Dutch Supreme Court on December 13, 2007. On February 15, 2008, the plaintiffs filed a conditional appeal against the decision with the Dutch Supreme Court, challenging certain aspects of the Court of Appeals decision in the event that Liberty Global Europe’s appeal was not dismissed by the Dutch Supreme Court. On April 9, 2010, the Dutch Supreme Court issued its decision in which it honored the appeal of Liberty Global Europe, dismissed the plaintiffs’ conditional appeal and referred the case to the Court of Appeals in The Hague. It is unclear when the Court of Appeals in The Hague will render a new decision.

On June 13, 2006, Liberty Global Europe, Priority Telecom, Euronext NV and Euronext Amsterdam NV were each served with a summons for a new action (the 2006 Cignal Action) purportedly on behalf of all other former Cignal shareholders and provisionally for the nine plaintiffs in the 2002 Cignal Action. The 2006 Cignal Action claims, among other things, that the listing of Priority Telecom on Euronext Amsterdam NV in September 2001 did not meet the requirements of the applicable listing rules and, accordingly, the IPO was not valid and did not satisfy Liberty Global Europe’s obligations to the Cignal shareholders. Aggregate claims of $200 million, plus statutory interest, are asserted in this action, which amount includes the $28 million provisionally claimed by the nine plaintiffs in the 2002 Cignal Action. On December 19, 2007, the District Court rendered its decision dismissing the plaintiffs’ claims against Liberty Global Europe and the other defendants. The plaintiffs appealed the District Court’s decision to the Court of Appeals in Amsterdam. On December 10, 2009, the Court of Appeals issued a partial decision holding that Priority Telecom was not liable to the Cignal shareholders, but postponed its decision with respect to the other defendants pending receipt of the decision of the Dutch Supreme Court. That decision has been delivered to the Court of Appeals. The Court of Appeals in Amsterdam is currently expected to render its decision with respect to the other defendants during the first quarter of 2011.

 

I-54


Table of Contents

PART II

 

Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

General

The capitalized terms used in PART II of this Annual Report on Form 10-K are defined in the notes to our consolidated financial statements. In the following text, the terms, “we,” “our,” “our company” and “us” may refer, as the context requires, to LGI or collectively to LGI and its predecessors and subsidiaries.

Market Information

We have three series of common stock, LGI Series A, Series B and Series C, that trade on the NASDAQ Global Select Market under the symbols “LBTYA,” “LBTYB” and “LBTYK,” respectively. The following table sets forth the range of high and low sales prices of shares of LGI Series A, Series B and Series C common stock for the periods indicated:

 

     Series A      Series B      Series C  
     High      Low      High      Low      High      Low  

Year ended December 31, 2010

  

           

First quarter

   $ 29.47       $ 21.82       $ 29.46       $ 21.89       $ 29.05       $ 21.76   

Second quarter

   $ 29.85       $ 22.78       $ 29.64       $ 23.41       $ 29.56       $ 22.57   

Third quarter

   $ 31.20       $ 25.18       $ 32.59       $ 26.20       $ 30.95       $ 25.13   

Fourth quarter

   $ 40.86       $ 30.42       $ 41.18       $ 30.92       $ 38.47       $ 30.19   

Year ended December 31, 2009

                 

First quarter

   $ 19.79       $ 9.11       $ 21.58       $ 9.50       $ 18.35       $ 8.95   

Second quarter

   $ 18.66       $ 12.94       $ 18.02       $ 13.43       $ 18.30       $ 12.75   

Third quarter

   $ 25.27       $ 14.46       $ 25.29       $ 14.99       $ 25.06       $ 14.36   

Fourth quarter

   $ 23.84       $ 18.75       $ 23.56       $ 19.01       $ 23.71       $ 18.79   

Holders

As of February 17, 2011, there were 2,119, 130 and 2,186 record holders of LGI Series A, Series B and Series C common stock, respectively (which amounts do not include the number of shareholders whose shares are held of record by banks, brokerage houses or other institutions, but include each such institution as one record holder).

Dividends

We have not paid any cash dividends on LGI Series A, Series B and Series C common stock, and we have no present intention of so doing. Payment of cash dividends, if any, in the future will be determined by our Board of Directors in light of our earnings, financial condition and other relevant considerations including applicable Delaware law. There are currently no contractual restrictions on our ability to pay dividends in cash or stock, although credit facilities to which certain of our subsidiaries are parties would restrict our ability to access their cash for, among other things, our payment of cash dividends.

Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities

None.

 

II-1


Table of Contents

Issuer Purchase of Equity Securities

The following table sets forth information concerning our company’s purchase of its own equity securities during the three months ended December 31, 2010:

 

Period

  Total number of
shares  purchased
    Average price
paid per  share (a)
    Total number of shares
purchased as part of
publicly  announced

plans or programs
    Approximate
dollar value
of shares
that may
yet  be
purchased
under the
plans or

programs
 

October 1, 2010 through

             

October 31, 2010

    Series A:        237,329        Series A:      $ 33.20        Series A:        237,329     
    Series C:        240,206        Series C:      $ 32.80        Series C:        240,206        (b

November 1, 2010 through

             

November 30, 2010

    Series A:        58,127        Series A:      $ 38.73        Series A:        58,127     
    Series C:        615,638        Series C:      $ 35.33        Series C:        615,638        (b

December 1, 2010 through

             

December 31, 2010

    Series A:               Series A:      $        Series A:            
    Series C:        1,295,177        Series C:      $ 33.99        Series C:        1,295,177        (b

Total — October 1, 2010 through

             

December 31, 2010

    Series A:        295,456        Series A:      $ 34.29        Series A:        295,456     
    Series C:        2,151,021        Series C:      $ 34.24        Series C:        2,151,021        (b

 

(a) Average price paid per share includes direct acquisition costs where applicable.

 

(b) As of December 31, 2010, the remaining amount authorized under our most recent repurchase program was $109.7 million. Subsequent to December 31, 2010, our board of directors authorized a new program of up to $1.0 billion for the repurchase of Series A common stock, Series C common stock, securities convertible into such stock or any combination of the foregoing, through open market and privately negotiated transactions, which may include derivative transactions.

In addition to the shares listed in the table above, 37,286 shares of LGI Series A common stock and 37,244 shares of LGI Series C common stock were surrendered during the fourth quarter of 2010 by certain of our officers and employees to pay withholding taxes and other deductions in connection with the release of restrictions on restricted stock.

 

II-2


Table of Contents

Stock Performance Graph

The following graph compares the percentage change from January 1, 2006 to December 31, 2010 in the cumulative total stockholder return (assuming reinvestment of dividends, as applicable) on LGI Series A common stock, LGI Series B common stock, LGI Series C common stock, the NASDAQ Composite Index and the NASDAQ Telecommunications Index. The graph assumes that $100 was invested on January 1, 2006.

LOGO

 

     As of December 31,  
     2006      2007      2008      2009      2010  

LGI Series A

   $ 129.56       $ 174.18       $ 70.76       $ 97.29       $ 157.24   

LGI Series B

   $ 129.12       $ 172.37       $ 69.60       $ 96.57       $ 157.50   

LGI Series C

   $ 132.08       $ 172.59       $ 71.60       $ 103.11       $ 159.86   

Nasdaq Telecommunications Index

   $ 131.49       $ 116.96       $ 67.20       $ 100.77       $ 130.11   

Nasdaq Composite Index

   $ 109.84       $ 119.14       $ 57.41       $ 82.53       $ 97.95   

 

II-3


Table of Contents
Item 6. SELECTED FINANCIAL DATA

The following tables present selected historical financial information of LGI and its consolidated subsidiaries. The following selected financial data was derived from our consolidated financial statements as of and for the years ended December 31, 2010, 2009, 2008, 2007 and 2006. This information is only a summary, and should be read together with our Management’s Discussion and Analysis of Financial Condition and Results of Operations and consolidated financial statements included elsewhere herein.

 

     December 31,  
     2010     2009     2008     2007     2006  
     in millions  

Summary Balance Sheet Data: (a)

  

Property and equipment, net

   $ 11,112.3      $ 12,010.7      $ 12,035.4      $ 10,608.5      $ 8,136.9   

Goodwill

   $ 11,734.7      $ 13,353.8      $ 13,144.7      $ 12,626.8      $ 9,942.6   

Total assets

   $ 33,328.8      $ 39,899.9      $ 33,986.1      $ 32,618.6      $ 25,569.3   

Debt and capital lease obligations, including current portion

   $ 22,462.6      $ 25,852.6      $ 20,502.9      $ 18,353.4      $ 12,230.1   

Total equity

   $ 3,457.7      $ 6,497.1      $ 6,494.7      $ 8,282.1      $ 9,158.6   
     Year ended December 31,  
     2010     2009     2008     2007     2006  
     in millions, except per share amounts  

Summary Statement of Operations Data: (a)

  

Revenue

   $ 9,016.9      $ 7,497.4      $ 7,635.6      $ 6,697.7      $ 4,551.0   

Operating income

   $ 1,495.2      $ 982.4      $ 824.5      $ 287.2      $ 73.2   

Loss from continuing operations (b)

   $ (876.0   $ (62.0   $ (763.6   $ (396.2   $ (383.9

Loss from continuing operations attributable to LGI stockholders

   $ (1,000.5   $ (257.2   $ (755.4   $ (488.1   $ (412.1

Basic and diluted loss from continuing operations attributable to LGI stockholders per share — Series A, Series B and Series C common stock

   $ (3.96   $ (0.95   $ (2.39   $ (1.28   $ (0.94

 

(a) We acquired Unitymedia on January 28, 2010 and we sold the J:COM Disposal Group on February 18, 2010. Effective January 1, 2007, we began accounting for Telenet as a consolidated subsidiary. We also completed a number of other acquisitions during 2010, 2009, 2008, 2007 and 2006. For information concerning our acquisitions during the past three years, see note 4 to our consolidated financial statements.

 

(b) Includes earnings (loss) from continuing operations attributable to noncontrolling interests of $124.5 million, $195.2 million, ($8.2 million), $91.9 million and $28.2 million, respectively.

 

II-4


Table of Contents
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis is intended to assist in providing an understanding of our financial condition, changes in financial condition and results of operations and should be read in conjunction with our consolidated financial statements. This discussion is organized as follows:

 

   

Overview. This section provides a general description of our business and recent events.

 

   

Results of Operations. This section provides an analysis of our results of operations for the years ended December 31, 2010, 2009 and 2008.

 

   

Liquidity and Capital Resources. This section provides an analysis of our corporate and subsidiary liquidity, consolidated cash flow statements and contractual commitments.

 

   

Critical Accounting Policies, Judgments and Estimates. This section discusses those material accounting policies that contain uncertainties and require significant judgment in their application.

 

   

Quantitative and Qualitative Disclosures about Market Risk. This section provides discussion and analysis of the foreign currency, interest rate and other market risk that our company faces.

Unless otherwise indicated, convenience translations into U.S. dollars are calculated as of December 31, 2010.

