This report looks at the UK broadband and telephony market up to Q2 2009. The key trend is that the steep reduction in UK broadband net additions continued in Q2 2009, to 176,100

VMed’s Q2 results were again mixed but, on balance, encouraging, with the impact of the May price increases feeding through into revenue growth

Cable volume performance was poor but, with the exception of broadband, no worse than expected, and is not expected to deteriorate further relative to the market

We remain optimistic that management will succeed in combining revenue growth with reductions in operating costs to generate sustained growth in cash flow from autumn 2009

According to press reports, Sky has lodged a bid of about £160 million for the VMtv content arm of Virgin Media (VMed), estimated to be 50-60% higher than other offers in the latest and final round of the bidding contest

At TalkTalk Group (TTG) net broadband additions for the quarter were relatively strong, given likely market growth, probably due at least in part to reduced subscriber loss at AOL UK

In our view cut-price business broadband, rather than IPTV, offers the best prospect of profitable revenue growth in fixed line

VMed’s Q1 results were again mixed, with declining group revenue and OCF margin but improving performance at Virgin Mobile and continuing strength in TV

The core cable business is facing a return to negative customer growth due to a combination of seasonality and stalling demand for broadband

But de facto price increases in broadband, TV and mobile should boost financial performance from the autumn; we expect this to be combined with reduced opex to generate significant cash flow growth from 2010

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

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

UK broadband subscriber growth continued to decline in Q4 2008 year-on-year. We expect declining growth throughout 2009, with the growth rate remaining positive, but in single figures

We expect VMed to use the upgrading of its 2 Mbit/s broadband base to 10 Mbit/s as the basis for a de facto price increase

The resulting increase in revenue could be substantial, although growth in subsequent years is likely to be reduced by lower gross additions

We continue to expect cash flow performance in 2009 to be resilient but unspectacular. However, the prospects for double digit growth in subsequent years to 2012 are beginning to look more promising

VMed’s Q4 results were mixed, with consumer cable revenue remaining stable but cable net adds dropping significantly and opex performance hit by rising energy costs

Group OCF was stable thanks to improvements at Virgin Mobile and Content

We expect performance to prove relatively resilient in 2009, though not to the extent of generating significant growth in underlying annual cash flow

In Q4 2008 Iliad added 100,000 subscribers in a slowing French broadband market

A restructured 4th 3G licence call for tender is now expected in March, with a cost of €206 million for a 2x5MHz spectrum block, which Iliad is expected to bid for

We remain sceptical that Iliad will earn a return from this, with the 3G-only business model challenging even with a reduced licence cost and restricted network rollout