Steep declines in CD sales in major recorded music markets continued in 2009 as we had forecast last year (Recorded Music and Music Publishing [2008-39])

Sales of recorded music continue to be decimated by physical and online piracy, plus the disintermediation of the album purchase by the digital purchase of ‘cherry-picked’ tracks

A further knock-on effect on CD sales is the reduction in retailers’ shelf space devoted to music, including as a result of the bankruptcies of major chains (Circuit City, Woolworths and Zavvi) – what we have called the ‘perfect storm’ for the CD

Vodafone’s European revenue growth dipped sharply in the March 2009 quarter to -3.3% from -1.4% in the previous quarter, due to a combination of recessionary impact and continuing underperformance of the market

EBITDA margins also declined by 2ppts, with falling handset subsidies more than compensated for by a sharp rise in general operating expenses, despite cost cutting efforts

Implied guidance for Vodafone Europe in 2009/10 of an organic 4-5% drop in revenue and 2ppt dip in EBITDA margin is bleak but realistic, with even these figures at risk if either the economy does not start to recover or the company cannot keep general operating expenses flat

Carphone Warehouse’s acquisition of Tiscali UK makes TalkTalk Group the second largest UK ISP and the largest in terms of residential broadband subscribers, just as market growth begins to stall

The company’s synergy target looks readily achievable, although integration challenges are significant and could make the acquired customer base difficult to stabilise

Nonetheless, TalkTalk Group now seems set to dominate the ‘value’ end of the UK residential telecoms market

In fixed line, net broadband additions for the quarter were strong at TalkTalk given a tough market, but remained firmly negative at AOL UK

We are sceptical of new guidance for fixed line for the year to March 2010, but still expect reasonable performance, given the slowdown in broadband market growth

The distribution business continued to defy the consumer downturn in volume terms, with 12% connections growth and a solid outlook for next year, although the pain is being felt at the margin level

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

Ofcom’s statement on Next Generation Access (NGA) gives BT the maximum possible incentive to invest by allowing a high degree of pricing freedom and some short cuts to reduce implementation costs

But Ofcom cannot guarantee that BT will make a return from NGA, only the existence of an opportunity to make one

Ofcom’s statement is certainly positive for BT, but we remain sceptical of the business case for BT NGA, particularly given the low price of all-copper based offers and Virgin Media’s roll-out of 50 Mbit/s broadband

Ofcom has come up with a new 900MHz spectrum refarming/redistribution proposal, in which only 5MHz of spectrum is taken from Vodafone and O2, as opposed to the 15MHz it previously proposed

We still think that disrupting the voice and text services of existing customers in order to extend the availability of little-used 3G data services makes little sense, and that rearranging a small amount of intensively used spectrum when a far larger amount of unused spectrum is about to become available makes even less sense

Should Vodafone and O2 continue to oppose having their spectrum taken away, as appears likely, the delays to new spectrum auctions are likely to continue

The planned merger of Vodafone and H3G in Australia has raised the question of what consolidation could occur in Europe, although a direct analogy is not appropriate because Vodafone is much weaker in Australia (#3 operator) than it is in the larger European countries, and so would face much more regulatory scrutiny in Europe

The only merger opportunities in the top five markets which would have a similar or lower theoretical impact on competition (and hence would theoretically be as easily approved) in the top five European countries would be T-Mobile and H3G in the UK, Wind and H3G in Italy, and any operator with Yoigo in Spain

There are massive cost savings to be had from in-market consolidation, with network, marketing and general administration costs all fully overlapping between operators. The non-merging players would also enjoy a period of less competitive intensity, which may last indefinitely

The iPhone has inspired all the major Smartphone makers to launch touchscreen models, and dramatically improve the usability of their interfaces. The iPhone itself remains the most easily usable touchscreen handset in our view, although at the cost of speed of use and adaptability

Unfortunately, the characteristics that make these handsets easier to surf the internet with – large screens and/or QWERTY keyboards – are just the characteristics that are unlikely to trickle down into mass market handset models, meaning that the impact on mobile data usage is limited

We continue to believe that web browsing is unlikely to be popular on mass market handsets for the foreseeable future, but usage of web services can be popularised by more of a widget approach, which the cheap but smart INQ1 handset demonstrates well

Vodafone’s December quarter KPIs showed only slightly worse underlying European revenue growth compared to last quarter, with another plummet in growth in Spain moderated by improving figures in Germany

In the context of GDP growth across its markets being considerably worse, this is a relatively good performance, with its market share loss likely to prove less severe than last quarter

However, its growth is still very substantially worse than earlier in the year, even compared to GDP, and with GDP declines set to worsen through 2009, and termination rate cuts to bite again in the second half of 2009, growth is likely to decline further