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This report updates our ongoing coverage of the UK commercial radio sector (UK Commercial Radio Q2 2008 [2008-84]), and includes our latest revenue forecasts for the period 2009-2013 (Table 1)

In the context of a UK recession that is proving to be deeper and longer than official forecasts had anticipated in 2008, we have severely downgraded our advertising forecasts. We now anticipate that, following the 6.4% decline in 2008 to £560.2 million, commercial radio advertising revenues will decline by a further 14.6% in 2009, to £478.2 million (compared to the peak of £641 million reached in 2004)

Johnston Press results for 2008 (calendar year) all too eloquently illustrate accelerating local media advertising decline, with property advertising down 10% in Q1 and 55% in Q4

Write-downs have forced Johnston to record losses of £429 million in the year and there is a very real threat that the publisher will breach its borrowing covenants in June 2009, or by the end of the year

While digital is highlighted as the only growth area for the group, we remain concerned that many local publishers are effectively accelerating their own decline by ‘doing too much too well’ in terms of digital news provision at the expense of the quality of their newspapers

IAB/PwC released figures for 2008 showing that annual spending on internet advertising rose 19.1% to £3.35 billion, accounting for close to 20% of total UK advertising, far higher than in any other major market

The recession started to bite in H2 2008. As budgets are cut, display has been hit harder than search and classified, as a rising share of inventory (almost 50%) is sold by ad networks for discounted CPMs or on a performance-basis

Our revised forecast for internet advertising is for zero growth in 2009, with a low single digit rise in paid search offset by falls in display and classified

H3G group’s H2 2008 results showed a 5% decline in revenue on a constant currency basis and a return to strongly negative underlying EBITDA, with a margin of -17% in H2 2008 and -8% for the year as a whole, versus a margin of -1% in 2007

The UK performed reasonably well, with 11% revenue growth and improving margins, albeit still being cashflow negative, but Italy suffered from an 18% revenue decline and falling margins

The company’s target of positive EBIT in 2009 looks very unlikely without contributions from some major accounting adjustments, and the consolidation move in Australia looks likely to be repeated elsewhere

Overall reported year-on-year growth for the top 5 markets recovered in the quarter to December after a significant fall in the previous quarter, rising from 0.2% to 0.8%

However this movement was entirely due to the improving regulatory landscape which reduced the negative impact on growth by 0.6ppts in the quarter, particularly due to less pressure on growth from last year’s roaming cuts, which we estimate reduced reported growth by 1.3ppts this quarter vs. 1.9ppts last quarter

Stripping out these negative influences, and our estimate of underlying service revenue growth for the quarter is flat at 2.2%

UK Digital TV (DTV) growth has finally started to slow significantly. By the end of 2008, 86% of TV homes and 91% of the population living in TV homes had DTV reception on one or more sets

Almost the only growth now is coming from the satellite sector, as Freeview digital terrestrial TV (DTT) reception reaches its upper limit prior to the full commencement of digital switchover (DSO) in spring 2009. This will see the digital technical household coverage of the main PSB channels extend from 80% to 98.5% by the completion of DSO in 2012. These forecasts update our previous forecasts issued in June 2008 (see UK DTV Homes to 2017 June update [2008-62])

Leading pay-TV operators Sky and Virgin Media (VMed) have shown little sign of recessionary damage in 2008 and the outlook for Q1 2009 remains positive. Difficulties are apparent at complementary pay-TV service provider Setanta

Ofcom’s pay-TV investigation enters its final stages in 2009. Ofcom faces a formidable challenge to devise a workable wholesale must-offer solution for premium film and sports content that fosters competition across all platforms

With prospects fading fast of a VMed sale of its UKTV and possibly VMTV assets to a BBCW/Channel 4 joint venture, Discovery looks an increasingly suitable candidate, as competition concerns could arise if Sky was the chosen partner

This report concludes our series of country reports (France, Germany, the Netherlands, Spain and Sweden) on next generation access on the Continent

Although Italy boasts the largest FTTH network in Europe, it is the least propitious market for new NGA plans among those we have surveyed. Telecom Italia has no specific plans for NGA, precluded by its level of indebtedness, and neither does any of the altnets

Because Italy does not want to be ‘left behind’ on NGA, a public/private partnership dedicated to building local FTTH networks for wholesaling to service providers is likely to be created in the near future. Its initial focus is likely to be denser city centres, where broadband penetration is high, and pockets of demand for FTTH-based applications can be located

Iliad, now France’s number two broadband provider, will increase total revenues by 10% per year by 2012, mainly by growing its subscriber base (rather than ARPU) in a market however rapidly reaching maturity

Excluding mobile, the EBITDA margin could rise by five percentage points to 40% in 2012, but a mobile launch in 2011 would pare the margin down to 32%

Funding both the fibre-to-the-home and the mobile network capex commitments could compress Iliad’s cumulative cash flow to just €168 million during 2009-2012, thus requiring new financing or a minority partner in the mobile venture