In June, Apple’s new ‘iAd’ unit will begin serving ads within iPhone apps. iAd will compete with Google’s AdMob, paralleling Google Android’s competition with the iPhone, as the two companies contend to shape how people will use the mobile internet

The iPhone’s success is underpinned by apps, which draw in both consumers and publishers in a virtuous circle, but undercut Google’s search model. With iAd, Apple seeks to make sure iPhone apps remain the most profitable place for publishers

Steve Jobs has suggested a multi-billion dollar revenue potential – the true figure could be a tenth of that, but the real value of iAd will be in defending and supporting the iPhone

The iPad is a beautiful device that offers new ways to consume and interact with content. It takes ideas that have been discussed for decades and turns them into a (fairly) practical consumer product

The iPad poses huge challenges for print publishers, since it
has the potential both to unlock the benefits of digital for them, but also to remove
the last remaining advantages of their physical products

However, the iPad costs at least $500 and is hard to see as essential
for anyone. While there is real money to be made here, it will take a long time
to match the scale that comes from 10m people buying a newspaper every day in the
UK

H3G Group organic service revenue growth was just 0.2% in Europe in 2009, with EBITDA now roughly breakeven and cashflow remaining firmly stuck in negative territory, and lower subscriber net adds driving most of the EBITDA improvement

H3G UK is outperforming the UK market, but only just, and remains loss-making. Its prospects for 2011 are good, with its network share roll-out likely to have been completed and lower termination rates likely to be implemented, and the Orange/T-Mobile merger could provide significant long term benefits, but it will still require significant investment to gain scale

H3G Australia is now a sound business after the merger with Vodafone Australia, but all of the European businesses are sub-scale, with significant further investment and/or M&A activity required to reach sustainable profitability

Mobile content is moving to the centre of strategies for online
media. At MWC, the world’s biggest mobile conference, Google announced it now develops
all products ‘mobile first’ and Facebook reported a quarter of its 400m users access
the service through mobile

Three years after the iPhone 
launched, the handset industry is catching up, adding decent user interfaces
and mobile apps to colour touch screens and taking easy access to mobile content
beyond the iPhone

Beyond the self-selecting early adopter iPhone base, we found
real evidence of companies already successfully providing mobile content to much
wider segments of the population

Apple’s hardware-driven strategy for music recently passed two major milestones, with 10 billion paid track downloads and 250 million iPods sold

In 2009, Apple ‘returned’ to record labels and publishers roughly $1.9 billion, while generating gross profits in the region of $3.2 billion from the sale of iPods and music

Of wider significance to Apple is the music strategy’s contribution to building a mass market brand and expanding its customer base, helping to drive adoption of their computers and, more recently, the iPhone

Large parts of print media face existential problems from the structural decline of consumption and core advertising businesses, and the growth of an internet model of free content and large-scale disaggregation

Employment trends in US media underline the depth of the decline in sales of print media (no similar data is available for the UK), across newspapers, periodicals and books

Publishers are being forced to search for business models that align with new patterns of consumer behaviour –and which make money

H3G’s H1 2009 results showed some improvement on revenue growth and profitability on a very weak H2 2008, but it is still growing very slowly while barely EBITDA positive

The company has at last admitted that it will not be EBIT positive in 2009, and without some major changes we doubt it ever will be

For the UK business, there are a number of factors which may turn in its favour over the coming two years, allowing a more concerted marketing push to scale; for Italy and the smaller European operation, consolidation appears the only answer

Steep declines in CD sales in major recorded music markets continued in 2009 as we had forecast last year (Recorded Music and Music Publishing [2008-39])

Sales of recorded music continue to be decimated by physical and online piracy, plus the disintermediation of the album purchase by the digital purchase of ‘cherry-picked’ tracks

A further knock-on effect on CD sales is the reduction in retailers’ shelf space devoted to music, including as a result of the bankruptcies of major chains (Circuit City, Woolworths and Zavvi) – what we have called the ‘perfect storm’ for the CD

H3G group’s H2 2008 results showed a 5% decline in revenue on a constant currency basis and a return to strongly negative underlying EBITDA, with a margin of -17% in H2 2008 and -8% for the year as a whole, versus a margin of -1% in 2007

The UK performed reasonably well, with 11% revenue growth and improving margins, albeit still being cashflow negative, but Italy suffered from an 18% revenue decline and falling margins

The company’s target of positive EBIT in 2009 looks very unlikely without contributions from some major accounting adjustments, and the consolidation move in Australia looks likely to be repeated elsewhere

The planned merger of Vodafone and H3G in Australia has raised the question of what consolidation could occur in Europe, although a direct analogy is not appropriate because Vodafone is much weaker in Australia (#3 operator) than it is in the larger European countries, and so would face much more regulatory scrutiny in Europe

The only merger opportunities in the top five markets which would have a similar or lower theoretical impact on competition (and hence would theoretically be as easily approved) in the top five European countries would be T-Mobile and H3G in the UK, Wind and H3G in Italy, and any operator with Yoigo in Spain

There are massive cost savings to be had from in-market consolidation, with network, marketing and general administration costs all fully overlapping between operators. The non-merging players would also enjoy a period of less competitive intensity, which may last indefinitely