In this short presentation we show our analysis of trends in UK broadband and telephony to September 2010, based on the published results of the major service providers and Ofcom telephony data. We include our own estimates where reported data is incomplete. This quarter’s edition includes a revision to some historical trends resulting from our own interpretation of BT’s recent adjustment to the volume of unbundled lines.

Highlights in the quarter included exceptionally strong growth in broadband net additions at Sky and the resumption of the long term rate of decline in broadband market growth by volume.

European mobile revenue growth improved by 0.8ppts in Q3 to reach -0.3%, but all of this improvement and more was due to easing regulatory pressures, with underlying growth actually declining marginally

GDP growth continues to improve year-on-year, but in the current low confidence environment underlying mobile revenue growth is not (yet) responding. Smartphone sales are surging, but their net impact on revenue is hard to discern

Looking forward, the regulatory impact is likely to turn negative again for the next few quarters, so some underlying growth catch-up is required for revenue growth to stay at around zero

Vodafone Europe’s underlying revenue growth rose slightly in the September quarter, performing well in a market that is still only slowly recovering. Control of fixed costs was strong, but rising handset subsidies pushed margins down again

Vodafone’s updated strategy contains strong elements of a focus on the nitty gritty and a move away from the more expansive desires of the past, which is excellent. Successful implementation remains a challenge, but at least head office is likely to be a help, not a hindrance

Vodafone’s medium term expectations are for growing revenue and stable margins, which is laudably ambitious compared to past performances, and may even be achievable if it can balance smartphone tariffs and handset subsidies to its net advantage

Vivendi is close to being in a cash position to buy out minority shareholdings in SFR and Canal+, shedding the image of a ‘conglomerate’ of partly owned and diverse assets, which has weighed on valuation Acquiring Vodafone’s 44% stake in SFR (now only a question of price) would allow Vivendi to rebrand itself as a telecoms story, serving France, with Maroc Télécom and mainly Brazil’s GVT supplying the upside To fully acquire Canal+, Vivendi’s offer will need to consider Lagardère’s option of floating its 20% stake. Owning 100% of Canal+ and SFR opens the narrative of a ‘French media/telecoms champion’ – which we find less credible

The decline in UK residential broadband market growth has paused due to accelerating adoption by older householders and increased household formation. We expect 970,000 net additions in 2010 and 20.5 million broadband households by 2015. However we expect growth will continue to decline from 2011 as the impact of the government spending review feeds into consumer confidence and the market becomes increasingly saturated

As BT’s next generation access network is deployed, there is likely to be accelerated improvement in DSL price/performance, with DSL customers migrating to a 40 Mbit/s headline speed as it becomes available. The impact of this is likely to be compounded by Virgin Media up-rating its broadband portfolio from speeds of 10, 20 and 50 Mbit/s to 20, 50 and 100 Mbit/s

In the absence of further consolidation, in market share terms the industry appears set to remain divided into three strategic segments: the ‘big three’, brand extenders, and Sky. We expect residential broadband market revenue (excluding content) to continue to decline gradually, stabilising by 2015 as the impact of market share gain by lower priced ISPs attenuates due to a combination of a maturing market and reduced price differentials caused by NGA

 

Everything Everywhere’s maiden investor day presentation was soured by the disappointing results it reported for Q2 2010, with service revenue growth underperforming its UK competitors by 7 percentage points. At current relative growth rates, O2 will retake its lead by June 2011

The synergy savings targets have been maintained, but focused more towards back office functions and away from front line assets such as shops and network base station sites, with the brands being kept separate for the time being. This is a sensible enough approach, and the cost savings still look eminently achievable

Going forward, the company will have the advantage of a better network but the disadvantage of disruptive integration for the next few years. Its main challenge will be to reverse the current negative revenue momentum, which puts both its revenue and margin targets at risk

 

Vodafone Europe’s revenue growth again notched up, increasing by 0.7ppts as reported or 0.3ppts in underlying terms, with minutes volume growth accelerating by 1.8ppts

This is a little disappointing in the context of the rate of reported GDP recovery, but consumer confidence, particularly in Southern Europe, has re-dipped in the last few months, making raw GDP figures less relevant than they once were

Data revenue is forging ahead, but voice pricing is steadily weakening, and with many offers linking voice, text and data into an inseparable bundle the former may be causing the later, implying that data’s contribution to overall revenue is easy to overestimate

 

Vodafone Europe’s organic revenue growth improved again, from -3.2% to -2.4%, with it enjoying a fair share of the improvement in mobile market growth driven by improving economies across Europe

EBITDA margin fell, partly as a result of weak cost control but mainly because SAC/SRCs rose as Vodafone subsidised consumers getting more expensive handsets, which involves a short term (but not long term) profitability hit

Vodafone Europe could move back into positive revenue growth this year as it rides the wave of market recovery, but short term margin targets will be hard to hit as handset subsidies continue to rise

 

Vodafone’s European revenue growth improved by 1.4 percentage points in the December 2009 quarter to reach -3.2%, the first improvement since the start of the economic slowdown in 2008

While data revenue is growing fast in absolute terms, its contribution to growth is flat to slightly down, with the main driver being more traditional services improving due to the recovery in year-on-year GDP growth

We expect revenue growth to continue to improve as economic comparables improve, with a return to positive growth likely by the end of 2010