European mobile service revenue growth was flat at -0.8%, while underlying country movements were somewhat more dramatic. The key highlights were Italy returning to positive growth driven by pricing stability, and France showing worsening growth decline for the first time in over two years impacted by challenger telco pricing cuts

An assessment of these challenger telcos highlights a somewhat precarious position, as continued price aggression yields diminishing incremental gains, and they all remain some way from gaining the scale to achieve profitability

The only incentive for challengers to remain aggressive is as an encouragement for their competitors to buy them; increasing regulatory hurdles to consolidation would remove even this incentive, leaving price increases as their only rational route to profitability

The UK residential communications market maintained strong growth of 6% in Q4, helped by overlapping price increases at BT and TalkTalk, albeit mitigated by weaker volume growth as a result of the TalkTalk cyber-attack

This strong growth level benefits from multiple factors, including continually growing broadband adoption, broadband ARPU being boosted by the shift to superfast, price increases across line rental, calls and premium pay TV, and additional pay TV adoption at the lower end

We expect a modest dip in market revenue growth moving into 2016 as various one-off boosts drop out, but the underlying drivers of growth are sufficiently diversified to give us confidence that further downside is limited

UK mobile service revenue growth dipped down in Q4, but at least remained still just positive at 0.3%. The dip was driven by contract ARPU weakness at the largest three operators, mitigated by strong ARPU growth at the smallest operator H3G

Looking forward, the sources of weakness (growth of SIM-only and tariff policy adjustments) look more temporary than the sources of growth (data volume growth filling up capacity). SIM-only is likely to hit a natural ceiling, whereas data volume growth has no ceiling in sight and the scope for network capacity expansion is limited

With CK Hutchison currently negotiating with the European Commission in regards to the fate of the H3G and O2 merger, there is a high level of uncertainty on the future of the structure of the UK mobile market. Merging the two networks would generate extra capacity and capability, likely increasing competitive intensity, but the precise form this would take is unclear, as is the future of the brands and the identity of the capacity MVNO recipient(s)

Ofcom is encouraging competitive investment in local access networks using BT’s ducts and poles; in our view this is very unlikely to happen on a large scale, due to both the lack of spare capacity in existing plant and the generally poor prospective economics of a third local access network in the UK

Ofcom’s favoured model for Openreach is an enhanced version of the current structural separation model, and this is most likely to be reached via a negotiated settlement with BT; this and a number of other proposed measures, if implemented, will increase Openreach’s costs, and these costs will be re-charged to both BT’s retail division and its DSL competitors

Ofcom remains keen to retain four mobile network operators, in spite of clear evidence that at most three are viable at current retail price levels, and it is keen to implement a number of interventionist consumer protection measures that suggest it is keen on competition in theory, but not so much in practice

EE reported solid contract net adds, but weakening contract ARPU, which drove mobile service revenue growth down to -2.5%

However, EBITDA growth was spectacular at 15% in H2, suggesting that much of the subscriber growth is in low revenue high margin segments such as SIM-only and B2B, as well as cost control being strong

EE’s new parent BT is likely to be able to drive further progress in these areas, and the outlook is robust even if quad play demand remains low in the consumer market

Damage from the cyber-attack was revealed to be a 2% impact to the on-net subscriber growth, a 3% impact to Group revenue growth and a combined EBITDA and exceptionals cost impact of £75-80m, roughly double the previous guidance

An updated FY17 trading strategy promises “more conservative” price increases and greater focus on upselling mobile/fibre/TV to existing customers, while maintaining rather than growing the consumer base

FY17 guidance has been updated to account for cyber-attack related setbacks and trading strategy adjustments, now aiming for modest revenue growth and EBITDA of £320-360m and an implied margin of 17-20%

European mobile service revenue growth again improved, albeit marginally, with the quarter’s gain driven by declines easing further in what nevertheless remain the three weakest markets: France, Italy and Spain. Generally stabilising pricing environments were a key factor although ARPUs in these markets remain largely in decline, under continued pressure from strong out-of-bundle revenue declines

In a post-consolidation world, H3G/O2 in the UK and Yoigo in Spain will be the only mobile-only MNOs in the top five European mobile markets, effectively cementing a convergence based future. Consolidation trends might point to the prospect of greater price stabilisation but a fresh land grab for the converged market could derail this

Overall, in spite of healthy underlying data trends, we continue to see medium term growth recovery prospects capped at around 1% given precedent from both the UK, where a healthy economy, healthy pricing environment and strong data trends have failed to exceed this level, and Germany, where post-consolidation revenue growth has reverted to negative territory, both due to competition and consolidation

UK mobile service revenue growth remained at 0.9% in Q3, but on an underlying basis growth increased 0.1ppts to 1.4%. This continues a trend of very gradual improvement in underlying growth over the past year, while reported growth has stayed constant at around 1% due to the re-introduction of regulated MTR cuts on 1 May 2015

Within the market, performances were mixed. O2 remains a service revenue growth star performer thanks to strong sustained contract net adds and stable contract ARPU while Vodafone’s service revenue growth fell back into decline as its contract ARPU suffered due to a sharp fall in out-of-bundle revenue. EE’s contract net adds were strong, but its contract ARPU growth remains weak, partly due to its renewed contract net adds performance being supported by low ARPU data devices and B2B

Since the end of the quarter, on 28 October, the CMA provisionally approved the BT/EE acquisition without conditions, and on 30 October, the EC opened an in-depth investigation into H3G/O2. Both acquirers would be wise in our view to be wary of making any rapid changes to branding and/or channel strategy, given that EE and O2 account for nearly 60% of UK gross subscriber additions between them and disrupting these sales will have a significant impact on subscriber growth, as EE’s experience since dropping Orange and T-Mobile has shown

UK residential communications revenue growth bounced up in Q3 as we had predicted, on the back of continuing solid volume growth and improved ARPU growth driven by a series of price increases impacting in the quarter

The overall revenue growth of 6% was supported by some one-off factors, such as overlapping price increases and the launch of BT Sport Europe, but we believe that growth at this level will be sustained for the next two quarters at least

Looking forward, the impact of TalkTalk’s cyber-attack is uncertain in the detail, but it will clearly slow TalkTalk, benefit some of the others and may temporarily impact market volumes. Another area of competitive uncertainty is the impact of Virgin Media’s network extension as it gathers momentum into 2016, with all of the others likely to lose significant share in Virgin’s expanded areas

TalkTalk’s results revealed a challenging market environment, with it struggling to maintain its broadband subscriber base given the onslaught from larger and more differentiated competitors

Revenue growth was still a healthy 6%, but this was helped by acquisitions, price adjustments and low margin mobile, with its EBITDA falling despite the drop in broadband customer growth and associated costs

Its cost savings programme and marked price increases are likely to allow it to grow EBITDA this year and next, with the impact of the cyber-attack being significant but short-lived, but its declining retail customer base is a longer term concern