Overview

We are an international provider of video, broadband internet and telephony services with consolidated broadband communications and/or DTH operations at December 31, 2010 in 14 countries, primarily in Europe, Chile and Australia. Our European and Chilean operations are conducted through Liberty Global Europe. Through UPC Holding, we provide video, broadband internet and telephony services in nine European countries and in Chile. The European broadband communications and DTH operations of UPC Holding and the broadband communications operations of Unitymedia in Germany are collectively referred to as the UPC Broadband Division. UPC Holding’s broadband communications operations in Chile are provided through VTR. Through Telenet, we provide broadband communications services in Belgium. Through Austar, we provide DTH services in Australia. Our operations also include (i) consolidated broadband communications operations in Puerto Rico and (ii) consolidated interests in certain programming businesses in Europe and Argentina. Our consolidated programming interests in Europe are primarily held through Chellomedia, which also owns or manages investments in various other businesses, primarily in Europe. Certain of Chellomedia’s subsidiaries and affiliates provide programming services to certain of our broadband communications operations, primarily in Europe.

Our analog video service offerings include basic programming and, in some markets, expanded basic programming. We tailor both our basic channel line-up and our additional channel offerings to each system according to culture, demographics, programming preferences and local regulation. Our digital video service offerings include basic and premium programming and incremental product and service offerings such as enhanced pay-per-view programming (including video-on-demand and near video-on-demand), digital video recorders and high definition programming.

We offer broadband internet services in all of our broadband communications markets. Our residential subscribers generally access the internet via cable modems connected to their personal computers at various speeds depending on the tier of service selected. We determine pricing for each different tier of broadband internet service through analysis of speed, data limits, market conditions and other factors. We currently offer ultra high-speed internet services in most of our European markets with download speeds ranging up to 128 Mbps. We expect to continue to expand the availability of ultra high-speed internet services throughout our European broadband communications markets.

We offer voice-over-internet-protocol, or “VoIP” telephony services in all of our broadband communications markets. In Austria, Belgium, Chile, Hungary and the Netherlands, we also provide circuit-switched telephony services. In certain markets, including Belgium and Australia, we also offer mobile telephony services using third-party networks.

 

II-5


Table of Contents

As further described in note 4 to our consolidated financial statements, we have completed a number of transactions that impact the comparability of our 2010, 2009 and 2008 results of operations. The most significant of these transactions was the Unitymedia Acquisition on January 28, 2010 and the Interkabel Acquisition on October 1, 2008. We also completed a number of less significant acquisitions in Europe during 2010, 2009 and 2008. In addition, we closed down the DTH operations of Unitymedia’s arena segment effective September 30, 2010 and we sold (i) the J:COM Disposal Group on February 18, 2010 and (ii) UPC Slovenia on July 15, 2009. As further discussed in note 4 to our consolidated financial statements, our consolidated statements of operations and cash flows have been reclassified to present Unitymedia’s arena segment, the J:COM Disposal Group and UPC Slovenia as discontinued operations. In the following discussion and analysis, the operating statistics, results of operations, cash flows and financial condition that we present and discuss are those of our continuing operations unless otherwise indicated.

The UPC Broadband Division provides DTH services to customers in the Czech Republic, Hungary, Romania and Slovakia. During the first quarter of 2010, we initiated the process of centralizing these DTH operations into a Luxembourg-based organization, which we refer to as “UPC DTH,” and began reporting UPC DTH’s operations under a centralized management structure within the UPC Broadband Division’s Central and Eastern Europe reportable segment. Under the previous management structure, these DTH operations were managed locally in the respective countries with support from the UPC Broadband Division’s central operations and, accordingly, were reported within the results of the UPC Broadband Division’s Central and Eastern Europe and central operations categories. As a result of this change in structure, the UPC DTH operating results that were previously reported within the UPC Broadband Division’s central operations are now reported within the UPC Broadband Division’s Central and Eastern Europe segment. In the below discussion and analysis, references to the financial amounts and operating statistics of the applicable individual countries within our Central and Eastern Europe reportable segment include the UPC DTH amounts that are associated with the subscribers that reside in the respective countries.

From a strategic perspective, we are seeking to build broadband communications and video programming businesses that have strong prospects for future growth in revenue, operating cash flow (as defined in note 19 to our consolidated financial statements) and free cash flow (as defined below under Liquidity and Capital Resources — Consolidated Cash Flow Statements). As discussed further under Liquidity and Capital Resources — Capitalization below, we also seek to maintain our debt at levels that provide for attractive equity returns without assuming undue risk.

We focus on achieving organic revenue and customer growth in our broadband communications operations by developing and marketing bundled entertainment and information and communications services, and extending and upgrading the quality of our networks where appropriate. As we use the term, organic growth excludes foreign currency translation effects (FX) and the estimated impact of acquisitions. While we seek to obtain new customers, we also seek to maximize the average revenue we receive from each household by increasing the penetration of our digital cable, broadband internet and telephony services with existing customers through product bundling and upselling, or by migrating analog cable customers to digital cable services that include various incremental service offerings, such as video-on-demand, digital video recorders and high definition programming. We plan to continue to employ this strategy to achieve organic revenue and customer growth.

Through our subsidiaries and affiliates, we are the largest international broadband communications operator in terms of subscribers. At December 31, 2010, we owned and operated networks that passed 31,192,700 homes and served 27,773,500 revenue generating units (RGUs), consisting of 16,755,700 video subscribers, 6,407,700 broadband internet subscribers and 4,610,100 telephony subscribers.

Including the effects of acquisitions, our continuing operations added a total of 6,597,900 RGUs during 2010. Excluding the effects of acquisitions (RGUs added on the acquisition date), but including post-acquisition date RGU additions, our continuing operations added 859,300 RGUs on an organic basis during 2010, as compared to 598,700 RGUs that were added on an organic basis during 2009. The organic RGU growth during 2010 is attributable to the growth of our (i) digital cable services, which added 1,123,500 RGUs, (ii) broadband internet services, which added 664,900 RGUs, (iii) telephony services, which added 544,200 RGUs and (iv) DTH video services, which added

 

II-6


Table of Contents

58,300 RGUs. The growth of our digital cable, broadband internet, telephony and DTH video services was partially offset by a decline in our analog cable RGUs of 1,521,100 and a less significant decline in our multi-channel multi-point (microwave) distribution system (MMDS) video RGUs.

We are experiencing significant competition in all of our broadband communications markets. This significant competition, together with the maturation of certain of our markets, has contributed to organic declines in certain of our markets in revenue, RGUs and/or average monthly subscription revenue per average RGU (ARPU), the more notable of which include:

 

  (i) organic declines in subscription and overall revenue in both Austria and Romania during the fourth quarter of 2010, as compared to the fourth quarter of 2009;

 

  (ii) organic declines in subscription revenue from (a) video services in Romania and the Czech Republic, (b) broadband internet services in Austria and (c) telephony services in Switzerland during the fourth quarter of 2010, as compared to the fourth quarter of 2009;

 

  (iii) organic declines in video RGUs in Switzerland, the Netherlands, Belgium and Germany during the fourth quarter of 2010;

 

  (iv) organic declines in video RGUs in most of our markets during 2010;

 

  (v) an organic decline in total RGUs in Romania during 2010;

 

  (vi) organic declines in ARPU from broadband internet and telephony services in most of our broadband communications markets during the fourth quarter of 2010, as compared to the fourth quarter of 2009; and

 

  (vii) organic declines in overall ARPU in the Czech Republic and Austria during the fourth quarter of 2010, as compared to the fourth quarter of 2009.

In addition to competition, our operations are also subject to economic, political and regulatory risks that are outside of our control. For example, high levels of sovereign debt in certain European countries such as Ireland and Belgium could lead to austerity measures, currency instability and other outcomes that might adversely impact our operations.

On February 27, 2010, certain areas served by VTR’s broadband distribution network in Chile experienced a significant earthquake. This earthquake and the related tsunami destroyed or otherwise adversely impacted an estimated 24,000 homes passed by VTR’s broadband communications network, resulting in the loss of an estimated 15,500 RGUs. With the exception of destroyed homes, service has been restored to substantially all of the homes within VTR’s network footprint. Although the direct financial impacts of the earthquake adversely affected VTR’s results of operations during the first quarter of 2010, VTR’s operations in subsequent periods have not been materially impacted by the earthquake.

Over the next few years, we believe that we will continue to be challenged to improve our organic revenue, RGU and operating cash flow growth rates as we expect that competition will remain strong and that certain of our markets will continue to mature. However, with advanced digital cable offerings and ultra high-speed broadband internet offerings available in most of our broadband communications markets, we believe that we are well positioned to meet the competition and that our digital video, internet and telephony products will continue to show growth. During this timeframe, we also plan to further improve our competitive position by, among other items, (i) introducing mobile products in (a) Chile through a combination of our own wireless network and mobile virtual network operator (MVNO) arrangements (the VTR mobile initiative) and (b) select markets within our UPC Broadband Division through MVNO arrangements and (ii) launching a next generation set-top box. While we expect that these new products and technologies will ultimately have a positive impact on our revenue and operating cash flow, we also expect that (i) we will experience increased capital expenditures associated with (a) the construction of our wireless network in Chile and (b) the deployment of our next generation set-top box and (ii) that our mobile product offerings in Chile and Europe will initially have a negative impact on our operating cash flow. Our expectations with respect to the items discussed in this paragraph are subject to competitive, economic, technological, political and regulatory developments and other factors outside of our control. Accordingly, no assurance can be given that actual results in future periods will not differ materially from our expectations.

 

II-7


Table of Contents

The video, broadband internet and telephony businesses in which we operate are capital intensive. Significant capital expenditures are required to add customers to our networks and to upgrade our networks to enhance our service offerings and improve the customer experience, including expenditures for equipment and labor costs. Significant competition, the introduction of new technologies or adverse regulatory or economic developments could cause us to decide to undertake previously unplanned upgrades of our broadband communications networks in the impacted markets. In addition, no assurance can be given that any future upgrades will generate a positive return or that we will have adequate capital available to finance such future upgrades. If we are unable to, or elect not to, pay for costs associated with adding new customers, expanding or upgrading our networks or making our other planned or unplanned capital expenditures, our growth could be limited and our competitive position could be harmed. For information regarding our capital expenditures, see Liquidity and Capital Resources — Consolidated Cash Flow Statements below.

Results of Operations

As noted under Overview above, the comparability of our operating results during 2010, 2009 and 2008 is affected by acquisitions. In the following discussion, we quantify the impact of acquisitions on our operating results. The acquisition impact represents our estimate of the difference between the operating results of the periods under comparison that is attributable to an acquisition. In general, we base our estimate of the acquisition impact on an acquired entity’s operating results during the first three months following the acquisition date such that changes from those operating results in subsequent periods are considered to be organic changes. Accordingly, in the following discussion, variances attributed to an acquired entity during the first twelve months following the acquisition date represent differences between the acquisition impact and the actual results.

