The UK mobile market suffered its worst performance in six years this quarter as competition heated up and regulation continued to bite

Vodafone’s unlimited tariffs have proven popular, reaching 5% of its contract base in one quarter, helping to drive its outperformance

Some reprieve is in prospect next quarter, before the impact of out-of-contract notifications and automatic discounts from February, although there is the possibility of pre-emptive moves bringing some of the effects forward 
 

Vodafone continues to strike a very shareholder-friendly focus and tone but its operating performance remains decidedly muted, with revenue growth up just a touch but EBITDA growth halved

Vodafone’s drive for convergence is still costing it dearly. German mobile ARPU is down 7% and Liberty Global’s assets disappointed on their first consolidation with cashflow enhancement less than half that expected 

Apart from its ill-advised convergence strategy, Vodafone is making many sensible moves and there are indications that its unlimited plans are gaining traction. With leverage tight, pressure is mounting for demonstrable improvements in the financials some time very soon 

BT suffered a weak Q2 with revenue and (particularly) EBITDA declines accelerating, but this was mainly down to timing (particularly at Openreach, which will likely recover in Q3), with the company confident in maintaining full year expectations

BT’s fixed broadband business enjoyed some recovery as the pricing environment improves, but will suffer another price timing bump next quarter, and its mobile business is suffering from a tough market environment that is unlikely to improve in the short term

The company is busy re-branding, re-positioning and transforming, but the outlook for football rights costs and fibre roll-out regulation will dominate in the short term, and further bumps (such as the Virgin MVNO contract loss) may emerge

Mobile sector returns are low, particularly for smaller-scale operators, with H3G earning less than its cost of capital. Regulatory initiatives, spectrum auctions and 5G look set to worsen this picture as H3G strives to gain viable scale

Back-book pricing is crucial to the returns of fixed challengers. Regulatory intervention is likely to lead to a waterbed effect in the fixed sector and exacerbate challenges in mobile

New entrant business case in full fibre is limited to de facto monopoly opportunities. There is the potential for BT’s returns to increase markedly if it gets full fibre right but new entrants’ inferior economics are unlikely to offer sufficient investor appeal

The UK mobile market suffered its worst performance in five years this quarter with Vodafone alone, somewhat inexplicably, bucking the trend

5G capacity is impacting pricing trends with SIM only packages flattening and unlimited packages increasing in popularity and complexity

As the operators invest in solving rural coverage and rolling out 5G, they will continue to be hit by regulation. Out of contract notifications and discounts are next in a long series of assaults

BT’s divisions had contrasting fortunes in Q1 2019/20, with Consumer revenue growth sharply turning negative but Openreach external revenue growth accelerating to 10%, leaving the Group level unchanged at -1% and EBITDA on course to meet guidance.

Consumer was hit by several regulatory and pricing factors mainly affecting mobile, and the short-term outlook remains tough, with a number of legacy pricing issues across fixed and mobile still to be resolved.

Openreach is reaping the benefit of previous price declines annualizing out, allowing it to take full advantage of higher speed demand, and due to its full fibre roll-out this dynamic could persevere for years.
 

The UK mobile market posted its slowest growth in more than two years this quarter; just 0.5% service revenue growth although net adds were strong and churn was down

ARPU is under considerable pressure thanks to regulation limiting out-of-bundle spend which will exacerbate as the year progresses

Several other negative developments look set to be layered on the pressures this quarter, including a step-up in competitive intensity as 5G launches –  with H3G’s pricing of unlimited data a sign of a resurgence in its aggression

BT is accelerating its ‘full fibre’ rollout, likely due to a combination of a successful build to date, very promising regulatory developments, and (let’s not deny it) worrying competitor build plans

Full year results were a little weak versus consensus, with guidance a little soft as well, leading to questions of how this can be funded, particularly the roll-out acceleration from 2021/22 to cover half the country by the mid-2020s

Whatever the funding mechanism, we regard the investment as sound, with BT’s planned operational transformation also promising but potentially requiring further upfront investment

Sky made a surprisingly weak start to 2019, with revenue growth decelerating to 1.9% (the first time below 4% since the European businesses merged in 2015), due to weaker ARPU trends

However, Sky expects improvement to follow, blaming one-off factors in the quarter. The ARPU weakness drove EBITDA down 11.3%, but this should bounce back across the rest of 2019 as football rights costs turn from a drag to a positive

Comcast highlighted collaborations with Sky across tech, advertising, content distribution and even news, stating it is on track to achieve the anticipated $500 million in annual synergies over the next couple of years

The capacity boost with 5G will be more important than any speed or latency uplift. We estimate a 7-fold increase in mobile capacity in the UK and 13x+ for O2 and H3G

We view fixed mobile substitution products as quite niche although the number of mobile-only households is likely to creep up. mmWave would have the capacity to substitute for fixed but has many hurdles to overcome

Capacity-constraints have tempered competition of late and their removal risks an increase in intensity, especially as H3G views itself as sub-scale – good for policy makers but another challenge to add to the industry’s woes