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Over the four years to 2008, fixed telephony market revenue has fallen by about 17% (£1.9 billion). But the picture is complex

The total number of fixed access lines has fallen by only 4% since 2004, but losses have been predominantly of business lines, due to a combination of inter-related factors involving a shift from ISDN2 to broadband, fixed call substitution and increased home working

We estimate that roughly half of the decline in total market revenue since 2004 has been due to substitution of dial-up internet access by broadband, the rest being accounted for by the substitution of regular call minutes by email and other forms of text communication, as well as by mobile, and price cuts

This report on the French broadband market examines growth trends in 2009 and forecasts to 2012, updates our previous assessments of the commercial significance of IPTV in the triple play (a bundle of broadband, telephony and TV), and details the state of fibre-to-the-home (FTTH) deployment

Shrugging off the recession (milder and shorter than in the UK), the French broadband market is set to reach 19.6 million connections by the end of 2009, up 1.9 million on 2008 – only 12% less than the level of net adds of 2008. With 2009 better than we expected, we now anticipate a sharper slowdown in net adds in 2010, with 1.4 million net adds projected. We still expect the total to reach 22.8 million connections by 2012 (70% household penetration)

Vodafone Europe’s service revenue growth declined again in the September quarter to -4.6%, but on an underlying basis it improved, and volume growth also improved, suggesting that improving economic fundamentals are starting to feed through

Margins again fell, with the net benefit of the cost reduction program a long way from compensating for revenue declines, but overhead costs are at least dropping in absolute terms

We are optimistic that revenue growth can continue recovering in Europe, implying a still-depressed 2009/10 but a much better 2010/11, with positive revenue growth in 2010/11 a real possibility, and that the company could stabilise margins if it sticks to cost reduction plans, and resists the temptation to ‘reinvest’ in ‘strategic’ initiatives

The international business (CWI) has been hit by a sharp downturn in tourism, but performance at the UK-based business (Worldwide) remains on course, despite declining revenue

The initial announcement of an intention to demerge Worldwide from CWI will be followed by more details by the end of November

With little prospect of growth at International in the second half, and a successful turnaround phase at Worldwide beginning to draw to a natural conclusion, the demerger may not have the impact some had hoped

Iliad is the only candidate in the rerun of the French 4th 3G Licence tender and we believe its bid will be successful

Free Mobile could launch by the autumn of 2011 under a ‘low cost’ model

We remain doubtful on the venture’s economic prospects – Iliad appears to underestimate the network and subscriber acquisition costs required to build a mobile operator of profitable scale

Annual market growth is dropping in line with our predictions over the past two years, despite some significant quarterly blips.We continue to project growth in 2009 to be significant, but much lower than in the past, with net additions of 1 million

We expect annual net additions in 2010 to drop by another 20% to 800,000 as the market becomes ever more saturated

We project 19.8 million broadband households by 2014 and have slightly increased our projections from 2010 to take into account the likely impact of higher growth in the number of households as recently predicted by the Office for National Statistics (ONS)

BT’s Q2 results, and improved guidance for the year to March 2010 provided further encouraging evidence of the new management team’s ability to take cost out of the business

However, the group is in a phase of revenue decline, primarily due to recession, but also strong competition

We continue to view limited deployment of next generation access as a worthwhile defensive move, but remain sceptical regarding the potential for uplift to shareholder value

Three years into its pay-TV investigation, we expect Ofcom to impose a wholesale must-offer obligation with regulated prices on the Sky premium films and sports channels in its final statement scheduled for Q1 2010

The WMO could take effect by the middle of 2010. It appears unlikely that Sky will be granted a stay of implementation whilst its appeals against the lawfulness and substance of the WMO remedy are being heard

Assuming the WMO proceeds, its impact on the pay-TV market is likely to be small in the first three to five years, but could become significant in the long-term; the core issue throughout being the rate-card prices set by the regulator, Ofcom

In The Netherlands, KPN faces strong competitive pressure on voice and broadband from cable operators historically addressing subscription TV services due to their superior fibre/coax networks – KPN needs to upgrade its ADSL network to increase IPTV coverage and bandwidth to compete effectively on the triple play

KPN is pursuing a multi-technology approach to its network upgrade, deploying VDSL over the existing copper access network as a ‘transitional’ solution, accompanied by deployment of FTTC and FTTH. Currently, 13% of Dutch homes are passed by fibre, with KPN setting a ‘medium term’ coverage target of 30-60% of households

KPN says that FTTC and FTTH trial results show material increases in ARPU and market share, supporting the case for deployment. KPN is assuming entirely the costs of FTTC, but the investment in more expensive FTTH is being made by joint venture KPN-Reggefiber, whose need for finance in mid-2010 will require it to convince debt markets of its business plan for FTTH