Changes in foreign currency exchange rates have a significant impact on our reported operating results as all of our operating segments, except for Puerto Rico, have functional currencies other than the U.S. dollar. Our primary exposure to FX risk during 2010 was to the euro as 56.4% of our U.S. dollar revenue during 2010 was derived from subsidiaries whose functional currency is the euro. In addition, our reported operating results are impacted by changes in the exchange rates for the Swiss franc, the Chilean peso, the Australian dollar and other local currencies in Europe. The portions of the changes in the various components of our results of operations that are attributable to changes in FX are highlighted under Discussion and Analysis of our Reportable Segments and Discussion and Analysis of our Consolidated Operating Results below. For information concerning our foreign currency risks and the applicable foreign currency exchange rates in effect for the periods covered by this Annual Report, see Quantitative and Qualitative Disclosures about Market Risk — Foreign Currency Risk below.

The amounts presented and discussed below represent 100% of each operating segment’s revenue and operating cash flow. As we have the ability to control Telenet, VTR and Austar, we consolidate 100% of the revenue and expenses of these entities in our consolidated statements of operations despite the fact that third parties own significant interests in these entities. The noncontrolling owners’ interests in the operating results of Telenet, VTR, Austar and other less significant majority owned subsidiaries are reflected in net earnings attributable to noncontrolling interests in our consolidated statements of operations.

Discussion and Analysis of our Reportable Segments

General

All of the reportable segments set forth below derive their revenue primarily from broadband communications and/or DTH services, including video, broadband internet and telephony services. Most segments also provide B2B services. At December 31, 2010, our operating segments in the UPC Broadband Division provided services in 10 European countries. Our Other Western Europe segment includes our operating segments in Austria and Ireland. Our Central and Eastern Europe segment includes our operating segments in the Czech Republic, Hungary, Poland, Romania and Slovakia. Telenet, VTR and Austar provide broadband communications services in Belgium, Chile and Australia, respectively. Our corporate and other category includes (i) less significant operating segments that provide (a) broadband communications services in Puerto Rico and (b) video programming and other services in

 

II-8


Table of Contents

Europe and Argentina and (ii) our corporate category. Intersegment eliminations primarily represent the elimination of intercompany transactions between our broadband communications and programming operations, primarily in Europe.

The tables presented below in this section provide a separate analysis of each of the line items that comprise operating cash flow (revenue, operating expenses and SG&A expenses, excluding allocable stock-based compensation expense, as further discussed in note 19 to our consolidated financial statements) as well as an analysis of operating cash flow by reportable segment for (i) 2010, as compared to 2009 and (ii) 2008, as compared to 2009. These tables present (i) the amounts reported by each of our reportable segments for the comparative periods, (ii) the U.S. dollar change and percentage change from period to period and (iii) the percentage change from period to period, after removing FX and the impacts of acquisitions. The comparisons that exclude FX assume that exchange rates remained constant at the prior year rate during the comparative periods that are included in each table. As discussed under Quantitative and Qualitative Disclosures about Market Risk below, we have significant exposure to movements in foreign currency exchange rates. We also provide a table showing the operating cash flow margins of our reportable segments for 2010, 2009 and 2008 at the end of this section.

The revenue of our reportable segments includes revenue earned from subscribers for ongoing services, installation fees, advertising revenue, mobile telephony revenue, channel carriage fees, telephony interconnect fees, late fees and revenue earned from B2B services. Consistent with the presentation of our revenue categories in note 19 to our consolidated financial statements, we use the term “subscription revenue” in the following discussion to refer to amounts received from subscribers for ongoing services, excluding installation fees, late fees and mobile telephony revenue.

The rates charged for certain video services offered by our broadband communications operations in Europe and Chile are subject to rate regulation. Additionally, in Europe, our ability to bundle or discount our services may be constrained if we are held to be dominant with respect to any product we offer. The amounts we charge and incur with respect to telephony interconnection fees are also subject to regulatory oversight in many of our markets. Adverse outcomes from rate regulation or other regulatory initiatives could have a significant negative impact on our ability to maintain or increase our revenue.

Most of our revenue is derived from jurisdictions that administer value-added or similar revenue-based taxes. Any increases in these taxes could have an adverse impact on our ability to maintain or increase our revenue to the extent that we are unable to pass such tax increases on to our customers. In the case of revenue-based taxes for which we are the ultimate taxpayer, we will also experience increases in our operating expenses and corresponding declines in our operating cash flow and operating cash flow margins to the extent of any such tax increases. In this regard, (i) value added tax rates have increased (a) during 2010, in Romania and, to a lesser extent, in the Czech Republic, and (b) effective January 1, 2011, in Switzerland, Poland and Slovakia. In addition, during the fourth quarter of 2010, the Hungarian government imposed a revenue-based tax that is applicable to our broadband communications operations in Hungary. For additional information regarding the new Hungarian tax, see Operating Expenses of our Reportable Segments — 2010 compared to 2009 below.

 

II-9


Table of Contents

Revenue of our Reportable Segments

Revenue — 2010 compared to 2009

 

     Year ended
December  31,
    Increase
(decrease)
    Increase
(decrease)
excluding

FX and the
impact of
acquisitions
 
     2010     2009     $     %     %  
           in millions                    

UPC Broadband Division:

          

Germany

   $ 1,146.6      $      $ 1,146.6        N.M.        N.M   

The Netherlands

     1,156.8        1,139.7        17.1        1.5        6.6   

Switzerland

     1,076.8        1,020.6        56.2        5.5        1.3   

Other Western Europe

     820.3        835.3        (15.0     (1.8     3.2   
                                        

Total Western Europe

     4,200.5        2,995.6        1,204.9        40.2        5.1   

Central and Eastern Europe

     1,109.4        1,120.5        (11.1     (1.0     0.3   

Central operations

     0.7        1.2        (0.5     (41.7     (45.5
                                        

Total UPC Broadband Division

     5,310.6        4,117.3        1,193.3        29.0        3.8   

Telenet (Belgium)

     1,727.2        1,674.6        52.6        3.1        7.1   

VTR (Chile)

     798.2        700.8        97.4        13.9        4.1   

Austar (Australia)

     652.7        533.9        118.8        22.3        5.4   

Corporate and other

     608.6        548.9        59.7        10.9        9.7   

Intersegment eliminations

     (80.4     (78.1     (2.3     (2.9     (8.2
                                        

Total

   $ 9,016.9      $ 7,497.4      $ 1,519.5        20.3        5.0   
                                        

 

N.M. — Not Meaningful.

Germany. The revenue increase for Germany during 2010, as compared to 2009, is entirely attributable to the January 28, 2010 Unitymedia Acquisition. Germany’s subscription revenue includes revenue from multi-year bulk agreements with the landlord or housing association or with a third party (Professional Operator) that operates and administers the in-building network on behalf of housing associations. These bulk agreements provide access to more than half of Germany’s analog cable subscribers. The 20 largest of these agreements accounted for an estimated 8% to 9% of Germany’s total revenue (including amounts billed directly by Germany to the building occupants for premium cable, internet and telephony services) during the period from January 28, 2010 to December 31, 2010. No assurance can be given that Germany’s bulk agreements with Professional Operators will be renewed or extended on financially equivalent terms or at all. Germany’s non-subscription revenue includes fees received for the carriage of channels on Germany’s analog and digital cable services. These fees, which represented approximately 8% of Germany’s total revenue during the period from January 28, 2010 to December 31, 2010, are subject to contracts that expire or are otherwise terminable by either party at various dates ranging from 2011 through 2013. No assurance can be given that these contracts will be renewed or extended on financially equivalent terms, or at all.

The Netherlands. The Netherlands’ revenue increased $17.1 million or 1.5% during 2010 as compared to 2009. Excluding the effects of FX, the Netherlands’ revenue increased $75.4 million or 6.6%. This increase is primarily attributable to an increase in subscription revenue and, to a lesser extent, non-subscription revenue. The increase in subscription revenue is attributable to (i) a higher average number of RGUs and (ii) higher ARPU. The increase in the average number of RGUs is attributable to the net effect of (i) increases in the average numbers of digital cable, broadband internet and telephony RGUs and (ii) a decline in the average number of analog cable RGUs. The decline in the Netherlands’ average number of analog cable RGUs led to a decline in the average number of total video RGUs in the Netherlands during 2010, as compared to 2009. This analog cable decline is primarily attributable to (i) the migration of analog cable customers to digital cable services and (ii) the effect of significant competition

 

II-10


Table of Contents

from the incumbent telecommunications operator in the Netherlands. ARPU increased during 2010, as compared to 2009, as the positive impacts of (i) improvement in the Netherlands’ RGU mix, attributable to higher proportions of digital cable, broadband internet and telephony RGUs, (ii) January 2010 price increases for certain video, broadband internet and telephony services and (iii) growth in the Netherlands’ digital cable services, including increased revenue from customers selecting higher-priced tiers of service and premium digital services and products, were only partially offset by the negative impacts of (a) competition, including the impact of product bundling discounts, (b) higher proportions of customers selecting lower-priced tiers of broadband internet service and (c) lower telephony call volumes for customers on usage-based calling plans. We expect that we will continue to face significant competition from the incumbent telecommunications operator in future periods. The increase in the Netherlands’ non-subscription revenue is largely attributable to increases in (i) B2B revenue, due primarily to growth in business broadband internet and telephony services, (ii) installation revenue and (iii) interconnect revenue.

Based on the most recent tariff regulations, fixed termination rates in the Netherlands are scheduled to decline significantly during the next two years. The associated declines in the Netherlands’ revenue are expected to be largely offset by corresponding decreases in the Netherlands’ interconnect expenses.

Switzerland. Switzerland’s revenue increased $56.2 million or 5.5% during 2010, as compared to 2009. Excluding the effects of FX, Switzerland’s revenue increased $13.1 million or 1.3%. This increase is primarily attributable to an increase in non-subscription revenue and, to a much lesser extent, an increase in subscription revenue. The increase in subscription revenue is primarily attributable to an increase in the average number of RGUs, as increases in the average numbers of digital cable, broadband internet and telephony RGUs were only partially offset by a decrease in the average number of analog cable RGUs. The decline in the average number of Switzerland’s analog cable RGUs led to a decline in the average number of total video RGUs in Switzerland during 2010, as compared to 2009. This analog cable decline is primarily attributable to (i) the migration of analog cable subscribers to digital cable services and (ii) the effects of significant competition from the incumbent telecommunications operator in Switzerland. We expect that we will continue to face significant competition from the incumbent telecommunications operator in future periods. ARPU remained relatively unchanged during 2010, as compared to 2009, due primarily to the net impact of (i) improvement in Switzerland’s RGU mix, attributable to higher proportions of digital cable and, to a lesser extent, broadband internet and telephony RGUs, (ii) the adverse effects of competition, including the impact of product bundling discounts, (iii) price increases implemented during the second half of 2010 for certain video services, (iv) increased revenue from digital cable customers selecting higher-priced tiers of service, (v) lower telephony call volumes for customers on usage-based calling plans and (vi) increases in the proportion of broadband internet subscribers selecting lower-priced tiers of service. The negative effect of the declines in ARPU from telephony and broadband internet services led to organic declines in Switzerland’s revenue from each of these services during 2010, as compared to 2009. The increase in Switzerland’s non-subscription revenue is primarily attributable to the net impact of (i) an increase in installation revenue, (ii) higher revenue from the sale of customer premise equipment, due largely to the second quarter 2010 introduction of “digicards”, which enable customers with “common interface plus” enabled televisions who subscribe, or otherwise have purchased access to, our digital cable service, to view our digital cable service without a set-top box, and (iii) a decline in B2B revenue. The decline in B2B revenue is due primarily to lower construction and equipment sales that were only partially offset by modest growth in business broadband internet and telephony services.

