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The potential for residential broadband connectivity in France, Germany and the UK depends on the availability of low-priced broadband products (hardware, installation and monthly subscriptions) and a narrow pricing gap with existing Internet access packages. Unless monthly subscriptions fall below €30 (from current comparable levels of €45 and up) and hassle-free self-installation is ubiquitous, consumers will not migrate from narrowband, even if they appreciate the faster surfing and download speeds of broadband. But regulators are guarding against any price declines from the incumbents, having put their faith in infrastructure-based competition through local loop unbundling (LLU) and upgrading of cable infrastructure. We believe that expectations of alternative supply of broadband through either of these routes in France and Germany are misplaced; in the UK, broadband cable will make more headway due to specific historical and regulatory factors, while there will be no effective alternative supply of residential DSL through LLU.

In its projections supporting its £3.2 billion debt financing, H3G projects 172,000 subs in 2002, 1.2 million by end 2003 and 9 million by end 2010.

Combined with projected ARPU of £40/month (or about current contract ARPU in the UK), H3G’s revenue projections come to £2 billion in 2005 (note UK mobile market in total = £10 billion today).

The flow of news about ITV is going from bad to worse. But we think that the market may have misunderstood the real story behind last week's bombshell that ITV viewing has fallen by 25% in a year. This figure could have been predicted from existing data.

15 million UK adults regularly (at least once a month) accessed the Internet from home in Q3 2001, the same as in Q2 2001. This stagnation is due to mainly seasonal factors and we expect growth of the home Internet population to be renewed in the autumn and winter.

Our lower forecasts are derived from an analysis of the numbers of households and small businesses that are apparently prepared to buy ADSL at current price levels, but also driven by concerns about this particular product. Users will have to acquire new email addresses and pay for a new email service. We do not think the product will work in networked multi-PC homes or offer ISDN users a real alternative. We see tremendous confusion in the marketplace from two competing BT Broadband offerings from BT Retail and BTopenworld.

This report is the first of a quarterly series by Toby Syfret, one of Europe's best known commentators on viewing trends.

We believe it will opt for the BBC offering. This note shows why.

The UK Internet population continued to grow very slowly in the fall of 2001, reaching 14.7 million home users (30% adult penetration rate). Although this slow pace of customer growth may give dot.com investors pause for concern, we found some good news on e-tailing to report, such as higher numbers of purchasers - to almost 9 million - and positive experiences online that will lead to repeat shopping. Books, clothes, DVDs and computer games were especially popular items. Bricks-and-clicks e-tailers like WHSmith, Argos and John Lewis are well positioned to take advantage of offline/online marketing synergies, but Amazon (around 3 million unique visitors) is impressive in execution. Tesco has retained its very wide lead over other online supermarkets, almost doubling reach to 9% of home Internet users in 2001, and Argos is also doing well.

This note looks in detail at the reseller business model, and in particular for BT service providers taking over BT lines, where Oftel has just mandated a ‘wholesale line rental’ product. We think the small international call segment is unappealing for entry as competition is already fierce. The new entrant will also find it difficult to establish a foothold on the local and national calls segments where substitution of mobile telephony is draining any dynamism from the market. Even more ominous is the advantage the BT Together packages have given BT over resellers in the customer segment most likely to be aggressively marketed by stretchy brands: families making off-peak and weekend calls to family and friends.

Sky's continued excellent performance has attracted favourable comment in the weeks since its half yearly results. But much of the commentary missed some critical points. The analysts did not question Sky's assertions that it was successfully targeting high value customers. Actually, the last half-year saw a fall in the numbers taking the top-priced package. Similarly, few commentators noticed that despite the favourable comments in the results announcement, interactive revenues actually fell last quarter. The steepest rate of decline was seen in betting, which a year ago was going to be application that formed the core of Sky's interactive ARPU. Similarly nobody seemed to have noticed that Sky's overall share of TV viewing declined in the quarter, despite the addition of two hundred thousand new subscribers.

According to the Financial Times (27/03/2002), the European Commission is planning ‘to clamp down on the cost of calling mobiles’ and issue ‘tough new rules’, which ‘would make it easier for national telecoms regulators to force mobile phone companies to reduce excessive call termination charges’. According to our research, this is an exaggerated assessment: the likeliest outcome would be a Commission recommendation on ‘best practice’ guidelines, rather than new rules. Our research also shows that the pressures from NRAs on MNOs to lower mobile termination charges are highly uneven in the top three markets: they are most acute in the UK (predictably, given the pro-consumer orientation of Oftel), less significant but nevertheless present in Italy, and non-existent in Germany. Thus, if the UK Competition Commission endorses Oftel’s proposed charge cap in its forthcoming ruling, we can expect the four leading UK MNOs to lose about £880 million in revenues for the 2002-2006 period, with the annual reduction in 2002-2003 estimated at about £265 million.

The mobile operators in the UK and elsewhere probably make a higher margin on SMS than on any other product. We think that about 30% of a UK operator's gross margin in derived from SMS and the percentage is rising. This report asks the question 'why should mobile operators launch any other mobile data products aimed at consumers?'. SMS now generates about £800 per megabyte of traffic. GPRS prices fall to about £1 per megabyte to heavy users. We conclude that operators may say that they are focusing on new consumer data services, but the reality will be very different as they work to protect their golden goose. In the long run, we think that SMS is vulnerable to Instant Messaging services introduced onto networks by innovative third parties. (In the US, where SMS has not really taken off, and thus the operators have no profits to protect, these applications are already available on some GSM networks).

The survey showed the typical UK consumer expects to keep his or her phone an average of 39 months. The most likely reason for changing would that the owner's existing phone no longer works. Younger consumers will replace their phone much more swiftly than the average.

The painful restructuring process at NTL is probably well underway. Holders of NTL bonds will have to accept a significant reduction in the nominal value of their holdings. To us, the crucial question is how much debt the slimmed-down UK businesses of NTL can afford to have on the balance sheet. If everything goes right, the number is something over £3 billion. But things will not go right, and the underlying debt capacity of NTL is probably considerably less than a billion pounds.

As noted, TV viewing did indeed fall sharply in the first quarter. Viewership of the main analogue channel, ITV, fell faster. And this is not caused by multichannel competition. ITV's share has fallen fastest in analogue terrestrial-only homes. Sky has been a beneficiary, as have ITV2 and E4, the digital offspring of the main commercial channels.

This brief note concerns further evidence of strong price sensitivity to broadband prices, as provided by Oftel's recent qualitative research. Since we expect an announcement from BT Group on February 26th regarding reduction of DSL wholesale prices to levels consistent with retail pricing of £30/month or slightly less, this is topical. In addition, we point to BTopenworld's very high market share (75% plus) in residential DSL installations so far.