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We have published extensively on digital TV in the past 18 months, consistently casting doubt on the potential of TV-centric interactive platforms to (a) generate enough income for operators to repay hardware subsidies and (b) compete with the PC for home shopping activity (t-commerce).

We see a clear distinction between the relative success of Sky and the continued slow growth of ITVdigital and the real difficulties being experienced by cable operators. Sky is gaining business while the other operators are struggling to retain their share. This is the first of two notes. In the first (attached), Chris Goodall examines the financial prospects of Sky in advance of its results next week. Chris looks at what would be good or bad numbers for Sky's results in all the main categories, and suggests reasons for short-term optimism. In our next note, which will be sent out on Monday, I analyse ITVdigital and question whether anything can be done to improve its prospects. The launch of ITVsport does not help, with its huge programming budget and limited opportunities.

Chris Goodall has dissected the economics of the major pay-TV operators. He finds that if current trends continue, BSkyB, NTL and Telewest will not generate the cash to pay back their debt in the foreseeable future. In the case of the cable companies this leaves the debt holders exposed. Equity holders should be concerned about further dilution from future debt to equity conversion.

This note examines the US 'spectrum shortage' campaign. We think that US 3G services will be forced to use existing spectrum, rather than move to greenfield frequencies. This is highly relevant to Europe because the lack of dedicated 3G spectrum in the US strongly favours CDMA2000 over Europe's preferred WCDMA. We see signs that several US operators will have CDMA2000 based 3G systems in place, with fully-functioning handsets, long before Europe. The onward march of GSM and its successors into the US may not be the foregone conclusion that some expect. Deutsche Telecom's bridgehead, VoiceStream, is not, for example, as well positioned as Sprint PCS. Furthermore, Vodafone's attempt to get Verizon Wireless to use WCDMA looks ill-conceived to us.

In our forthcoming report ‘BT Restructured Into Pieces’ we detail our views on BT's prospects as a separated entity, and consider the mooted spinning out of BT Wholesale in light of Oftel's current regulatory tone. In the report we argue that Oftel is likely to be favour the separation of Wholesale from Retail since Oftel has been disappointed with the rate at which effective competition has developed in the telecoms market, particularly in the residential market.  In no small part, one of the barriers to the development of effective competition has been the vertical integration of BT. There is no incentive for BT Wholesale to hasten the process of cutting access costs to the network, or to unbundle the local loop. Each of these activities would harm BT's retailing activities, and BT Retail generates extremely high returns on capital (184%pa).

In our recent report on 3G infrastructure, we analysed published actual contract values that demonstrated that claims that large European 3G networks would cost 5bn Euros or more each were very unlikely to be correct, at least in the next three years. We hypothesised that European operators would install a basic network which covered most of the national population, but that low needs for data transmission would mean that this network would suffice for the conceivable future. We showed that limited networks, costing no more than a few hundred million Euros, would be able to carry the fixed line voice traffic of most of the population.

In other words, in an effort to stop subscriber numbers falling, the networks have created an incentive for a user to send just one 10p SMS or make one 5p call during each six-month period. If this is the price of retaining a number, it can reasonably be expected that most inactive subscribers will fall into line; one never knows when that second phone given to you by Aunty Mabel last Christmas might come in useful. The single action of sending one SMS would enable the operator to move a subscriber back onto the 'active' list.

The UK telecoms regulator, Oftel, has just (1st May) produced a briefing note that seems to encourage the idea of infrastructure sharing of third generation mobile networks. It defines 'infrastructure sharing' as including both physical sharing of sites, and also the sharing of capacity. The example Oftel gives is interesting. It says that two operators could divide up the country, one, say, building a network in Manchester, the other in Leeds. They could then allow free 'roaming' between the cities.

Our primary purpose is to provide revenue forecasts for the next three years. Our central forecast sees Retail revenues falling at percentage rates in the low single digits. Wholesale revenues are driven by different forces and will rise rapidly next year, and at a slower rate thereafter. The rise in Wholesale revenues will not be enough to stop a fall in overall income.

NTL's quarterly results demonstrate an abrupt change of strategy. Customer acquisition has all but ceased. Increasing telecom prices is the new battle plan. This is sensible, but we question whether the potential revenue gains can do much for debt or equity holders. If UK customer numbers have peaked, even optimism about ARPU will not produce free cash flow. Our scepticism remains. NTL continues to raise money in huge volumes. But note that this quarter's capex (even after the end of the so-called network build-out) is still almost four times EBITDA because investment in providing new services has to continue (e.g. digital set-top boxes).

European handset sales have collapsed due to maturity of markets, lengthening replacement cycles and significant changes in operator marketing strategies.

Approximately 10-15% of European wireless users have multiple active SIMs; thus subscriber growth has actually been slower than reported and replacement cycles have been faster than perceived; this situation has now reversed in our opinion. The use of multiple active SIMs will diminish over time in our opinion, providing a further brake on sales.

Estimates of the cost of building 3G networks in large European countries have tended to cluster around $5 billion per operator. This, in addition to the embarrassing large licence fees paid to governments, is acting as a drag on stock market performance.

This figure is exactly what we would have predicted based on our modelling of 3G costs contained in our June report. Sweden is nearly twice the size of the UK, and the regulator's coverage requirements are probably the strictest in Europe - in theory the whole of population has to be covered. But costs are reduced because Europolitan will share its network with the Hutchison 3G venture in all areas of the country outside the four biggest cities.

Despite the bad news it offered the markets last week, Nokia still wields massive power in the handset market. Its market share goal of 40% is well within reach. This makes mobile phones a very unusual business; with the exception of handheld electronic games, we can think of no other major hardware market that is dominated by one manufacturer to the same extent. Moreover, even though mobile phone manufacture is a huge global business, only a handful of firms can actually design and build a new handset. Sendo is a new UK company trying to break into this brutal business. Its business strategy is compellingly different; it focuses entirely on own-brand manufacturing for operators. It already has impressive technical achievements. Will it succeed? Who knows. But we think its business strategy is worth exploring.

UK regional newspapers are better positioned than most media to withstand a downturn given the existence of multiple streams of revenue (advertising, circulation) and the unique nature of local franchises.

However, the underlying trends are poor and likely to get worse, particularly in recruitment advertising, with greater consolidation inevitable over the medium term.

NTL's share price slide over the last few weeks has focused attention again on the prospects for UK pay-TV.

This report extends the analysis to the two largest European incumbents, France Telecom and Deutsche Telekom. We look at trends in market share, wholesale and retail pricing, and the impact of increased competition. We identify the companies' strategies in the face of these forces and show the impact of stretched balance sheets on corporate actions.