Other Western Europe. Other Western Europe’s revenue decreased $15.0 million or 1.8% during 2010, as compared to 2009. Excluding the effects of FX, Other Western Europe’s revenue increased $26.4 million or 3.2%. This increase is primarily attributable to an increase in subscription revenue that resulted from the net effect of (i) a higher average number of RGUs and (ii) lower ARPU. The increase in subscription revenue in Other Western Europe is attributable to the net impact of (i) an increase in subscription revenue in Ireland and (ii) a decrease in subscription revenue in Austria. The decrease in subscription revenue in Austria, which also led to a decline in overall revenue in Austria, is attributable to declines in revenue from broadband internet and, to a lesser extent, telephony services. The increase in Other Western Europe’s average number of RGUs is attributable to increases in the average numbers of digital cable, telephony and broadband internet RGUs that were only partially offset by

 

II-11


Table of Contents

decreases in the average numbers of analog cable and, to a lesser extent, MMDS RGUs. The decline in the average number of analog cable RGUs is primarily attributable to (i) the migration of analog cable customers to digital cable services and (ii) the effects of competition. The negative impact of lower average numbers of analog cable and MMDS RGUs led to a decline in the average number of total video RGUs in Other Western Europe during 2010, as compared to 2009. ARPU decreased in our Other Western Europe segment during 2010, due primarily to the negative impacts of (i) competition, including the impact of product bundling discounts, (ii) fewer subscriptions to premium digital products and services, (iii) higher proportions of subscribers selecting lower-priced tiers of analog cable services, (iv) lower telephony call volumes for customers on usage-based calling plans and, in Austria, higher proportions of customers selecting such usage-based calling plans and (v) higher proportions of customers selecting lower-priced tiers of broadband internet services. These negative factors were partially offset by the positive impacts of (i) improvements in RGU mix, attributable to higher proportions of digital cable and broadband internet RGUs and (ii) rate increases for certain video, broadband internet and telephony services. Other Western Europe’s non-subscription revenue increased during 2010, due primarily to an increase in B2B revenue, including the positive impact of a first quarter 2010 settlement with the incumbent telecommunications operator in Austria.

Central and Eastern Europe. Central and Eastern Europe’s revenue decreased $11.1 million or 1.0% during 2010, as compared to 2009. This decrease is net of a $0.5 million increase attributable to the impact of an acquisition. Excluding the effects of the acquisition and FX, Central and Eastern Europe’s revenue increased $3.2 million or 0.3%. This increase is attributable to the net impact of (i) an increase in non-subscription revenue and (ii) a decrease in subscription revenue. The decrease in subscription revenue during 2010 is attributable to the net effect of (i) lower ARPU and (ii) a higher average number of RGUs. ARPU decreased in our Central and Eastern Europe segment during 2010, as compared to 2009, due primarily to the negative impacts of (i) competition, including the impact of product bundling discounts, (ii) higher proportions of broadband internet and video subscribers selecting lower-priced tiers of service, (iii) lower analog cable revenue from premium video services and products, (iv) lower telephony call volumes for customers on usage-based calling plans and (v) lower digital cable revenue from premium video services and products. These negative factors were partially offset by the positive impacts of (i) improvements in RGU mix, primarily attributable to higher proportions of digital cable and broadband internet RGUs and (ii) a June 2010 price increase for certain digital cable services in Poland. The increase in Central and Eastern Europe’s average number of RGUs is primarily attributable to increases in the average numbers of digital cable, broadband internet, telephony and, to a lesser extent, DTH video RGUs that were only partially offset by declines in the average numbers of analog cable and, to a much lesser extent, MMDS video RGUs. The declines in the average numbers of analog cable RGUs, which are attributable primarily to (i) the migration of analog cable subscribers to digital cable services and (ii) the effects of competition, led to declines in the average numbers of total video RGUs in each country within our Central and Eastern Europe segment during 2010, as compared to 2009. Non-subscription revenue in our Central and Eastern Europe segment increased during 2010, as increases in (i) interconnect revenue, primarily in Poland, and (ii) revenue from B2B services in Hungary, Poland and the Czech Republic were only partially offset by a decrease in revenue from B2B services in Romania.

Although competition is a factor throughout Central and Eastern Europe, we are experiencing particularly intense competition in Hungary and Romania. In response to the competition in Hungary and Romania, we have implemented aggressive pricing and marketing strategies. In Hungary, competition, including competition from a competitor that, as of December 31, 2010, has overbuilt more than half of our broadband communications network, has contributed to declines during the fourth quarter of 2010 in (i) video, broadband internet, telephony and overall revenue, and (ii) ARPU, each as compared to the corresponding fourth quarter 2009 amount. In Romania, competition contributed to organic declines in broadband internet and telephony RGUs during the fourth quarter of 2010. Despite the fact that we have increased our subscriber retention efforts in Romania, we believe that competitive and regulatory factors will continue to adversely impact our ability to retain analog cable customers in Romania. Competition also has impacted the Czech Republic and Slovakia, as lower average numbers of video RGUs led to organic declines in revenue from video services and total subscription revenue in each of these countries during the fourth quarter of 2010, as compared to the fourth quarter of 2009. Additionally, in Poland and Slovakia, our competitors include DTH operators and other cable operators that have overbuilt or plan to overbuild significant portions of our broadband communications network. We expect that we will continue to experience significant competition in future periods in our Central and Eastern Europe segment.

 

II-12


Table of Contents

Telenet (Belgium). Telenet’s revenue increased $52.6 million or 3.1% during 2010 as compared to 2009. This increase includes $24.2 million attributable to the impact of acquisitions. Excluding the effects of the acquisitions and FX, Telenet’s revenue increased $118.6 million or 7.1%. This increase is primarily attributable to an increase in subscription revenue that resulted from (i) an increase in ARPU and (ii) a higher average number of RGUs. ARPU increased as the positive impacts of (i) improvements in Telenet’s RGU mix, attributable to higher proportions of digital cable, broadband internet and telephony RGUs, (ii) increases in revenue from premium digital cable services and (iii) February 2009 and 2010 price increases for certain analog and digital cable services and a March 2009 price increase for telephony services were only partially offset by the negative impacts of (a) competition, including the impact of product bundling discounts, (b) increases in the proportion of customers selecting lower-priced tiers of broadband internet service and (c) lower telephony call volumes for customers on usage-based plans. The increase in the average number of RGUs primarily is attributable to increases in the average numbers of digital cable, broadband internet and telephony RGUs that were only partially offset by a decline in the average number of analog cable RGUs. The decline in the average number of analog cable RGUs led to a decline in the average number of total video RGUs during 2010 as compared to 2009. This analog cable decline is primarily attributable to (i) the migration of analog cable subscribers to digital cable services and (ii) the effects of competition, including significant competition from the incumbent telecommunications operator in Belgium. We expect that Telenet will continue to face significant competition from the incumbent telecommunications operator in future periods. Telenet’s non-subscription revenue increased during 2010 as compared to 2009, due primarily to a $29.0 million increase in mobile telephony revenue that was only partially offset by (i) a decrease in installation revenue, primarily attributable to increased discounting and a lower number of RGU additions, (ii) lower sales of mobile handsets and digital set-top boxes, (iii) lower revenue from contract termination billings and (iv) a decrease in third-party commissions earned by Telenet’s mobile telephony retail operations. An increase in interconnect revenue and other individually insignificant changes in non-subscription revenue also contributed to the increase.

Based on the most recent tariff regulations, mobile termination rates in Belgium are scheduled to decline significantly during the next two years. The associated declines in Telenet’s revenue are expected to be largely offset by corresponding decreases in Telenet’s interconnect expenses.

For information concerning the potential adverse impacts on ARPU and revenue from video services as a result of regulatory developments in Belgium, see note 18 to our consolidated financial statements.

VTR (Chile). As further described in Overview above, the direct financial impacts of the February 27, 2010 earthquake in Chile adversely impacted VTR’s revenue, RGU base and ARPU during the first quarter of 2010. VTR’s revenue increased $97.4 million or 13.9% during 2010 as compared to 2009. Excluding the effects of FX, VTR’s revenue increased $29.1 million or 4.1%. This increase is attributable to an increase in subscription revenue and, to a lesser extent, non-subscription revenue. The increase in subscription revenue during 2010 is primarily attributable to a higher average numbers of RGUs, as increases in the average numbers of digital cable, broadband internet and telephony RGUs were only partially offset by a decline in the average number of analog cable RGUs. VTR’s ARPU was relatively unchanged during 2010, as compared to 2009, primarily due to the net effect of (i) higher proportions of subscribers selecting higher-priced tiers of broadband internet services, (ii) competition (including the impact of product bundling discounts), particularly from the incumbent telecommunications operator in Chile, (iii) higher proportions of subscribers selecting lower-priced tiers of video service, (iv) improvements in VTR’s RGU mix, attributable to higher proportions of digital cable and broadband internet RGUs, (v) increases in revenue from premium digital services and products, (vi) the negative impact of credits provided to customers in the weeks following the earthquake and (vii) increases due to inflation and other price adjustments. We expect that VTR will continue to face significant competition from the incumbent telecommunications operator in future periods. The increase in VTR’s non-subscription revenue is attributable to a net increase resulting from individually insignificant changes in various non-subscription revenue categories.

Austar (Australia). Austar’s revenue increased $118.8 million or 22.3% during 2010, as compared to 2009. Excluding the effects of FX, Austar’s revenue increased $29.0 million or 5.4%. This increase is primarily attributable to an increase in subscription revenue that resulted from (i) a higher average number of DTH video RGUs and (ii) higher ARPU. The increase in ARPU is primarily attributable to (i) February 2010 and March 2009

 

II-13


Table of Contents

price increases for certain DTH video services and (ii) higher penetration of premium services, such as digital video recorders. Austar’s non-subscription revenue decreased slightly during 2010, due primarily to a decline in revenue from mobile telephony services that was only partially offset by an increase in installation revenue.

Recently, certain areas in Australia that Austar is authorized to serve have experienced significant flooding. As Austar currently estimates that less than 10,000 of its subscribers were severely impacted by the flooding, we believe that the resulting adverse financial impacts will not be material to our results of operations or financial position.

