The outlook for ad-supported UK media businesses is brighter in the short term than in the medium term, irrespective of who wins the election, since fiscal tightening is inevitable early in the next parliamentWe expect the Conservatives, should they win, to favour commercial media (Sky, ITV) over the BBC in general and in particular in the upcoming negotiations on the licence fee settlement post 2013Super-fast broadband networks enjoy cross-party support, but Labour’s 50 pence landline tax was blocked by the Conservatives, who prefer to use a small portion of the BBC licence fee
Hulu’s postponed UK launch, and the inability of SeeSaw and MSN to get carriage deals with the BBC and ITV, underscore the difficulty for internet TV aggregators of acquiring mainstream content
In-stream video advertising is nascent – we estimate it was worth just over 1% of UK TV ad spend last year – giving major channel operators/rights holders little incentive to syndicate their programming to online services
The future for ad-funded internet aggregators continues to look highly challenging, aside from YouTube, due to its audience scale and Google’s deep pockets
At TalkTalk Group (TTG) net broadband additions were solid, possibly helped by stronger growth in total market demand; but churn at Tiscali UK appears to remain high
TTG revenue was heavily distorted by the Tiscali acquisition but appears to remain in gradual decline on a like-for-like basis, due to continuing decline in non-broadband customers
Carphone Warehouse’s like-for-like distribution revenue showed a firm pick-up in the quarter, with it likely enjoying the first quarter of significantly improving market growth since the recession started
The BBC Trust has given its provisional approval to the BBC Executive’s proposals for Project Canvas, the JV between the BBC and five partners that aims to enable DTT homes with broadband connections to access IPTV content on their TV sets
Canvas promises to enrich greatly the DTT platform; however, it is likely to encounter fierce opposition during the coming consultation from equipment manufacturers and the pay-TV platform operators, Sky and Virgin Media, especially in relation to its attempts to prescribe the user experience (UX)
We think that the BBC Trust will give its final approval, subject to the conditions specified in its provisional statement, but further delays seem likely and we do not expect Canvas devices to appear in the shops before 2011
Fixed line revenue growth continued to decline excluding the impact of Tiscali UK, but at a manageable rate, and profitability continued to improve strongly. TalkTalk Group is performing well in the run-up to demerger, and management is sounding very confident. But there are some clouds on the horizon, not least the relaunch of Tesco Telecom
Sky+ HD is now manifestly the centre point of a three-pronged operational strategy that focuses on driving customer growth, selling more products into the customer base and seeking efficiencies in fixed costs
Sky 3D, due for residential launch in H2 2010, fits in well with the core Sky+ HD proposition and the satellite operator looks well placed to combat growing retail competition from other platforms, assuming Ofcom implements its wholesale pay-TV proposals for Sky premium subscription films and sports some time in spring 2010
At TalkTalk Group (TTG) net broadband additions at TalkTalk/AOL UK were unexpectedly strong, with low cannibalisation of Tiscali subscribers particularly good news
At the newly acquired Tiscali UK, the inevitable skeletons are starting to emerge from their cupboards. Management appears well prepared for the challenges, although it is early days
Carphone Warehouse’s distribution business grew connections at 2.1% during the quarter, another very creditable performance in a declining market, and it remains well positioned for the market recovery
The BBC Executive has fleshed out many details of Project Canvas in response to questions raised by the BBC Trust: Canvas being the proposed joint venture between the BBC, BT, ITV and Five that aims to solve the challenge of realising the seamless convergence of linear broadcast TV and internet video to the TV screen in the living room
For Project Canvas to succeed, it is likely, in spite of its merits, to have to address competition concerns in the areas of company structure, stifling innovation and editorial controls over who gets to participate
Stifling innovation – whether to do with creative restrictions, marginalisation of competing players or undue prominence given to the traditional public service broadcasting (PSB) model – appears the most problematic issue facing Project Canvas, whose success will depend on its ability to convince the rest of the industry that it is stimulating, not stifling innovation
The distribution business experienced modest growth in connections and revenue, easily outpacing European market handset growth of -15%, as the company continues to build market share
At TalkTalk Group (TTG) net broadband additions for the quarter were relatively strong, given likely market growth, probably due at least in part to reduced subscriber loss at AOL UK
In our view cut-price business broadband, rather than IPTV, offers the best prospect of profitable revenue growth in fixed line
Carphone Warehouse’s distribution business had a slightly mixed year, with strong volumes and revenue mitigated by a sharp drop in margins and profit, with margin being sacrificed for market share
Given the very poor recession-hit market for handsets, Carphone Warehouse’s market share gains have been dramatic, so the sacrifice was at least not in vain
Although TalkTalk Group missed much of its guidance to March 2009, we now view new guidance as achievable, with the main risks related to the integration of Tiscali UK
Carphone Warehouse’s acquisition of Tiscali UK makes TalkTalk Group the second largest UK ISP and the largest in terms of residential broadband subscribers, just as market growth begins to stall
The company’s synergy target looks readily achievable, although integration challenges are significant and could make the acquired customer base difficult to stabilise
Nonetheless, TalkTalk Group now seems set to dominate the ‘value’ end of the UK residential telecoms market