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Last week Nokia launched its first 3G handset, the 6650. Or did it? Although the size, weight and price initially looked impressive, the handset has not really been launched (not until H1 2003), and technically it is not really 3G (the data rates are too slow). By the time the handset is actually widely available to consumers, GSM-only handsets will have a much better feature/price combination, with a 3G handset only appealing to laptop users who would probably prefer a data card anyway. This is good news for the operators - they can comfortably delay potentially expensive 3G roll-outs safe in the knowledge that competitors will not gain any advantage by being first to market with the current generation of handsets.

This note looks at what has happened to NTL in the past year, and the prospects for 2003-2004. It emerges from a period of introspection to face stronger competition than ever. Sky has won the battle for digital TV. Although NTL has been successful in broadband this year, BT has serious plans for this market.

This note reports on our third bi-monthly survey of handset replacement intentions in the UK. Purchase intentions have weakened slightly in the last four months, suggesting a further lengthening in the average replacement cycle. Interest in replacing phones to acquire new handset features remains low. Awareness of camera phones is extremely high, but the most recent survey shows a decline in the level of interest in purchasing, probably as the prices of these devices has become more widely known. Nokia remains the overwhelmingly dominant choice for consumers’ next brand of phone. No other manufacturer has more than a tiny prospective share.

We think that TPS can probably just survive the prospective loss of football to Canal Satellite. Paradoxically, this may not be an ideal result for TF1, because it will not be able to argue that a merger of the two satellite platforms is justified on 'failing firm' grounds. Competition regulators will sometimes allow a merger on the grounds that the weaker company is bound to fail. This does not seem to be likely to be the case in French pay-TV, though TPS's subscriber numbers will be dented by the loss of the best football.

Wanadoo's results for the first half of 2002, detailed in the attached note, show that the company is well on track to make its target of positive EBITDA as the loss margin has been cut by half on the Internet side of the business. The targeted revenue increase of 30% also looks plausible as Internet access revenues have done well in France due to migration of the subscriber base to higher priced broadband packages. Wanadoo hopes to have 1 million broadband subscribers by the end of the year, and is counting on the rollout of a new lower speed (128k) and lower-priced broadband package in mid-October. The French Competition Commission has also permitted the company to again market its broadband packs in FT's network of shops, cutting customer acquisition costs. Margins will improve in mid-October due to wholesale broadband price declines mandated by the regulator ART.

We think that the business is worth about €6bn, rather less than the €7-9bn that the investment banks are projecting. The difference arises because we think that they over-estimate the value of Universal’s music publishing business and expect a faster upturn in recorded music sales. But Universal is clearly strongest of the major music companies and we do expect the company’s margins to recover from the low levels seen this year.

This note shows the mixed evidence on household penetration. Most surveys report a distinct plateau in subscribing household numbers in the UK, particularly compared to France and Germany, where numbers are still growing. Other surveys show a continuing rise in individual users. On balance, we think the data does point to a clear deceleration in the growth in subscribing households. Current penetration is just over 10m homes, or 40% of the UK total.

In this short note we look at three data product offerings recently launched by the operators: Vodafone Live!, the Orange SPV and Vodafone Mobile Office laptop card service. Vodafone Live! follows a sensible strategy of having the operator define the user interface to help drive revenues, and is launched with two new light and compact handset models. However, the service has many glitches, with only the camera function working as well as it should, and very few of its target market will be likely to be able to afford the handsets. The SPV and laptop cards, being aimed at business users, stand a much better chance of being affordable to their target market, but we wait to see if those products are marketed and executed well.

The UK consumer magazines business has shown steady growth and stable profitability, though some individual participants have suffered from failed attempts at international expansion. The industry has overcome the advertising recession very successfully so far. This is partly because only 30% of revenue is derived from advertising, but also because page rates have continued to be firm. Though profit margins are currently lower than regional newspapers, the sector shows considerable scope for improved returns.

Several factors lie behind this assessment.  The first is that growth of Internet households will slow, possibly to 10%, although expansion will be faster than in the UK or Germany.   The second is that Wanadoo, as the ISP arm of France Télécom, continues to benefit in our view from advantages that other ISPs cannot match, significantly reducing customer acquisition and retention costs, whether on narrowband or on broadband.  Actions taken by the regulator have largely been too little, too late.

The November 12th bids for football rights are a nightmare for Canal+. Its operating margins and cash flow are under pressure, but failure to outbid TPS would mean a probable loss of perhaps 25% of its subscribers. This makes it likely, we think, that TPS will end up buying Canal+ from Vivendi, whoever wins the football rights, at a much lower price than the valuation of €3.5bn suggested recently by Morgan Stanley. Similarly, Vivendi may realise that it will be forced to sell the studio and the record business to Bronfman/Diller for less than current valuations. This potential devastating scenario perhaps explains why M. Fourtou is so keen to buy the rest of Cegetel, rather than selling out to Vodafone. Otherwise he would have little else left to manage. Or perhaps he is simply playing poker with Chris Gent, but running the risk that he ends up over paying. Vodafone cannot lose. It will either buy Cegetel now, or wait for it to fall into its hands when the bankers withdraw support for Vivendi.

This note provides our forecast for the number of UK households able to receive extra television through satellite, cable and terrestrial multi-channel platforms. Though Sky’s performance has been strong this year, subscriber growth has been largely at the expense of cable and digital terrestrial. We expect this pattern – Sky outperformance within a slowly growing multi-channel universe – to continue. We are pessimistic about the prospects for Freeview, the BBC’s new digital terrestrial platform. The programme offering is weak and too directed towards the under 35s, who now largely already have digital television. The technical problems of obtaining better coverage for the service remain severe.

In this report, we show that price competition between ISPs is helping to push broadband penetration to higher levels than we expected. BT is likely to achieve at least some of its targets for broadband connections. However, this is at the expense of profitability. We suggest that BT Retail is unlikely to make money on broadband connections, particularly in view of the high acquisition costs and the potential for subscriber churn. We also note that the BT strategy in broadband is crippling other ISPs.