Revenue — 2009 compared to 2008

 

     Year ended
December  31,
    Increase
(decrease)
    Increase
(decrease)
excluding

FX and the
impact of
acquisitions
 
     2009     2008     $     %     %  
           in millions                    

UPC Broadband Division:

          

The Netherlands

   $ 1,139.7      $ 1,181.1      $ (41.4     (3.5     1.7   

Switzerland

     1,020.6        1,017.0        3.6        0.4        0.6   

Other Western Europe

     835.3        893.8        (58.5     (6.5     (1.6
                                        

Total Western Europe

     2,995.6        3,091.9        (96.3     (3.1     0.4   

Central and Eastern Europe

     1,120.5        1,301.0        (180.5     (13.9     2.2   

Central operations

     1.2        1.9        (0.7     (36.8     (15.4
                                        

Total UPC Broadband Division

     4,117.3        4,394.8        (277.5     (6.3     0.9   

Telenet (Belgium)

     1,674.6        1,501.1        173.5        11.6        8.2   

VTR (Chile)

     700.8        713.9        (13.1     (1.8     5.7   

Austar (Australia)

     533.9        534.7        (0.8     (0.1     6.8   

Corporate and other

     548.9        576.0        (27.1     (4.7     2.6   

Intersegment eliminations

     (78.1     (84.9     6.8        8.0        3.1   
                                        

Total

   $ 7,497.4      $ 7,635.6      $ (138.2     (1.8     3.4   
                                        

The Netherlands. The Netherlands’ revenue decreased $41.4 million or 3.5% during 2009, as compared to 2008. Excluding the effects of FX, the Netherlands’ revenue increased $20.3 million or 1.7%. This increase is attributable to an increase in subscription revenue that was partially offset by a decrease in non-subscription revenue. The increase in subscription revenue during 2009 reflects the net effect of (i) the positive impacts of higher ARPU and a slightly higher number of average RGUs and (ii) the impact of a $7.9 million decrease that is primarily related to favorable analog cable rate settlements with certain municipalities that we recognized in 2008, with $5.3 million of the decrease occurring in the fourth quarter. ARPU increased during 2009, as compared to 2008, as the positive impacts of (i) an improvement in the Netherlands’ RGU mix, attributable to higher proportions of digital cable, telephony and broadband internet RGUs, (ii) January 2009 price increases for certain video, broadband internet and telephony services and (iii) growth in the Netherlands’ digital cable services, including increased revenue from customers selecting higher-priced tiers of service and premium digital services and products were only partially offset by the negative impacts of (a) competition, including the impact of product bundling discounts, (b) lower telephony call volumes for customers on usage-based calling plans and (c) a higher proportion of customers selecting lower-priced tiers of broadband internet services. The slight increase in the average number of RGUs during 2009 is attributable to the net effect of increases in the average numbers of digital cable, telephony and broadband internet RGUs and a decline in the average number of analog RGUs. The decline in the Netherlands’ average number of analog cable RGUs is primarily attributable to (i) the effects of significant competition from the incumbent telecommunications operator in the Netherlands and (ii) the migration of analog cable customers to digital cable services. The decrease in the Netherlands’ non-subscription revenue is primarily attributable to (i) a

 

II-14


Table of Contents

decrease in revenue from B2B services, due largely to the loss of certain B2B contracts during the latter part of 2008, and (ii) lower interconnect revenue, due largely to January 1, 2009 and July 1, 2009 reductions in termination rates imposed by regulatory authorities.

Switzerland. Switzerland’s revenue increased $3.6 million or 0.4% during 2009, as compared to 2008. Excluding the effects of FX, Switzerland’s revenue increased $6.1 million or 0.6%. This increase is attributable to an increase in subscription revenue that was partially offset by a slight decrease in non-subscription revenue. The increase in subscription revenue is due to an increase in the average number of RGUs and slightly higher ARPU. The increase in the average number of RGUs during 2009 is attributable to the net effect of increases in the average numbers of digital cable, broadband internet and telephony RGUs and a decline in the average number of analog cable RGUs. The decline in the average number of Switzerland’s analog cable RGUs is primarily attributable to (i) the migration of analog cable subscribers to digital cable services and (ii) the effects of competition. During 2009, competition in Switzerland contributed to a net organic decline in total RGUs, as declines in analog cable and telephony RGUs were only partially offset by increases in digital cable and broadband internet RGUs. ARPU increased slightly during 2009, as compared to 2008, as the positive impacts of (i) an improvement in Switzerland’s RGU mix, attributable to higher proportions of digital cable, broadband internet and telephony RGUs, and (ii) increased revenue from premium digital services and products more than offset the negative impacts of (a) competition, including the impact of product bundling discounts, (b) lower telephony call volumes for customers on usage-based calling plans and (c) an increase in the proportion of broadband internet subscribers selecting lower-priced tiers of service. The negative effect of the decline in Switzerland’s telephony ARPU contributed to an organic decline in revenue from telephony services during 2009, as compared to 2008. The slight decrease in Switzerland’s non-subscription revenue is primarily attributable to the net effect of (i) lower revenue from B2B construction services and equipment sales and (ii) an increase in revenue from late fees.

Other Western Europe. Other Western Europe’s revenue decreased $58.5 million or 6.5% during 2009, as compared to 2008. This decrease is net of an increase of $2.2 million attributable to the impact of acquisitions. Excluding the effects of acquisitions and FX, Other Western Europe’s revenue decreased $14.6 million or 1.6%. This decrease is attributable to a decrease in subscription revenue that was only partially offset by an increase in non-subscription revenue. The decrease in subscription revenue during 2009 is due to the net effect of lower ARPU and a higher average number of RGUs. The decline in subscription revenue in Other Western Europe, which is largely attributable to competition, includes declines in (i) revenue from broadband internet and telephony services in Austria, and (ii) revenue from video services in Ireland. The declines in Austria’s revenue from broadband internet and telephony services led to declines in Austria’s subscription and overall revenue during 2009. ARPU decreased in Other Western Europe during 2009, as compared to 2008, due primarily to the negative impacts of (i) competition, including the impact of product bundling discounts, (ii) a higher proportion of subscribers selecting lower-priced tiers of digital cable service and fewer premium digital products and services, (iii) a higher proportion of customers selecting lower-priced tiers of broadband internet services and, in Austria, telephony services (including usage-based calling plans) and (iv) in Austria, lower telephony call volumes and an increase in the proportion of subscribers selecting VoIP telephony service, which generally is priced lower than Austria’s circuit-switched telephony service. These negative factors were partially offset by the positive impacts of (a) an improvement in RGU mix, primarily attributable to higher proportions of digital cable RGUs, (b) rate increases for certain analog cable, digital cable and broadband internet services and (c) higher telephony call volume and a higher proportion of customers selecting higher-priced tiers of telephony services in Ireland. The increase in the average number of RGUs is attributable to increases in the average numbers of digital cable, telephony and broadband internet RGUs that were only partially offset by decreases in the average numbers of analog cable and, to a lesser extent, MMDS RGUs. The decline in the average number of analog cable RGUs is primarily attributable to (i) the migration of analog cable customers to digital cable services and (ii) the effects of competition. The negative impact of lower average numbers of analog cable and MMDS RGUs contributed to an organic decline in the average number of video RGUs in Other Western Europe during 2009, as compared to 2008. During the fourth quarter of 2009, Ireland experienced a sequential increase in revenue from premium digital services, due largely to steps taken during the latter part of 2009 to combat signal theft. The increase in Other Western Europe’s non-subscription revenue during 2009 is primarily attributable to increases in (i) B2B revenue, due primarily to growth in the number of business broadband internet and telephony customers, and (ii) installation revenue.

 

II-15


Table of Contents

Central and Eastern Europe. Central and Eastern Europe’s revenue decreased $180.5 million or 13.9% during 2009, as compared to 2008. This decrease is net of a $2.1 million increase attributable to the impact of acquisitions. Excluding the effects of acquisitions and FX, Central and Eastern Europe’s revenue increased $28.0 million or 2.2%. Most of this increase is attributable to an increase in subscription revenue as the positive impact of a higher average number of RGUs was only partially offset by the negative impact of a decrease in ARPU. The increase in the average number of RGUs is primarily attributable to increases in the average numbers of digital cable, broadband internet and telephony RGUs that were only partially offset by a decline in the average number of analog cable RGUs. The decline in the average number of analog cable RGUs, which is attributable primarily to (i) the migration of analog cable subscribers to digital cable services and (ii) the effects of competition, led to a decline in the average number of total video RGUs in Central and Eastern Europe during 2009, as compared to 2008. This decline includes average video RGU decreases in Romania, Hungary, the Czech Republic and, to a lesser extent, Slovakia that were only partially offset by a small increase in Poland. The decline in average video RGUs in Romania, Hungary, the Czech Republic and Slovakia led to organic declines in revenue from video services in each of these countries during 2009, as compared to 2008. ARPU decreased in our Central and Eastern Europe segment during 2009, as the negative impacts of (i) competition, including the impact of product bundling discounts, (ii) a higher proportion of broadband internet and video subscribers selecting lower-priced tiers of service, (iii) lower analog and digital cable revenue from premium video services and products and (iv) lower telephony call volumes and other changes in telephony subscriber calling patterns were only partially offset by the positive impacts of (a) an improvement in RGU mix, primarily attributable to higher proportions of digital cable and broadband internet RGUs, and (b) rate increases for certain video and telephony services in several countries. Decreases in ARPU from broadband internet services in Hungary and Slovakia led to organic declines in revenue from broadband internet services in each of these countries during 2009, as compared to 2008. Central and Eastern Europe’s non-subscription revenue increased during 2009, as compared to 2008, as a decrease in revenue from B2B services in Romania was more than offset by (i) an increase in interconnect revenue, (ii) higher installation revenue and (iii) a net increase resulting from individually insignificant changes in other non-subscription revenue categories.

Although competition has been a factor throughout Central and Eastern Europe, we experienced particularly intense competition in Hungary and Romania during 2009. In Hungary, competition, including competition from a competitor that has overbuilt nearly half of Hungary’s broadband communications network, has contributed to declines during the quarter and full year ended December 31, 2009 in (i) video, broadband internet and overall revenue and (ii) ARPU, each as compared to the corresponding period in 2008. In addition, competition has contributed to a decline in the total number of RGUs in Hungary during 2009. In Romania, competition contributed to declines in video revenue and overall revenue during 2009, as compared to 2008.

