VMed’s Q3 results showed continuing strength in the face of heavy marketing by BT Retail and BSkyB, although cable churn increased significantly

There are plenty of further challenges on the horizon, including a downturn in consumer confidence and later, the launch of YouView and wider deployment by BT of next generation access

The broad based nature of the company’s growth and its plans for further product development in TV and broadband continue to give us confidence in the potential for further growth in cash flow, albeit at a more modest pace

A switch in marketing focus from HD to home communications and sports appeared chiefly responsible for a record quarter in multiproduct take-up, with the biggest increases being registered in broadband, telephony and line rental

Although Q1 2011 net HD take-up halved against the previous quarter, partly reflecting reduced emphasis in marketing plus the World Cup factor, there is abundant room for growth and we expect a strong Q2 as Sky enlarges its HD offer with the ITV digital channels, and prepares for the launch of Sky Atlantic HD in early calendar 2011

The exceptional leap in home communications product sales underlines Sky’s competitive strengths against the rest of the sector using its existing LLU platform, suggesting Sky is under little pressure to sign up to BT’s more expensive high speed broadband access product

Ofcom’s decision not to investigate Project Canvas under the Competition Act removes one more regulatory obstacle to the launch of the broadband connected TV service with the brand name YouView

It looks increasingly as if the YouView launch will experience further delay, with autumn 2011 looking steadily more likely as disputes continue over the satisfactoriness of the technical specifications released by YouView for meeting manufacturer needs

Although backed by powerful broadcast and ISP interests, YouView faces stiff challenges to achieving widespread adoption among ‘Freeverse’ homes, with much depending on YouView’s ability both to deliver consistent product quality and to get its message across

The decline in UK residential broadband market growth has paused due to accelerating adoption by older householders and increased household formation. We expect 970,000 net additions in 2010 and 20.5 million broadband households by 2015. However we expect growth will continue to decline from 2011 as the impact of the government spending review feeds into consumer confidence and the market becomes increasingly saturated

As BT’s next generation access network is deployed, there is likely to be accelerated improvement in DSL price/performance, with DSL customers migrating to a 40 Mbit/s headline speed as it becomes available. The impact of this is likely to be compounded by Virgin Media up-rating its broadband portfolio from speeds of 10, 20 and 50 Mbit/s to 20, 50 and 100 Mbit/s

In the absence of further consolidation, in market share terms the industry appears set to remain divided into three strategic segments: the ‘big three’, brand extenders, and Sky. We expect residential broadband market revenue (excluding content) to continue to decline gradually, stabilising by 2015 as the impact of market share gain by lower priced ISPs attenuates due to a combination of a maturing market and reduced price differentials caused by NGA

The bounce back in H1 2010 advertising revenues (18% up over H1 2009), combined with extra cost savings, turned last year’s £72 million loss into this year’s £71 million profit; but could not disguise the need for transformation of a business overly dependent on an advertising model in long-term structural decline

The management’s five year goal of reducing the advertising revenue share (now 74%) to 50% echoes previous targets and the ability of the new team to deliver the goal will depend first and foremost on a revitalised ITV content production business

The agreement with Sky to launch HD versions of ITV2, ITV3 and ITV4 to Sky+ HD subscribers marks ITV’s first return to pay-TV since the collapse of the ITV Digital venture in 2002. This should not be seen as an about turn in ITV’s commitment to free-to-air broadcasting, but rather as a one off win-win opportunity for ITV and Sky

There were approximately 19 million fixed broadband lines in the UK at the end of June 2010 including those used by small and medium enterprises (SMEs)

Year-on-year subscriber growth in Q2 increased by half a percentage point, following stabilisation in Q1, the first material since the early years of UK broadband

Looking at net additions in the quarter, Q2 saw a sequential drop of 23%, the lowest Q1 to Q2 sequential decline since 2005 . Year-on-year growth in net adds, at 51%, continued to accelerate rapidly

Strong FY 2010 adjusted revenue growth of 11% was powered by a 15% rise in subscription revenues, reflecting a mixture of solid subscriber growth in spite of the recession and burgeoning multi-product sales, with HD subscriptions registering a net increase of 1.63 million to end the year at 2.94 million and the telecoms sector breaking into operating profit in Q4

Firm cost control and streamlining of manufacturing and subscriber management expenses now make Sky’s 25% TV operating margin target look very achievable, but also leave it room to increase spend on programming substantially within the guidance limits of pegging increases to the rate of revenue growth

Overshadowing the results is News Corp’s proposal to purchase the 60.9% of BSkyB shares that it does not already own, subject to regulatory review. Assuming it goes ahead, News Corp will have a larger market share in the UK across media (TV, newspapers and books) than any other company in a major market

Virgin Media’s Q2 results showed real strength in the top line, with continuing growth in cable revenue due to increases in both price and volume compounded by long-awaited growth in revenue from mobile and B2B, although overall performance was compromised to an extent by higher costs

The sale of VMtv to Sky cements a de facto pay TV duopoly by clarifying the distinctive wholesale and retail roles of the two leading players, against which others will find it hard to compete

The outlook continues to look encouraging despite the economic environment and this is reflected in management’s plan to return £700 million of capital, a historic milestone in the history of UK cable

The transaction size means that the OFT was obliged to examine BSkyB’s purchase of the VMtv channels. The transaction will probably be approved because of the small impact on Sky’s share of NAR (Net Advertising Revenue), which will rise from around 14% to 16%

The more pressing competition concern, which has attracted little attention, is Sky’s growing market power in the determination of carriage fee payments. Nevertheless the lack of companies actively prepared to complain to the OFT probably means that the transaction will go through without a murmur

Separately, the likely purchase of Five by Richard Desmond raises regulatory issues to do with the possible reduction of media ‘plurality’. The Sky/VMtv transaction and Channel 4’s taking over UKTV advertising sales also places Five Sales in a significantly weaker position, but any attempts to join with one of the big three sales groups (ITV, Channel 4 or Sky) may well be rejected by the competition regulators

UK consumer magazines continue to be squeezed by every consumption, technology and market trend, yet we believe the sector, while rebasing in scale, continues to offer unique attributes as a media experience for consumers and marketers

Circulations are falling, and in the context of digital media usage leading titles in each magazine genre are not just typically gaining market share, but emerging as the only ‘must have’ brand for consumers and advertisers

Publishers with multiple titles in mid-table positions may be able to draw short-term margin from some of them, but long-term investment plays increasingly need to be at the top of the pile