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.

Marconi blames reduced capital expenditure budgets for its troubles. We suspect the truth is more complex. Operators and CLECs have put a lot of optical bandwidth into Europe. This looked sensible when expected traffic growth was 100%+ a year. Now, operators see much lower demand growth, so they have little incentive to invest in Marconi's bandwidth-enhancing DWDM technologies. New investment will not come in volume until existing capacity is used. We think this will occur in late 2002, not at the turn of this year as Marconi predicts. Demand will then rise again at a healthy clip. But will Marconi be able to retain its position in Europe or will Ciena or Cisco, with their newer technologies, have captured its major customers?

We examine the impact of a potential decrease in consumers' expenditure by looking at the experience of the early 1990's recession in the UK. We put forward a simple model of how consumers' TMT expenditure might change in the event of recession in 2002.

This report updates our UK E-Commerce 2000 report from December 2000 and our European B2C E-Commerce Update of April 2001. It draws mainly on data provided by the British Market Research Bureau (BMRB) collected in February 2001.

We have analysed the latest numbers from the EMC world database.  The countries covered represented 68% of year-end 2000 global subs, so are incomplete but give a fair indication of progress so far this year.  In addition to updating countries to end Q2, EMC has also made retrospective adjustments to US and China numbers (both of which make the numbers more consistent with bottom-up sources we have looked at).  The countries given partially or mostly cover Western Europe, North America and Asia Pacific, and the analysis below extrapolates the missing countries and regions.

Q1: 97m

Q2: 91m

This report is based on more than 40 interviews with existing online advertisers, agencies and online properties. It highlights the main barriers to growth and sets a challenging agenda for industry participants.

This is the first of a series of notes on the outlook for the core fixed-line businesses of BT and the other European incumbent telcos. In order to prepare investors for the coming rights issue we briefly consider the issues that face BT's core operations. The follow-on note will provide a more in-depth analysis.

Our main points are as follows:

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.

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.