Telenet (Belgium). Telenet’s revenue increased $173.5 million or 11.6% during 2009, as compared to 2008. This increase includes $134.0 million attributable to the impact of the October 1, 2008 Interkabel Acquisition and another less significant acquisition. Excluding the effects of these acquisitions and FX, Telenet’s revenue increased $122.9 million or 8.2%. This increase is attributable to an increase in subscription revenue that resulted from (i) an increase in ARPU and (ii) a higher average number of RGUs. ARPU increased during 2009, as compared to 2008, as the positive impacts of (i) an improvement in Telenet’s RGU mix, primarily attributable to higher proportions of digital cable, broadband internet and telephony RGUs, (ii) an increase in revenue from premium digital cable services, such as video-on-demand, (iii) an increase in revenue from set-top box rentals due to Telenet’s increased emphasis since the second quarter of 2008 on the rental, as opposed to the sale, of set-top boxes, and (iv) February 2009 price increases for digital and analog cable services and a March 2009 price increase for VoIP telephony services were only partially offset by the negative impacts of (a) competition, including the impact of product bundling discounts, (b) an increase in the proportion of customers selecting lower-priced tiers of service, and (c) lower call volume and a change in subscriber calling patterns. The increase in the average number of RGUs primarily is attributable to increases in the average numbers of digital cable, broadband internet and telephony RGUs that were only partially offset by a decline in the average number of analog cable RGUs. The decline in the average number of analog cable RGUs is primarily attributable to (i) the migration of analog cable subscribers to digital cable services and (ii) the effects of competition. Telenet’s non-subscription revenue decreased slightly during 2009, as compared to 2008, due primarily to the net effect of (i) an increase in installation revenue of $16.8 million, primarily attributable to a higher number of digital cable installations, (ii) a decrease in revenue from

 

II-16


Table of Contents

interconnect fees of $14.2 million, (iii) an increase in mobile telephony revenue and (iv) lower revenue from set-top box sales. The lower revenue from interconnect fees is due primarily to the January 1, 2009 reduction in fixed-line termination rates imposed by regulatory authorities.

VTR (Chile). VTR’s revenue decreased $13.1 million or 1.8% during 2009, as compared to 2008. Excluding the effects of FX, VTR’s revenue increased $40.6 million or 5.7%. Most of this increase is attributable to an increase in subscription revenue that resulted primarily from a higher average number of RGUs. The increase in the average number of RGUs is attributable to increases in the average numbers of digital cable, broadband internet and telephony RGUs that were only partially offset by a decline in the average number of analog cable RGUs. ARPU remained relatively constant during 2009 as (i) an improvement in VTR’s RGU mix, attributable to a higher proportion of digital cable and broadband internet RGUs, and (ii) increases due to various inflation and other price adjustments for certain video, broadband internet and telephony services were offset by (a) a decrease due to competition (including the impact of product bundling discounts), particularly from the incumbent telecommunications operator in Chile, and (b) a decrease due to higher proportions of subscribers selecting lower-priced tiers of video, broadband internet and telephony services. A decline in VTR’s telephony ARPU contributed to an organic decline in revenue from telephony services during 2009, as compared to 2008.

Austar (Australia). Austar’s revenue decreased $0.8 million or 0.1% during 2009, as compared to 2008. Excluding the effects of FX, Austar’s revenue increased $36.1 million or 6.8%. This increase is attributable to an increase in subscription revenue that resulted from (i) a higher average number of DTH RGUs during 2009 and (ii) the positive impact of higher ARPU. The increase in ARPU is primarily attributable to (i) a March 2009 price increase for certain DTH video services and (ii) higher penetration of premium services, such as personal video recorders. Austar’s non-subscription revenue decreased slightly during 2009, as compared to 2008, as a decline in revenue from mobile telephony services was partially offset by a net increase resulting from individually insignificant changes in other non-subscription revenue categories.

 

II-17


Table of Contents

Operating Expenses of our Reportable Segments

Operating expenses — 2010 compared to 2009

 

     Year ended
December  31,
    Increase
(decrease)
    Increase
(decrease)
excluding FX
and the
impact of
acquisitions
 
     2010     2009     $     %     %  
           in millions                    

UPC Broadband Division:

          

Germany

   $ 272.8      $      $ 272.8        N.M.        N.M.   

The Netherlands

     349.2        347.3        1.9        0.5        5.5   

Switzerland

     322.6        308.8        13.8        4.5        0.4   

Other Western Europe

     319.1        319.0        0.1               5.1   
                                        

Total Western Europe

     1,263.7        975.1        288.6        29.6        2.8   

Central and Eastern Europe

     438.8        413.9        24.9        6.0        7.9   

Central operations

     50.2        53.0        (2.8     (5.3     (1.6
                                        

Total UPC Broadband Division

     1,752.7        1,442.0        310.7        21.5        4.1   

Telenet (Belgium)

     614.3        600.8        13.5        2.2        4.6   

VTR (Chile)

     333.6        299.4        34.2        11.4        1.8   

Austar (Australia)

     335.2        269.6        65.6        24.3        7.2   

Corporate and other

     380.0        331.8        48.2        14.5        12.8   

Intersegment eliminations

     (79.5     (77.5     (2.0     (2.6     (8.1
                                        

Total operating expenses excluding stock-based compensation expense

     3,336.3        2,866.1        470.2        16.4        5.2   
                

Stock-based compensation expense

     10.7        9.6        1.1        11.5     
                                  

Total

   $ 3,347.0      $ 2,875.7      $ 471.3        16.4     
                                  

 

N.M. — Not Meaningful.

General. Operating expenses include programming, network operations, interconnect, customer operations, customer care, stock-based compensation expense and other direct costs. We do not include stock-based compensation in the following discussion and analysis of the operating expenses of our reportable segments as stock-based compensation expense is not included in the performance measures of our reportable segments. Stock-based compensation expense is discussed under the Discussion and Analysis of Our Consolidated Operating Results below. Programming costs, which represent a significant portion of our operating costs, are expected to rise in future periods as a result of the expansion of service offerings and the potential for price increases. In addition, we are subject to inflationary pressures with respect to our labor and other costs and foreign currency exchange risk with respect to costs and expenses that are denominated in currencies other than the respective functional currencies of our operating segments (non-functional currency expenses). Any cost increases that we are not able to pass on to our subscribers through service rate increases would result in increased pressure on our operating margins. For additional information concerning our foreign currency exchange risks see Quantitative and Qualitative Disclosures about Market Risk — Foreign Currency Risk below.

UPC Broadband Division. The UPC Broadband Division’s operating expenses (exclusive of stock-based compensation expense) increased $310.7 million or 21.5% during 2010, as compared to 2009. This increase includes $281.9 million attributable to the impact of the Unitymedia Acquisition and another less significant

 

II-18


Table of Contents

acquisition. Excluding the effects of acquisitions and FX, the UPC Broadband Division’s operating expenses increased $59.6 million or 4.1%. This increase includes the following factors:

 

   

An increase in programming and related costs of $35.6 million or 10.4%, due primarily to (i) growth in digital video services, predominantly in the Netherlands, Ireland, our UPC DTH operations and Poland, and (ii) foreign currency exchange rate fluctuations with respect to non-functional currency expenses associated with certain programming contracts, primarily in Poland and Switzerland. These factors were partially offset by the impact of the fourth quarter 2010 release of $8.1 million of copyright fee accruals in connection with the settlement of certain contingencies, primarily in Germany and the Netherlands;

 

   

An increase of $19.3 million that represents the full-year 2010 impact of a new revenue-based tax that was imposed in Hungary during the fourth quarter of 2010, with retroactive effect to the beginning of 2010. The new Hungarian tax law is currently scheduled to expire at the end of 2012. It is not yet clear whether the new Hungarian tax is compliant with EU regulations;

 

   

A decrease in bad debt and collection expenses of $18.0 million, due largely to improved collection experience, most notably in Germany and the Czech Republic. For information regarding our approach to estimating the effects of acquisitions, see Results of Operations above;

 

   

An increase in network related expenses of $15.5 million or 8.5%, due largely to (i) higher costs associated with the refurbishment of customer premise equipment by the Netherlands, UPC DTH, Romania and Poland, (ii) higher energy costs in the Netherlands and the Czech Republic and (iii) higher costs in central operations due to increased network transit requirements. The higher energy costs in the Netherlands are partially attributable to non-recurring items;

 

   

An increase in outsourced labor and professional fees of $8.1 million or 7.0%, due largely to higher outsourced labor associated with customer-facing activities, primarily in Switzerland and Ireland; and

 

   

A $3.3 million decrease during the three months ended September 30, 2010 due to the impact of a favorable interconnect rate settlement in Switzerland.

Telenet (Belgium). Telenet’s operating expenses (exclusive of stock-based compensation expense) increased $13.5 million or 2.2% during 2010, as compared to 2009. This increase includes $18.3 million attributable to the impact of acquisitions. Excluding the effects of acquisitions and FX, Telenet’s operating expenses increased $27.8 million or 4.6%. This increase includes the following factors:

 

   

An increase in interconnect and access costs of $16.2 million or 22.0%, primarily due to growth in mobile and fixed-line telephony services, the impact of which was only partially offset by lower mobile termination rates;

 

   

An increase in mobile telephony handset costs of $14.1 million, attributable to the success of mobile telephony calling plan promotions involving free or heavily discounted handsets;

 

   

An increase in programming and related costs of $11.6 million or 7.0%, due primarily to growth in digital cable services that was only partially offset by the impact of lower negotiated rates for programming content;

 

   

A decrease in outsourced labor of $11.4 million or 14.0%, due primarily to (i) the insourcing of certain customer care functions and (ii) decreased expenses associated with a decline in the number of visits to customer premises to reconnect or maintain services;

 

   

A decrease of $9.7 million related to the impact of a fourth quarter 2009 charge that was recorded to reflect the settlement of future obligations to provide post-employment benefits to certain Telenet employees;

 

   

An increase in network related expense of $8.2 million or 9.5%, due primarily to (i) digital terrestrial television (DTT) network costs that Telenet began incurring during the fourth quarter of 2010 pursuant

 

II-19


Table of Contents
 

an agreement that provides Telenet with the right to use a specified DTT network through June 2024, (ii) higher costs associated with the refurbishment of customer premise equipment and (iii) higher maintenance costs;

 

   

A decrease in customer premise equipment sold to customers of $6.2 million, due primarily to lower mobile handset and digital set-top box sales; and

 

   

An increase in personnel costs of $5.7 million or 5.9%, due primarily to (i) increased staffing levels, largely related to (a) the insourcing of certain customer care functions and (b) increased network operations activities, including activities associated with Telenet’s conversion to a full MVNO during the fourth quarter of 2010, and (ii) higher severance costs.

VTR (Chile). VTR’s operating expenses (exclusive of stock-based compensation expense) increased $34.2 million or 11.4% during 2010, as compared to 2009. Excluding the effects of FX, VTR’s operating expenses increased $5.3 million or 1.8%. This increase includes the following factors:

 

   

A decrease in network-related expenses of $8.1 million or 18.8%, due primarily to lower tariff rates for pole rentals;

 

   

An increase in programming and related costs of $6.0 million or 6.2%, as an increase associated with growth in digital cable services was only partially offset by decreases associated with foreign currency exchange rate fluctuations with respect to VTR’s U.S. dollar denominated programming contracts. A significant portion of VTR’s programming costs are denominated in U.S dollars;

 

   

An increase in personnel costs of $2.8 million or 6.7%, due primarily to higher bonus costs; and

 

   

An increase in bad debt expense of $2.5 million or 7.5%, due primarily to subscriber growth and economic conditions.

For information regarding the impact on VTR’s operations of the February 27, 2010 earthquake in Chile, see Overview above.

Austar (Australia). Austar’s operating expenses (exclusive of stock-based compensation expense) increased $65.6 million or 24.3% during 2010, as compared to 2009. Excluding the effects of FX, Austar’s operating expenses increased $19.5 million or 7.2%. This increase is primarily attributable to an increase in programming, distribution and related costs of $18.6 million or 8.1%, due primarily to (i) increased costs related to delivery of additional high definition programming channels, (ii) increased monthly costs associated with the launch of a new satellite during the fourth quarter of 2009 and (iii) subscriber growth.

