Market revenue growth in the UK residential communications sector continued to be robust in Q2 2014 at 5.4%, a slight increase on the previous quarter, with continued volume growth and firm pricing countering weak call volumes and the negative impact of a VAT legislation change hitting Virgin Media and TalkTalk

BT was the fastest growing out of the ‘big four’ in revenue terms in Q2 even after the direct revenue impact of BT Sport is excluded, a remarkable turnaround after being in last place a year ago, driven by both volume and ARPU growth continuing to accelerate, with fibre helping both

Since the end of Q2, promotional activity has already intensified, particularly from BT and Sky around the start of the new football season, and churn is likely to be under more pressure at all of the operators, although the disruption is likely to be less severe than that experienced around the launch of BT Sport last year, and we expect all of the major players to continue to grow in net terms

BSkyB’s Sky Europe project has added a new layer of interest in results of its Continental sister platforms. Sky Italia is almost profitable but with meagre growth prospects, while Sky Deutschland is loss-making but with significant expansion potential

In Germany Sky’s underlying subscriber growth trend is improving while churn is at a historical low. But ARPU growth has stalled, leading us to expect slower revenue growth in fiscal 2015. The latter would be consistent with Sky’s guidance for subscribers and EBITDA

Despite a double dip recession and erosion of its subscriber base, Sky Italia has improved profitability in fiscal 2014. Lower churn points to a possible return to growth – if the economy stabilises

EE reported impressive operating figures, with 4G net adds accelerating sharply from an already impressive base and mobile contract net adds leading the UK market

Service revenue growth was respectable, but did not improve on the previous quarter despite the surge in premium 4G customers, although profitability did continue to improve as further synergies were realised

EE will maintain a 4G coverage lead over the other operators into 2015, and the base is likely to continue to migrate to 4G in large numbers, but it remains to be seen if it can convert this into improvements on the top line

2014 saw a fall in profits as BSkyB absorbed the £217 million step-up in the annual cost of PL rights and invested £60-70 million in accelerating growth in its connected offerings, but with strong underlying revenue growth pointing to a resurgence of profits in 2015

The annual results release was over-shadowed by the news of BSkyB’s proposal to create Sky Europe through the acquisition of 21C’s shares in Sky Deutschland and Sky Italia, where it sees great opportunities for revenue growth and cost synergies

Taking on a large increase in debt to finance the acquisitions when the next PL auction is about to strike sends out the message that BSkyB management is confident about the state of its business, has a clear view about the value of PL rights, and will not be side-tracked from the pursuit of its broader strategic objectives

TalkTalk’s June quarter results revealed solid subscriber trends, with broadband, fibre, line rental and TV net adds all either matching or slightly improving upon the previous quarter

Revenue growth dipped down on the previous quarter (3% vs. 5%), but the price increases in May/June have yet to have a full quarter’s effect, and the company remains confident in its full year guidance of at least 4%

Churn dropped again on the previous quarter, and the company makes a strong case that its triple play strategy should reduce it further, but the big test will be whether it can continue the trend over the rest of the financial year

After a three-week long “messy and opaque” high drama auction Sky retained its broadcast rights for all Italy’s Serie A games for 2015-18 with a negligible 1% price increase.

Its rival Mediaset managed to keep hold of the top fixtures, but its coverage shrinks by 18% whilst paying 35% more. A deal earlier this year for the Champions’ League rights will add considerably to Mediaset’s total costs.

In the stagnating Italian economy, Sky may manage a return to more comfortable profitability. Mediaset’s pay-TV business model looks much more challenging, even if a new investor were to be lured in.

UK mobile service revenue growth remained relatively healthy at -1.6% in Q1 2014, despite the absence of some favourable one-off factors in the previous quarter, consolidating the improvements seen in 2013. Underlying growth improved a touch to 0.3%, and given that the regulatory impact will drop out next quarter, reported revenue growth may well turn positive in Q2

Service revenue growth among the ‘big three’ has re-converged to around -3% to -4%, with Vodafone improving due to strong recent subscriber gains, and EE worsening slightly after a strong previous quarter. H3G’s growth worsened due to the previous quarter including some one-off benefits, but it remains very strong at 10%, with contract ARPU having stabilised

We expect the market environment to continue to be relatively benign, with the biggest disruptive threats Vodafone, which is currently competing on quality but may become more aggressive on price if it loses patience, and the fixed line operator MVNOs, who have significant distribution disadvantages but nonetheless can harm the market with discounted pricing

Ofcom’s fibre margin squeeze test’s initial indicative assessment concludes that BT’s current wholesale/retail pricing is ‘close to the boundary’ of creating a squeeze on its competitors

While BT can take comfort that it is at least close to passing the test, its DSL competitors (Sky, TalkTalk et al) can take comfort that BT cannot make life materially more difficult for them without failing it

Crucially, the costs of BT Sport are included in the test, so BT is now heavily dis-incentivised from further aggressive bids for sports rights, which is positive news for the prospective cashflows of both Sky and indeed BT itself

Market revenue growth in the UK residential communications sector was surprisingly robust in Q1 2014, rising a touch to over 5% (or around 4% excluding the direct impact of BT Sport) from just under 5% the previous quarter, despite facing a number of headwinds

Revenue growth at the top four operators has converged to around 4% for all, which marks a major long term turnaround for BT and TalkTalk, who back in 2012 were both experiencing firmly declining revenue well below market growth, and have since done much to stabilise their subscriber bases and sustain ARPU growth

Looking forward, we expect that BT will continue to do well in the June quarter given Sky’s continued focus on TV products, but thereafter its focus may change, and whether BT's recent competitive boost from fibre will continue growing is uncertain. Having said this, any likely market share shifts are relatively minor in the context of the market, with the general theme likely to remain that the rising tide is lifting all boats

Sky and TalkTalk are rolling out fibre in a small part of York, using a model that they could potentially extend to cover 10-15% of UK households

The economics of greenfield fibre build are still terrible in general, with even building in cherry-picked areas very hard to justify under current conditions, although the economics will improve over time as demand for speed increases

Moreover, once it is built it is built, and BT loses the wholesale revenue forever. Taking the hint and offering more reasonable wholesale fibre pricing may not be a bad option if Sky and TalkTalk persist