BT’s Q4 was mixed in the detail, with consumer broadband volumes weakening but FTTP roll-out and adoption surging, with performance at the Group level solid enough.

The April price increase has reportedly landed well, strongly supporting BT’s guidance for revenue and EBITDA growth in 2022/23 with no other improvements required.

The macroeconomic environment continues to weaken, affecting BT and its premium brands in a number of ways, but it appears to have enough room in its guidance to weather this storm.

Whilst we remain sceptical of the churn reduction benefits of fixed/mobile convergence, the pandemic and a more astute approach from the operators is enhancing the case for it in the UK.

Creating the impression of a giveaway whilst minimizing the effective discount is key, as is extracting any loyalty and cost benefits.

Even if well executed, any upsides are likely to be modest. Operators are right to keep discounts to a minimum and to avoid M&A premia predicated on fixed/mobile convergence synergies.

European mobile revenue growth was zero for the third successive quarter with better mobility but less roaming upside, some B2B weakness, and stronger competitive intensity in the Italian and Spanish markets

Q1 should evidence some similar trends but the impact of out-of-contract notifications will begin to emerge and roaming looks set to become a significant boost from Q2

Consolidation fever continues to dominate the headlines though this is set against a backdrop of considerable uncertainty regarding regulatory approval

The UK government is on the cusp of introducing legislation that will force online platforms to monitor and mitigate the presence and spread of harmful and illegal content, in a regulatory first for big tech.

Affected companies should take note: they will need to prepare for a higher level of transparency and communication with regulators, and larger service providers will require expanded moderation, user verification and research capabilities.

Users should be protected as platforms balance complex competing duties. News publisher content has a carveout, but publishers may experience butterfly effects as the online environment is reshaped.

Mobile service revenue growth improved slightly to -1.7% in Q4 as a higher mobility boost outweighed drags from continuing B2B weakness and MTR cuts.

Q1 prospects look mixed but the real turning point remains Q2 when the impact of inflation-linked price rises looks set to boost growth by 2-5ppts—nudging sector growth into positive territory for the first time since 2018.

Ofcom’s market review did not outline a change of stance on investment and consolidation in our view, but its inclination to have fewer consumer-focused initiatives is a welcome development.

Iliad has reportedly tabled a bid for Vodafone's Italian operations—unsurprising given challenges in that market for both players.

Press reports appear to be a concerted effort to pressure Vodafone to deal. There is the potential to resolve Vodafone's leverage issues, but there are implications for Vantage Towers.

Regulatory approval remains very much in question, but it makes sense to test the system with the potential for very positive read-through elsewhere. If a deal can be struck, it will likely be just the beginning of a long and checkered road.

Higher overall inflation, together with a bigger mark-up than in previous years for some, is implying significant in-contract price increases for the UK telecoms operators—an average of 7.7% for the mobile operators.

Although we may see a 5-6% short-term boost to mobile service revenue growth from these price increases, new-customer pricing remains crucial and could erode the boost from these in-contract rises entirely.

We have been surprised by Ofcom’s interventions to discourage these price increases. The industry needs all the help it can get to fund next generation 5G and full fibre networks, and these in-contract price increases are no guarantee that prices and revenues overall will start to rise.

Mobile growth improved very marginally to -3.6% this quarter as roaming revenues were harder hit and competitive intensity bounced back, but usage recovered from the lockdowns in Q2 and cuts to intra-EU calls were annualised.

Italy’s fortunes took a turn for the worse as roaming hit particularly hard and Iliad resurged. After a spate of downgrades to the outlook last quarter, there were some tentative upgrades in Q3 although the tone remains cautious.

The diminished drag from roaming is the primary positive driver from here. Although lockdowns of some degree are in place in Q4, their impact will be less severe than those in Q2.

 

Service revenue declines stabilised at -7% this quarter with a myriad of factors at play: roaming worsening, the end of lockdown taking some pressure off, B2B a mixed bag, and the annualisation of cuts to intra-EU calls.

Ofcom’s second 5G auction will be a focus in January. We expect selective bidding, proceeds of up to £2.7bn, and some wrangling over spectrum trading.

The outlook is better from here as the drag from roaming eases, in-contract price rises step up from the spring, Carphone Warehouse diminishes as a factor in the market, and the prospect of consolidation is still on the table.

COVID, potential consolidation, implications for ALF pricing and non-contiguous blocks have conspired to make the forthcoming second 5G spectrum auction a highly complicated affair.

H3G seems unlikely to bid in a meaningful way for the 5G spectrum (3.6GHz+) but is expected to share the 700MHz band with EE. With the three leading operators likely to split the 3.6GHz+ spectrum between them, proceeds of £1bn-£2.7bn are conceivable.

The non-contiguous nature of the spectrum blocks on offer risks the operators ending up with fragmented holdings in spite of Ofcom’s endeavours to encourage trading—an efficiency loss of up to 20%.