 

II-20


Table of Contents

Operating expenses — 2009 compared to 2008

 

     Year ended
December 31,
    Increase
(decrease)
    Increase
(decrease)
excluding FX
and the
impact  of
acquisitions
 
     2009     2008     $     %     %  
           in millions                    

UPC Broadband Division:

          

The Netherlands

   $ 347.3      $ 373.0      $ (25.7     (6.9     (1.6

Switzerland

     308.8        324.4        (15.6     (4.8     (4.6

Other Western Europe

     319.0        348.3        (29.3     (8.4     (3.6
                                        

Total Western Europe

     975.1        1,045.7        (70.6     (6.8     (3.2

Central and Eastern Europe

     413.9        462.7        (48.8     (10.5     6.2   

Central operations

     53.0        52.1        0.9        1.7        7.8   
                                        

Total UPC Broadband Division

     1,442.0        1,560.5        (118.5     (7.6       

Telenet (Belgium)

     600.8        535.0        65.8        12.3        3.3   

VTR (Chile)

     299.4        297.3        2.1        0.7        8.2   

Austar (Australia)

     269.6        275.9        (6.3     (2.3     4.6   

Corporate and other

     331.8        358.9        (27.1     (7.6     1.7   

Intersegment eliminations

     (77.5     (78.8     1.3        1.6        (3.7
                                        

Total operating expenses excluding stock-based compensation expense

     2,866.1        2,948.8        (82.7     (2.8     2.0   
                

Stock-based compensation expense

     9.6        9.6                   
                                  

Total

   $ 2,875.7      $ 2,958.4      $ (82.7     (2.8  
                                  

UPC Broadband Division. The UPC Broadband Division’s operating expenses (exclusive of stock-based compensation expense) decreased $118.5 million or 7.6% during 2009, as compared to 2008. This decrease is net of a $1.7 million increase attributable to the impact of acquisitions. Excluding the effects of acquisitions and FX, the UPC Broadband Division’s operating expenses remained relatively unchanged and includes the following factors:

 

   

An increase in programming and related costs of $23.4 million or 6.7%, due primarily to (i) growth in digital cable services, predominantly in the Netherlands, Poland, Romania and Austria, and (ii) FX with respect to non-functional currency expenses associated with certain programming contracts in Central and Eastern Europe, particularly in Romania, Poland and Hungary. These increases were partially offset by a decrease in programming and related costs in Ireland as a result of (i) a lower average number of video cable RGUs and (ii) the impact of subscribers selecting lower-priced tiers of digital cable services and products;

 

   

A decrease in interconnect and access costs of $19.2 million or 10.6%, due primarily to (i) lower interconnect and access rates in the Netherlands and Austria and (ii) lower B2B volume in the Netherlands. These decreases were partially offset by (a) higher interconnect rates and growth in the number of telephony and internet subscribers in Ireland and (b) the impact of interconnect tariff reductions that were imposed by a regulatory authority in Switzerland during the fourth quarter of 2008. The fourth quarter 2008 adjustments that we recorded to reflect these tariff reductions, which were retroactive to January 1, 2007, gave rise to increases in interconnect expense of $2.8 million and $1.5 million during the quarter and year ended December 31, 2009, respectively;

 

   

An increase in network and information technology related expenses of $18.0 million or 9.8%, due primarily to (i) higher maintenance costs in the UPC Broadband Division’s central operations, the Netherlands and Poland, (ii) higher utility costs in Poland and (iii) an increase relating to the impact of a $2.5 million energy tax credit received by the Netherlands during the fourth quarter of 2008;

 

II-21


Table of Contents
   

A decrease associated with lower levels of B2B construction services and equipment sales in Switzerland of $13.2 million;

 

   

A decrease in personnel costs of $7.5 million or 2.4%, due primarily to certain restructuring activities in Austria and lower staffing levels in Romania;

 

   

A decrease in bad debt and collection expenses of $3.1 million, due largely to decreases in bad debt expenses in Romania and Ireland that were only partially offset by increases in Switzerland and Austria. The decrease in bad debt expense in Romania, which amounted to $9.8 million, was due primarily to Romania’s improved credit and collection policies; and

 

   

A net increase resulting from individually insignificant changes in other operating expense categories.

Telenet (Belgium). Telenet’s operating expenses (exclusive of stock-based compensation expense) increased $65.8 million or 12.3% during 2009, as compared to 2008. This increase includes $76.4 million attributable to the impact of acquisitions. Excluding the effects of acquisitions and FX, Telenet’s operating expenses increased $17.7 million or 3.3%. This increase includes the following factors:

 

   

An increase in programming and related costs of $17.6 million or 12.3%, as an increase in content costs associated with the expansion of digital cable services more than offset a decrease in copyright fees that arose from lower average rates due to the favorable renegotiation of certain contracts. In addition, a $4.2 million decrease associated with the impact of accrual releases in connection with certain copyright fee settlements in 2008 contributed to the increase in programming and related costs;

 

   

An increase of $8.7 million related to the impact of a fourth quarter 2009 settlement of future obligations to provide post-employment benefits to certain of Telenet’s current employees;

 

   

A decrease in the cost of set-top boxes sold to customers of $8.8 million or 48.1%, due primarily to Telenet’s increased emphasis since the second quarter of 2008 on the rental, as opposed to the sale, of set-top boxes;

 

   

An increase in call center costs of $8.1 million or 28.2%, due primarily to higher incoming and outgoing call volumes arising from (i) an increase in the number of subscribers selecting advanced services such as digital cable, broadband internet and telephony services, (ii) the migration of customers in the Interkabel footprint to Telenet’s billing system and (iii) Telenet’s efforts to improve service levels and maintain or improve subscriber retention rates;

 

   

A decrease in personnel costs of $3.9 million or 3.7%, due to the net effect of (i) lower bonus and severance costs, (ii) annual wage increases and (iii) higher staffing levels; and

 

   

A net decrease resulting from individually insignificant changes in other operating expense categories.

VTR (Chile). VTR’s operating expenses (exclusive of stock-based compensation expense) increased $2.1 million or 0.7% during 2009, as compared to 2008. Excluding the effects of FX, VTR’s operating expenses increased $24.5 million or 8.2%. This increase includes the following factors:

 

   

An increase in programming and related costs of $13.9 million or 15.4%, due primarily to (i) growth in VTR’s digital cable services and (ii) foreign currency exchange fluctuations with respect to VTR’s U.S. dollar denominated programming contracts;

 

   

An increase in bad debt expense of $8.7 million, due primarily to (i) an increase in VTR’s customer base and (ii) the impact of difficult economic conditions. An increase associated with the $3.6 million impact of a second quarter 2008 reversal of a bad debt reserve in connection with the settlement of an interconnect fee dispute also contributed to the increase;

 

   

A decrease in interconnect and access costs of $8.5 million or 13.3%, due primarily to the net effect of (i) decreases associated with lower tariff rates and call volumes and (ii) increases associated with higher average numbers of broadband internet and telephony subscribers; and

 

II-22


Table of Contents
   

An increase in network-related expenses of $7.5 million or 20.3%, due primarily to higher maintenance and materials costs.

Austar (Australia). Austar’s operating expenses (exclusive of stock-based compensation expense) decreased $6.3 million or 2.3% during 2009, as compared to 2008. Excluding the effects of FX, Austar’s operating expenses increased $12.6 million or 4.6%. This increase is primarily attributable to an increase in programming and related costs of $13.8 million or 5.9%, due primarily to (i) a higher average number of Austar’s DTH video RGUs and (ii) rate increases for certain programming contracts.

SG&A Expenses of our Reportable Segments

SG&A expenses — 2010 compared to 2009

 

     Year ended
December 31,
    Increase
(decrease)
    Increase
(decrease)
excluding
FX and the
impact  of
acquisitions
 
     2010     2009     $     %     %  
     in millions              

UPC Broadband Division:

          

Germany

   $ 213.9      $ —        $ 213.9        N.M        N.M   

The Netherlands

     131.8        127.0        4.8        3.8        9.0   

Switzerland

     157.5        147.4        10.1        6.9        2.6   

Other Western Europe

     120.4        124.0        (3.6     (2.9     1.8   
                                        

Total Western Europe

     623.6        398.4        225.2        56.5        3.3   

Central and Eastern Europe

     142.0        132.3        9.7        7.3        9.2   

Central operations

     110.7        113.4        (2.7     (2.4     2.7   
                                        

Total UPC Broadband Division

     876.3        644.1        232.2        36.1        4.4   

Telenet (Belgium)

     240.1        241.2        (1.1     (0.5     0.8   

VTR (Chile)

     136.9        113.0        23.9        21.2        10.7   

Austar (Australia)

     90.6        78.9        11.7        14.8        (0.4

Corporate and other

     229.0        222.6        6.4        2.9        2.1   

Inter-segment eliminations

     (0.9     (0.6     (0.3     (50.0     (25.0
                                        

Total SG&A expenses excluding stock-based compensation expense

     1,572.0        1,299.2        272.8        21.0        3.6   
                

Stock-based compensation expense

     112.1        119.5        (7.4     (6.2  
                                  

Total

   $ 1,684.1      $ 1,418.7      $ 265.4        18.7     
                                  

 

N.M. — Not Meaningful.

General. SG&A expenses include human resources, information technology, general services, management, finance, legal and marketing costs, stock-based compensation and other general expenses. We do not include stock-based compensation in the following discussion and analysis of the SG&A expenses of our reportable segments as stock-based compensation expense is not included in the performance measures of our reportable segments. Stock-based compensation expense is discussed under Discussion and Analysis of Our Consolidated Operating Results below. As noted under Operating Expenses above, we are subject to inflationary pressures with respect to our labor and other costs and foreign currency exchange risk with respect to non-functional currency expenses. For additional information concerning our foreign currency exchange risks see Quantitative and Qualitative Disclosures about Market Risk — Foreign Currency Risk below.

 

II-23


Table of Contents

UPC Broadband Division. The UPC Broadband Division’s SG&A expenses (exclusive of stock-based compensation expense) increased $232.2 million or 36.1% during 2010, as compared to 2009. This increase includes $217.9 million attributable to the impact of the Unitymedia Acquisition and another less significant acquisition. Excluding the effects of acquisitions and FX, the UPC Broadband Division’s SG&A expenses increased $28.5 million or 4.4%. This increase includes the following factors:

 

   

An increase in personnel costs of $16.4 million or 5.9%, due largely to (i) increased marketing staffing levels in Switzerland and the Netherlands and (ii) increased staffing levels for our UPC DTH operations;

 

   

An increase in outsourced labor and professional fees of $3.7 million or 9.4%, due primarily to increased sales and marketing and information technology activities in Switzerland;

 

   

An increase in sales and marketing costs of $0.6 million or 0.3%, due primarily to the net effect of (i) higher costs associated with rebranding efforts in Ireland, (ii) higher marketing expenditures by UPC DTH and the Netherlands, due largely to increased advertising campaigns and (iii) lower sales commissions and/or decreased marketing activities in Austria, Germany, the Czech Republic and Hungary. For information regarding our approach to estimating the effects of acquisitions, see Results of Operations above; and

 

   

A net increase resulting from individually insignificant changes in other SG&A expense categories.

