The press has reported on an imminent merger of O2 and Virgin Media (UK). This is not likely to be driven by the pursuit of revenue synergies as dis-synergies are more likely if the brands are merged.

Cost synergies are real, albeit a bit tangential. However, in a mature market even modest synergies are worth pursuing.

A full regulatory review may be required but approval is likely. Market impact is somewhat nuanced, with the benefit of a distracted competitor short-term and a larger but still rational operator ultimately.

COVID-19 has sent online news surging, with publishers experiencing massive traffic uplift, as trusted news sources become increasingly important.

But the industry is still heavily reliant on print revenues, and we are seeing supply chains come under extreme pressure as core readers self-isolate and retail giants close or de-prioritise news media. Advertising—including categories like retail and travel—has collapsed.

In face of existential threats to the sector, we have written to DCMS to mobilise Government funding to sustain news provision and journalism.

European mobile service revenue growth improved by 1ppt to -1.2% primarily as a consequence of diminished competitive intensity in France. Trends elsewhere were largely flat.

The mobile sector is playing an important role in tackling COVID-19 and is likely to be relatively resilient in the short term with a broadly neutral financial impact. Longer term it will be exposed to the fortunes of the economy.

There are reasons to believe that the improvement in trends evidenced in the last quarter may continue as churn reduction takes the heat out of some markets, cuts to intra-EU calls annualises out and for most countries, end-of-contract notifications will only begin to impact in 2021.

 

Demand for telecoms capacity is booming, and the networks can (broadly) cope, with the increase primarily in off-peak demand. However, as the crisis continues, maintaining resilience becomes more challenging.

In the short term, the demand for ample, reliable connectivity coupled with reduced churn will add resilience to operator financials, although there may be significant weak spots especially in business markets.

However, as the crisis goes on, the pressure on capacity and network maintenance may grow, and the impact of the dramatic economic slowdown on consumers and businesses will also put pressure on financials.

The UK mobile market was steady this quarter at around -2% ahead of out-of-contract notifications hitting from February.

The mobile sector is playing an important role in tackling COVID-19 and is likely to be relatively resilient in the short term with a broadly-neutral financial impact. Longer term it will be exposed to the fortunes of the economy.

Elsewhere, there have been green shoots of positivity in the outlook: some good regulatory news; a degree of price inflation; Carphone Warehouse’s retreat is a positive for the operators, and some financial drags will drop out as the year progresses.

At the Enders/Deloitte Media & Telecoms 2020 and Beyond conference the economic and policy importance of telecoms infrastructure was a major theme, particularly in the current climate.

Operators envisage a pricing environment that will continue to be very challenging.

Help is required to secure infrastructure investment, deliver the economic upside from 5G, and level the playing field between sub-sectors.

Market revenue growth dipped to below zero in Q4 2019, as pricing pressures bite and smaller players gather share.

2020 is off to a challenging start, with new customer pricing dipping down again, and existing customer pricing under regulatory assault.

With expensive full fibre networks being built, persuading consumers to pay more for the higher speeds they enable will be key.

Virgin Media’s subscriber base fell again in Q4, although strong ARPU growth allowed a slight acceleration in cable revenue growth to 1.8%, and a deceleration in OCF decline to 1%.

Liberty Global group OCF guidance of mid-single digit decline in 2020 is likely to be mirrored at Virgin Media, as regulatory pressure and market competitiveness continue to bite, and mass-market demand for ultrafast remains nascent.

We continue to believe that the best way for Virgin Media to capitalise on full fibre rollouts is to use a wholesale deal with Openreach to expand its footprint to (eventually) nationwide.

The speeds made possible by full fibre build are unnecessary for most users in the short term, giving limited commercial advantage to those that can offer them, but are likely to prove essential in the medium/long term.

The economics of full-scale, independent alternative networks look very challenging in our view – especially without the support of Sky – although there are some limited arbitrage/cherry-picking opportunities.

The Openreach full fibre model makes economic sense under Ofcom’s proposed regulatory framework, provided it retains the lion’s share of the market, although considerable risks remain.

European mobile service revenue growth declined this quarter to 0.3%, likely due in large part to the increased negative impact from the European roaming surcharge cuts, which we estimate at around 0.5-1.0ppts for Europe as a whole

The continued growth was supported by continued ‘more-for-more’ price increases coupled with strong data volume growth. Partially countering this, there has been a step up in competition at the low end in some markets, often driven by the smaller operators

Looking forward, the negative EU roaming impact is likely to decline from next quarter given the end of the summer holiday season, and on balance we would expect positive price increase trends to overcome negative low end competitive trends, at least in the short term. This might change in 2018, as Iliad launches in Italy, and recently consolidated operators become more of a threat