The boost from annualising the COVID-19 hit dissipated this quarter with service revenues flat-lining at –2.5%. The year-on-year mobility boost weakened and pandemic upsides of lower churn, cost savings and B2B demand unwound.

Q4 looks mixed with an improving year-on-year mobility boost but further unwinding of some pandemic upsides. Spring 2022 has the potential to be the long-awaited panacea with price rises of up to 8% and the prospect of renewed roaming revenues.

The operators continue to seek sources of market repair through price rises (to compensate for regulatory intervention elsewhere) and consolidation—but with little visible support from policymakers as yet.

Google has lost its appeal of the European Commission’s antitrust ruling of 2017 that it had abused its position in general search to favour Google Shopping, its Direct-to-Consumer (DTC) channel for merchants, in relation to price comparison aggregators. 

Since the case was lodged in 2010, price comparison has receded as the key to consumers’ online purchases, also motivated by influencers, reviews, and browsing. Merchants use YouTube and Instagram to build brands, Facebook to launch products, and Google Shopping as the key alternative to Amazon for direct response.

The EU’s antitrust regime has once more solved yesterday’s problem, but this will shift for Big Tech to an ex-ante regime when the landmark Digital Services Act and Digital Markets Act come on-stream.

 

Vodafone’s leverage issue continues to drive its strategy and operational focus, as evidenced in its H1 results with solid EBITDA but lacklustre revenues.

Its leverage crisis is severely exacerbated by the prospect of a fibre build in Germany as well as a sizeable headwind to its cable business momentum there. Further sell-downs at Vantage will help and we view the prospects of consolidation as slightly improved, with Spain the most promising option.

Growth in the UK appears to be on hold and the outlook is mixed with VMO2’s notice for early termination for its MVNO, ongoing B2B weakness expected but significant inflation-linked price rises on the cards.

Sky has started to reap benefits from its substantial reduction in sports rights costs in Italy and Germany, helping to grow group EBITDA by 76% in Q3, despite a slight drop in revenue

With this change in strategy, the business model in Italy is undergoing an upheaval. Meanwhile, the UK continues to perform well, with further promise on the horizon thanks to the bold launch of Sky Glass

This streaming TV is a future-proofing leap forwards in Sky’s ever-more-central aggregation strategy, starting the business down the long path to retiring satellite, though this is probably still over a decade away

The two-part nature of the UK 5G auctions has thrown up various issues, with non-contiguous spectrum blocks proving the most challenging to resolve.

The Annual Licence Fees (ALFs) attached to H3G’s spectrum are the crucial stumbling block in spectrum trading negotiations, creating a level of uncertainty which is not conducive to striking a sensible deal.

Ofcom has a crucial role to play in securing an efficient outcome and time is very much of the essence.

The bounceback from COVID is yet to be evidenced in UK mobile as there was no improvement in service revenue trends this quarter beyond the simple annualisation of the pandemic hit.

More mobility and international travel will be crucial tailwinds. Q3 travel rates are only slightly higher than a year ago, limiting the near-term upside. Some pandemic boosts such as lower churn and higher B2B demand will also unwind somewhat.

Spring 2022 looks set to be a turning point for the sector with price increases of 6-7% in the offing on the basis of recent inflation rates, and the potential for renewed roaming revenues, even from Europe.

Sky’s revenue was up 15% in Q2, back to pre-COVID levels despite some lingering pandemic effects such as most pubs and clubs remaining closed. EBITDA fell by a third, driven by higher costs from sports rights, since very few live sports events took place in Q2 2020

The impact of “resetting” football rights is already evident in Germany and Italy, with 248k net customer losses across the group despite growth in the UK. However, Sky will make substantial savings, and we expect this will more than offset lost revenues

Meanwhile, Sky continues to strike deals with other content providers, solidifying its position as the leading household entertainment gatekeeper. In time, apps for NBCU’s Peacock, ViacomCBS’ Paramount+, ITV Hub, and, in Germany, RTL TV Now and DAZN, will all be aggregated within Sky Q

Post Brexit, Vodafone has followed EE's lead in reintroducing roaming fees for some mobile packages. We expect Virgin Media O2 and the MVNOs to follow suit, with H3G's approach more uncertain.

This move is somewhat inevitable as current arrangements leave operators exposed to up to €75 of monthly wholesale charges, and even more as legacy EU wholesale deals expire.

We don't envisage a return to the days of super-normal returns from roaming, but it is nonetheless conducive to much-needed price inflation in the sector.

Vodafone’s growth this quarter was a touch disappointing; the annualistion of the COVID hit was a clear boost but no evidence of any tailwinds. The 1.1% growth in the European markets should be the real focus for investors.

We see some evidence of positive initiatives from Vodafone such as its new EVO tariffs in the UK but it still has much to prove on operating momentum, especially in Germany.

There are signs that Vodafone is slow-pedalling in some markets and with demanding EBITDA targets and with leverage still finely balanced, we expect this focus on profitability to continue. The UK may be a special case.

As we expected, UK mobile operators are beginning to introduce EU roaming tariffs, with EE taking the first major leap in the hope that others will follow.

This move is somewhat inevitable as current arrangements leave operators exposed to up to €75 of monthly wholesale charges.

We don't envisage a return to the days of super-normal returns from roaming, but it is nonetheless conducive to much-needed price inflation in the sector.