This report updates our coverage of the commercial radio sector. In Q1 2010, RAJAR data showed that the average number of hours listened per listener and the total number of hours listened, across both the commercial sector and the BBC, fell by 2.7% and 1.2% respectively compared to Q1 2009. This continues the long term trend of gradual consumption decline we have highlighted in the past. Another consistent trend is the relative robustness of listening to BBC radio, whilst the brunt of the decline is borne by the commercial sector

Whilst BBC radio is funded by the licence fee, the commercial sector relies on advertising, which was severely impacted by the recession in 2008-09, on top of the structural shift of advertising to the internet. Oversupply of radio inventory continues to cause downward pressure on ad rates. As the UK economy exited recession in Q4 2009, commercial revenues rose 6.3% over Q4 2008, after six consecutive quarters of revenue decline. Q1 2010 is expected to come in at approximately 7-8%, with more modest positive growth in Q2

Public sector advertising, which includes procurement by the Central Office of Information (COI), has proved to be a significant source of income for radio (18.9% of revenues in 2009, COI itself accounting for 11.5%). On 24 May George Osborne announced that, with the exception of previously committed and “essential” campaigns, further COI advertising will be put on hold until March 2011. Based on this understanding about COI spend, which will translate to a small negative impact in H2 2010, we expect H2 2010 to be flat. Overall, we forecast small, positive annual growth of commercial segment revenues of 2.5% for 2010

Whilst income is being compressed, the cost of serving dual analogue and digital transmission remains a strain. Ofcom’s ongoing deregulation will have a small positive impact on costs. However, further station closures are entirely possible, especially if COI spend continues to be squeezed

A hung Parliament now appears the most likely outcome of the UK general election on 6 May, giving the Liberal Democrats influence, in terms of votes and seats, over the next government

Because the Lib Dems are ideologically closer to Labour than to the Conservatives, we anticipate their influence will favour the policy and regulatory status quo in media and telecommunications in relation to the proposals made by the Conservatives

This influence would be strongest in a coalition of Labour and the Liberal Democrats, but also would persist in a Conservative minority government, reducing the likelihood of a new legislative framework for media as proposed by the Conservatives

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

France’s altnet Iliad again delivered stronger than expected profit and cash flow growth in 2009 on the back of continued strong results at the Free brand and a positive contribution from the Alice brand

These results demonstrate the continued pull of Free for the triple play customer despite intensifying competition, including from cable, making the low cost, low churn business model sustainable

By 2012, we expect fixed line profitability to increase and deliver enough cash flow to finance the launch of the Free Mobile project

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

Despite the recession, in 2009 the French broadband market added 1.8 million connections to reach 19.6 million, but we expect the deceleration in growth to persist in 2010

Orange’s leading position weakened further in Q4 2009, despite retail price cuts, and we expect a further decline in market share in 2010, impacting FT’s top-line

SFR was the star performer of 2009, although its Ebitda margin has improved slightly. Iliad remains the ‘best in class’ in terms of profitability, but must address high churn at Alice. Bouygues’ fixed line début was an impressive splash – at a cost

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

This report on the French broadband market examines growth trends in 2009 and forecasts to 2012, updates our previous assessments of the commercial significance of IPTV in the triple play (a bundle of broadband, telephony and TV), and details the state of fibre-to-the-home (FTTH) deployment

Shrugging off the recession (milder and shorter than in the UK), the French broadband market is set to reach 19.6 million connections by the end of 2009, up 1.9 million on 2008 – only 12% less than the level of net adds of 2008. With 2009 better than we expected, we now anticipate a sharper slowdown in net adds in 2010, with 1.4 million net adds projected. We still expect the total to reach 22.8 million connections by 2012 (70% household penetration)

Iliad is the only candidate in the rerun of the French 4th 3G Licence tender and we believe its bid will be successful

Free Mobile could launch by the autumn of 2011 under a ‘low cost’ model

We remain doubtful on the venture’s economic prospects – Iliad appears to underestimate the network and subscriber acquisition costs required to build a mobile operator of profitable scale

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