European mobile service revenue growth dropped to -1.3% – its lowest level in three years – particularly disappointing as growth should be bouncing back post-EU roaming tariff cuts

Having enjoyed relatively favourable dynamics in 2018, the UK and Germany are facing marked changes in momentum from here

Regulation limiting intra-EU call prices could hit hard – up to 6% of revenues and 20% of EBITDA in the UK, although other EU countries may be less exposed due to lower tariffs currently

Following record growth last quarter, the UK mobile market took a step down to just 0.9% growth in the quarter to December on the back of increasing pressure in the business market and the impact of out-of-bundle limits

2019 looks set to be a tough year for the sector with: a series of potentially painful regulatory hits; markedly lower price rises than last year; and early signs of a degree of creeping competitive intensity

We view 5G as a much-needed means of expanding capacity in the sector with upsides from M2M and IoT likely to remain relatively small

UK online advertising spend continued its double-digit growth in 2018, up 11% to reach nearly £13bn in annual spend or 58% of the total advertising market, but a no-deal consumer downturn could nearly stop growth this year

Google, Facebook, Amazon, professional services firms and the largest marketing cloud companies are the biggest winners, while content media, media agencies and independent advertising technology firms languish 

Self-regulation has improved as pressure mounts on advertising technology firms, but interventions by both privacy and competition authorities are now inevitable

Our central case forecast with orderly EU withdrawal predicts 2.7% growth for total UK advertising spend, down from 4.7% in 2018. We have a no-deal Brexit scenario that predicts a smaller advertising recession than in 2009, with total ad spend declining 3% and display down 5.3% in 2019

The total advertising figures partly mask the pressure on UK consumers, through an expansion of the measured advertising spend universe. This is due to significant self-serve online advertising growth by SMEs, and non-advertising marketing budgets moving to online advertising platforms

In a downturn, we’d expect advertisers to become more tactical, which would disproportionally affect display media including TV, which is further affected by declining commercial impacts among younger adults. Search and social advertising would see only small growth through the first year of a recession

European mobile service revenue growth declined this quarter to 0.3%, likely due in large part to the increased negative impact from the European roaming surcharge cuts, which we estimate at around 0.5-1.0ppts for Europe as a whole

The continued growth was supported by continued ‘more-for-more’ price increases coupled with strong data volume growth. Partially countering this, there has been a step up in competition at the low end in some markets, often driven by the smaller operators

Looking forward, the negative EU roaming impact is likely to decline from next quarter given the end of the summer holiday season, and on balance we would expect positive price increase trends to overcome negative low end competitive trends, at least in the short term. This might change in 2018, as Iliad launches in Italy, and recently consolidated operators become more of a threat

We estimate that UK online ad spend grew by 12.3% this year, with growth concentrated almost exclusively in mobile search and social in-feed advertising (particularly video), and mostly incremental to overall ad spend

Even after payments to publishers and distributors, Google and Facebook captured 80% of all net new spend in the market, and 96% of it flowed through their platforms

Despite improving standardisation and disclosure, the outstanding issues around measurement, the ad-tech supply chain, and particularly the obscure and growing Google/Facebook/Amazon segment, lead us to identify a large portion of digital advertising as a “grey market”: difficult to get a handle on, with uncertain beneficiaries and slippery definitions

Mobile service revenue growth dipped this quarter but this was likely entirely due to the predictable (and predicted) impact of the abolition of EU roaming surcharges.  On an underlying basis, growth improved

BT/EE extended its lead in both service revenue and contract subscriber growth terms. EE’s substantial investments in network quality and customer service have driven returns to scale, and its multi-brand approach is working well

Contrasting with the returns to scale seen at EE, TalkTalk’s MVNO has suffered the reverse of this, unable to break-even despite peaking at just shy of 1 million customers, and deciding to retreat to an agency model.  Sky Mobile is performing respectably well in context, but may be headed for scale issues itself

Digital advertising in the UK has been a phenomenal success story, but a concentrated one, such that many online media companies have not found a sustainable model

User payments are growing, but are currently focused on large, expensive bundles: Spotify, Netflix, the New York Times. This implements a hard division between free and paid and limits the potential audience

Micropayments and microsubscriptions are alternative models which content owners in certain media can use to address more types of demand. Multiple obstacles remain but for many companies the need to experiment has become critical

Mobile service revenue growth continued to improve on a reported basis, but most of this improvement came from a significant dip in the MTR cut drag. EE remained the leader in terms of service revenue growth, with both the strongest ARPU growth and robust contract net adds

The quarter also benefited from the current round of in-contract price increases, which were more widespread and at a higher level than last year, and from a brief holiday in the impact of roaming cut regulation, the impact of which will strongly reverse in Q3 as ‘free roaming’ impacts the whole quarter at the same time as mobile users take their actual holidays

Recent spectrum announcements have far from clarified the auction outlook, with Ofcom deciding on a more restrictive spectrum cap than its initial views but both H3G and EE appealing its decision. It will likely be some time before all 5G spectrum auction rules are resolved, let alone actually holding the auctions or building the networks

European mobile service revenue growth witnessed a rare growth spike this quarter, rising to 0.5%, likely due in large part to the reduced impact this quarter from the European roaming cut regulation, but also helped by a slight softening of MTR cuts and continued ‘more-for-more’ price increases

This roaming regulation holiday will end next quarter and the full impact of ‘free roaming’ will be felt, thus the spike in mobile service revenue growth is likely to more-than-reverse

What is likely to prove lasting is the zero-rated data offers introduced in several markets in Q2, which we expect to see more of given their reported success at improving ARPUs