Telenet (Belgium). Telenet’s SG&A expenses (exclusive of stock-based compensation expense) decreased $1.1 million or 0.5% during 2010, as compared to 2009. This decrease includes $10.2 million attributable to the impact of acquisitions. Excluding the effects of acquisitions and FX, Telenet’s SG&A expenses increased $2.0 million or 0.8%. This increase includes the following factors:

 

   

A decrease in professional fees of $4.1 million or 12.5%, as the amount of consulting and legal costs associated with strategic and financial initiatives declined from the amounts incurred during 2009;

 

   

An increase in personnel costs of $2.3 million or 2.7%, due primarily to the net effect of (i) increased staffing levels, largely related to (a) the insourcing of certain call center sales functions and (b) an increase in information technology activities and (ii) higher severance costs;

 

   

A decreases in sales and marketing costs of $1.8 million or 2.0%, due primarily to lower sales commissions related to favorable changes in the sales channel mix and lower sales, partially offset by increased marketing activities, mostly related to the promotion of Telenet’s mobile telephony services; and

 

   

A net increase resulting from individually insignificant changes in other SG&A expense categories.

VTR (Chile). VTR’s SG&A expenses (exclusive of stock-based compensation expense) increased $23.9 million or 21.2% during 2010, as compared to 2009. Excluding the effects of FX, VTR’s SG&A expenses increased $12.1 million or 10.7%. This increase includes the following factors:

 

   

An increase in personnel costs of $7.8 million or 18.5%, due primarily to (i) higher bonus costs, (ii) increased staffing levels, primarily related to the VTR mobile initiative and an increased sales force and (iii) higher severance costs;

 

   

An increase in sales and marketing costs of $2.9 million or 9.1%, due primarily to a volume-related increase in third-party sales commissions partially offset by a decrease in marketing costs; and

 

   

An increase of professional fees of $1.4 million or 20.3% primarily due to increased consulting costs related to the VTR mobile initiative that were only partially offset by lower legal fees.

The VTR mobile initiative accounted for a total of $4.8 million of the $12.1 million organic increase in VTR’s SG&A expenses. For information regarding the impact on VTR’s operations of the February 27, 2010 earthquake in Chile, see Overview above.

 

II-24


Table of Contents

Austar (Australia). Austar’s SG&A expenses (exclusive of stock-based compensation expense) increased $11.7 million or 14.8% during 2010, as compared to 2009. Excluding the effects of FX, Austar’s SG&A expenses decreased $0.3 million or 0.4%. This decrease is primarily attributable to the net impact of (i) an increase in sales and marketing costs of $2.2 million or 6.5% and (ii) a net decrease in individually insignificant changes in other SG&A categories. The increase in sales and marketing costs is primarily attributable to higher sales commissions and an increase in marketing activities.

SG&A expenses — 2009 compared to 2008

 

     Year ended
December 31,
    Increase
(decrease)
    Increase
(decrease)

excluding
FX and the
impact of
acquisitions
 
     2009     2008     $     %     %  
     in millions              

UPC Broadband Division:

          

The Netherlands

   $ 127.0      $ 137.5      $ (10.5     (7.6     (2.1

Switzerland

     147.4        152.5        (5.1     (3.3     (2.9

Other Western Europe

     124.0        130.7        (6.7     (5.1     0.3   
                                        

Total Western Europe

     398.4        420.7        (22.3     (5.3     (1.6

Central and Eastern Europe

     132.3        158.7        (26.4     (16.6     (0.9

Central operations

     113.4        132.0        (18.6     (14.1     (9.3
                                        

Total UPC Broadband Division

     644.1        711.4        (67.3     (9.5     (2.9

Telenet (Belgium)

     241.2        239.5        1.7        0.7        0.7   

VTR (Chile)

     113.0        121.1        (8.1     (6.7     1.7   

Austar (Australia)

     78.9        81.5        (2.6     (3.2     3.4   

Corporate and other

     222.6        230.6        (8.0     (3.5     1.8   

Inter-segment eliminations

     (0.6     (6.1     5.5        90.2        90.5   
                                        

Total SG&A expenses excluding stock-based compensation expense

     1,299.2        1,378.0        (78.8     (5.7     (0.3
                

Stock-based compensation expense

     119.5        143.4        (23.9     (16.7  
                                  

Total

   $ 1,418.7      $ 1,521.4      $ (102.7     (6.8  
                                  

UPC Broadband Division. The UPC Broadband Division’s SG&A expenses (exclusive of stock-based compensation expense) decreased $67.3 million or 9.5% during 2009, as compared to 2008. This decrease is net of a $0.2 million increase attributable to the impact of acquisitions. Excluding the effects of acquisitions and FX, the UPC Broadband Division’s SG&A expenses decreased $20.6 million or 2.9%. This decrease includes the following factors:

 

   

A decrease in outsourced labor and professional fees of $7.4 million or 26.9%, due primarily to (i) a decrease in system implementation and other information technology costs incurred by the UPC Broadband Division’s central operations, (ii) a decrease related to costs incurred during 2008 associated with a billing system migration in Switzerland and (iii) a decrease in consulting costs in the Netherlands related to sales and marketing and information technology activities;

 

   

A $4.2 million increase due to the impact of a favorable settlement of a value added tax contingency in Switzerland during the fourth quarter of 2008;

 

   

A decrease in sales and marketing costs of $4.1 million or 2.0%, due largely to lower marketing expenditures in Austria, the Netherlands, Hungary and the Czech Republic; and

 

II-25


Table of Contents
   

A net decrease resulting from individually insignificant changes in telecommunications, travel and entertainment, personnel and other SG&A expense categories, due largely to cost containment efforts.

Telenet (Belgium). Telenet’s SG&A expenses (exclusive of stock-based compensation expense) increased $1.7 million or 0.7% during 2009, as compared to 2008. This increase includes $11.3 million attributable to the impact of acquisitions. Excluding the effects of acquisitions and FX, Telenet’s SG&A expenses increased $1.6 million or 0.7%. This increase includes the followings factors:

 

   

An increase in outsourced labor and professional fees of $7.1 million or 36.0%, due primarily to (i) temporary replacement of certain full-time employees with outside contractors and (ii) an increase in strategic consulting projects;

 

   

An increase in sales and marketing costs of $6.1 million or 6.7%, due primarily to (i) the impact of higher sales commissions and (ii) an increase in marketing efforts;

 

   

A decrease in personnel costs of $4.5 million or 5.0%, as the impacts of reduced staffing levels and lower severance costs were only partially offset by higher costs associated with annual wage increases;

 

   

A decrease in facilities expenses, due primarily to lower maintenance and insurance costs; and

 

   

A net decrease resulting from individually insignificant changes in other SG&A expense categories.

VTR (Chile). VTR’s SG&A expenses (exclusive of stock-based compensation expense) decreased $8.1 million or 6.7% during 2009, as compared to 2008. Excluding the effects of FX, VTR’s SG&A expenses increased $2.1 million or 1.7%. This increase includes the following factors:

 

   

An increase in sales and marketing costs of $3.2 million or 10.2%, due primarily to (i) higher sales commissions and (ii) an increase in marketing efforts;

 

   

A decrease in labor and related costs of $2.4 million or 5.2%, due primarily to reduced staffing levels; and

 

   

A net increase resulting from individually insignificant changes in other SG&A expense categories, including a decrease associated with legal fees incurred during the second quarter 2008 in connection with the settlement of an interconnect fee dispute.

Austar (Australia). Austar’s SG&A expenses (exclusive of stock-based compensation expense) decreased $2.6 million or 3.2% during 2009, as compared to 2008. Excluding the effects of FX, Austar’s SG&A expenses increased $2.8 million or 3.4%. This increase includes the following factors:

 

   

An increase in sales and marketing costs of $1.6 million or 4.9%, due primarily to higher costs in connection with rebranding and marketing efforts, partially offset by lower sales commissions; and

 

   

A net increase resulting from individually insignificant changes in other SG&A expense categories.

 

II-26


Table of Contents

Operating Cash Flow of our Reportable Segments

Operating cash flow is the primary measure used by our chief operating decision maker to evaluate segment operating performance. As we use the term, operating cash flow is defined as revenue less operating and SG&A expenses (excluding stock-based compensation, depreciation and amortization, provisions for litigation, and impairment, restructuring and other operating charges or credits). For additional information concerning this performance measure and for a reconciliation of total segment operating cash flow to our loss from continuing operations before income taxes, see note 19 to our consolidated financial statements.

Operating Cash Flow — 2010 compared to 2009

 

     Year ended
December 31,
    Increase
(decrease)
    Increase
(decrease)
excluding
FX and the
impact of
acquisitions
 
     2010     2009     $     %     %  
     in millions              

UPC Broadband Division:

          

Germany

   $ 659.9      $      $ 659.9        N.M.        N.M.   

The Netherlands

     675.8        665.4        10.4        1.6        6.8   

Switzerland

     596.7        564.4        32.3        5.7        1.4   

Other Western Europe

     380.8        392.3        (11.5     (2.9     2.0   
                                        

Total Western Europe

     2,313.2        1,622.1        691.1        42.6        7.0   

Central and Eastern Europe

     528.6        574.3        (45.7     (8.0     (7.2

Central operations

     (160.2     (165.2     5.0        3.0        (1.7
                                        

Total UPC Broadband Division

     2,681.6        2,031.2        650.4        32.0        3.4   

Telenet (Belgium)

     872.8        832.6        40.2        4.8        10.7   

VTR (Chile)

     327.7        288.4        39.3        13.6        4.0   

Austar (Australia)

     226.9        185.4        41.5        22.4        5.3   

Corporate and other

     (0.4     (5.5     5.1        N.M.        N.M.   
                                        

Total

   $ 4,108.6      $ 3,332.1      $ 776.5        23.3        5.5   
                                        

 

N.M. — Not Meaningful.

 

II-27


Table of Contents

Operating Cash Flow — 2009 compared to 2008

 

     Year ended
December 31,
    Increase
(decrease)
    Increase
(decrease)
excluding

FX and the
impact of
acquisitions
 
     2009     2008     $     %     %  
     in millions              

UPC Broadband Division:

          

The Netherlands

   $ 665.4      $ 670.6      $ (5.2     (0.8     4.3   

Switzerland

     564.4        540.1        24.3        4.5        4.7   

Other Western Europe

     392.3        414.8        (22.5     (5.4     (0.6
                                        

Total Western Europe

     1,622.1        1,625.5        (3.4     (0.2     3.2   

Central and Eastern Europe

     574.3        679.6        (105.3     (15.5     0.1   

Central operations

     (165.2     (182.2     17.0        9.3        4.3   
                                        

Total UPC Broadband Division

     2,031.2        2,122.9