EE appears to be soft-launching split contracts—it will become the final UK operator to offer these deals.

Split contracts are popular and particularly useful for higher-end handsets as they allow consumers to pay off their device over a longer period, dramatically reducing their monthly payments.

Wider availability of split contracts will take some of the shine off O2 and Vodafone's offerings, having been a key point of differentiation for O2 for many years, and a driver of growth for Vodafone more recently.

Vodafone and H3G have finally announced their long-trailed merger plans, with weaker-than-expected financials and the focus squarely on the superiority of a combined network.

We view the hailed synergy estimates of £700m per year as achievable but the merged entity will need to deliver other positive financial filips to get returns above its cost of capital.

The approval case for the merger is that: it makes the operators a stronger competitive force; prices won't rise; a combined network will be superior, and that the status quo is unsustainable in any case.

Mobile service revenue growth slowed again this quarter—now at +3%—as the impact of the 2022 price rises waned further, but a strong B2B performance for some compensated for consumer weakness.

Q2’s boost from bumper price rises will unwind over the following quarters as customers re-contract and face much lower increases next spring due to the inflation outlook.

Given the temporary nature of in-contract price rises, and the more permanent nature of elevated cost bases, new-customer pricing now appears to be edging upwards, and the case for consolidation is strengthened.

VMO2 had a subdued Q1, with EBITDA growth only just positive—this was pre-warned due to tougher comparables and the mid-teens price rise not due to take effect until April/May.

KPIs were mixed: fixed was fairly strong and mobile was slightly weak, with there being realistic hope that the former is a trend and the latter a blip, although more work is required to fully turn around fixed.

Guidance for mid-single-digit EBITDA growth for 2023 has been maintained. This now excludes the nexfibre construction margin benefit, thus is in a sense an upgrade, and still looks eminently achievable.

Headline inflation-busting price increases of 14% mask effective increases averaging a sub-inflation 8%, due to their limited scope across the customer base and over time.

The high headline increases have led to attacks from political and consumer groups, we would argue unfairly, and may yet drive reputational damage.

Looking forward, inflationary increases may be banned, but we would expect higher fixed increases to replace them, and micro-regulating pricing structures does tend to result in unintended consequences.

Mobile service revenue growth remained strong at 5% this quarter, albeit 1ppt lower than Q3 as boosts from roaming and the spring price rises diminished.

The cost-of-living crisis is becoming evident in weak net adds in the consumer segment while the B2B market remains quite robust for now.

Although the operators will implement in-contract price rises of 14-17% in April, the revenue impact will be much more muted (+4-9% for 2023), and transient (disappearing as customers recontract)—unlike their rising costs.

Providing home broadband connections via a mobile network (FWA) is gaining traction in certain markets where local conditions make it a viable alternative to fibre, such as New Zealand, Italy and the US.

FWA is a time-limited opportunity for most, with mobile traffic growth absorbing capacity for it and fixed traffic growth depleting the economic case. An ultimate shift to fibre is the best exit strategy.

In the UK, H3G's spare capacity could support up to 1 million FWA customers on a ten-year view—enough for a meaningful revenue fillip for H3G, but not enough to seriously disrupt the fixed market.

Telcos are pressing the EU to force big tech to make a ‘fair contribution’ to their network costs, although this has drawn opposition from telecoms regulators, who rightly fear risks to the wider ecosystem

There are valid concerns to address however, with content providers not currently incentivised to deliver traffic efficiently, and telcos constrained by net neutrality rules from doing anything about it, resulting in unnecessary costs and service degradation

However, there may be better ways to address these, through reforming the implementation of existing rules to encourage more efficient content delivery, and allowing the telcos to provide enhanced delivery routes of their own, with Ofcom’s approach in the UK a step in this direction, but perhaps not a step far enough

Service revenue growth was up just 0.1ppts to 2.0% this quarter, as price rises in the UK and the peak of the roaming boost offset weakness elsewhere.

Price increases to combat inflationary cost pressures are gathering momentum—a potential revenue cushion as roaming tailwinds diminish and challenging economic conditions weigh.

Vodafone is battling strategic issues in most of its main markets—significant change in strategy will be required from the new leadership.
 

Mobile service revenue growth rose to +6%—its highest level in over a decade as price increases fed through and roaming picked up.

However, there were early signs of a worsening economic environment: handset revenues and contract volumes were subdued and churn popped up for most operators.

Growth may soften from here as the roaming boost subsides and economic conditions worsen, but price rises of up to 15% in the spring could provide more resilience if fully implemented.