Vodafone’s Q3 results were slightly disappointing following the green shoots of Q2, with growth in Germany slipping back again, albeit some of it already flagged.

It is difficult to imagine the full year results event being a positive catalyst with the likelihood of a dividend cut, a recognition of the hard-currency reality of the financials, and a still challenging outlook for FY 2024/25.

Deal-making is a positive counter with a highly accretive deal still in the offing in Italy, and the prospect of execution in Spain and the UK. Various inorganic deals with 1&1, Microsoft and Accenture will also be helpful, although none of them as valuable as an improvement in the core operations.

The CMA has announced the launch of its Phase 1 review of the proposed Vodafone/Three merger, with the timeline suggesting a Phase 1 conclusion in late March and a Phase 2 decision around September/October.

The main focus is likely to be whether the merger would lead to a substantial lessening in competition (SLC), with the companies' varied market positioning helpful in this regard.

The merger's prospective 'countervailing factors' are substantial, with an estimated 25-50% increase in sector capacity further strengthening the imperative for the operators to get customers signed up.

Ofcom’s final statement on net neutrality addresses most of our prior concerns, leading to opportunities for UK telcos to effectively address internet congestion, and monetise their network capabilities.

BT is looking to take advantage of its new freedoms with new TV distribution services, which could save network capacity, improve user experience and earn it a share of the content distribution value chain.

We think that there are many other attractive opportunities, but telcos will have to work hard to sell any of them given the need to work together and reverse the bad blood that has developed with many content providers.

Service revenue growth was broadly flat this quarter as some unwinding of price increases was compensated by a pickup in roaming revenues.

Vodafone has made some progress on its turnaround plan: it has sold its ailing Spanish unit; is rumoured to be in talks about a deal in Italy; and its German business is (just) back to growth (for now).

We expect muted guidance for 2024 with lower prospective price increases for most, inflated cost bases, and continued consolidation uncertainty.

Ofcom’s plan to ban inflation-linked price rises creates a headache for most operators, but the financial hit will not be felt for years, if then (depending on their replacement).

Ofcom is correct in pointing out some of the drawbacks of the practice, but it will likely be replaced by an alternative tactic that may well end up being worse for consumers.

The unintended consequences could be significant, with a period of uncertainty for operators, low-end plans less appealing to offer, and poor signaling to investors in the sector.

Mobile service revenue growth dipped to 5.6% this quarter as the impact of Q2’s price rises began to wane, and the prospective lower price rises look set to slow growth to 2% by the end of 2024.

Bargain-hunting in the sector continues with the MVNOs still taking the lion’s share of net adds, to the detriment of the MNOs.

EE is offering keenly priced convergence and family plans with its new platform—another challenge for the other MNOs who don’t share the same incentives.

Market revenue growth was robust in Q3 at 1.4%, but heavily supported by price rises whose effect will wane over the next year.

Broadband net adds remained negative, with pay TV and telephony more negative still, mainly thanks to strained consumer finances.

Declining volumes and waning price rise boosts are likely to lead the market into decline next year, with a recovering economy needed to reverse this.

 

BT continued to perform well financially in Q2, with revenue and EBITDA growth remaining robust, and full year cashflow guidance nudged up.

ARPU growth remained robust across fixed, mobile and Openreach, but subscriber growth was weaker, especially in mobile and Openreach, and this will become more of a concern if it persists.

Maintaining growth across retail divisions will be a challenge as the price rise effect wanes, especially in weak economic conditions, and while Openreach’s FTTP roll-out is going well, full success is still not assured.

With a difficult price rise adjustment now behind it, VMO2’s subscriber momentum is much improved, in part aided by accelerated network expansion.

Backbook pricing remains under pressure on the fixed network with revenues down 1.2% in spite of sizeable price rises and footprint expansion—upcoming OTS may exacerbate this issue.

VMO2 has thus far only countered the downside of the UK’s fibre revolution. A new approach to branding and expansion of its addressable market are upside opportunities—with the ultimate potential to even deliver improvements on its previous position.

The metaverse is a radical expansion of online experiences— sparking a host of new safety challenges on harmful content, economic activity, and privacy.

Building safety into the metaverse will take a village: platforms and communities will set policies and moderation. Regulators could struggle to future-proof their tools, especially with decentralised platforms.

AI age verification and moderation is in a race against AI hazards: disinformation, deepfakes and dynamic user content all intensify harms in immersive settings.