Mobile growth improved very marginally to -3.6% this quarter as roaming revenues were harder hit and competitive intensity bounced back, but usage recovered from the lockdowns in Q2 and cuts to intra-EU calls were annualised.

Italy’s fortunes took a turn for the worse as roaming hit particularly hard and Iliad resurged. After a spate of downgrades to the outlook last quarter, there were some tentative upgrades in Q3 although the tone remains cautious.

The diminished drag from roaming is the primary positive driver from here. Although lockdowns of some degree are in place in Q4, their impact will be less severe than those in Q2.
 

Service revenue declines stabilised at -7% this quarter with a myriad of factors at play: roaming worsening, the end of lockdown taking some pressure off, B2B a mixed bag, and the annualisation of cuts to intra-EU calls.

Ofcom’s second 5G auction will be a focus in January. We expect selective bidding, proceeds of up to £2.7bn, and some wrangling over spectrum trading.

The outlook is better from here as the drag from roaming eases, in-contract price rises step up from the spring, Carphone Warehouse diminishes as a factor in the market, and the prospect of consolidation is still on the table.

COVID, potential consolidation, implications for ALF pricing and non-contiguous blocks have conspired to make the forthcoming second 5G spectrum auction a highly complicated affair.

H3G seems unlikely to bid in a meaningful way for the 5G spectrum (3.6GHz+) but is expected to share the 700MHz band with EE. With the three leading operators likely to split the 3.6GHz+ spectrum between them, proceeds of £1bn-£2.7bn are conceivable.

The non-contiguous nature of the spectrum blocks on offer risks the operators ending up with fragmented holdings in spite of Ofcom’s endeavours to encourage trading—an efficiency loss of up to 20%.

There are some reasons to be cheerful about Vodafone right now—small nuggets of encouragement in its H1 results and the prospect of some market repair in the UK. Annual in-contract price rises of CPI + 3.9% across the UK mobile sector could provide very valuable support.

German fixed momentum is a low-light of its H1 results with growth of just 0.6% in spite of heightened broadband demand and in contrast to the 5% growth rate of the Liberty Global assets at time of acquisition.

The IPO of Vodafone’s towers business remains imperative to maintaining its leverage targets and dividend. We estimate that it will need to sell at least 30% of equity and realise a hefty multiple in challenging market conditions.

BT’s revenue growth remained very suppressed in the September quarter at -7%, with a limited COVID-19 recovery chocked off by seasonal roaming effects and regulator-inspired pricing forbearance.

EBITDA growth did improve to -3% from -7% last quarter, mainly due to short-term cost actions and the early impact of its longer-term cost program, and the company has upgraded its short- and longer-term EBITDA targets.

The company is also optimistic on a longer-term return to underlying revenue growth, helped by a return to regular existing customer price increases and the impact of full fibre, but not until 2023, with a few bumps in the road before then.

EE has announced the ending of its relationship with Carphone Warehouse, hot on the heels of a similar announcement from O2 a few months ago and the recent closure of Carphone Warehouse high-street stores.

Representing less than a third of the market gross adds, Carphone Warehouse is going to struggle to be viewed as a true comparison distribution channel. Its future probably lies elsewhere.

The closure of Carphone Warehouse stores, and now the diminished appeal of its website/off-high street stores, is positive for the operators.

Growth deteriorated by 3.5ppts, with the UK the weakest and Italy most robust thanks to its early onslaught of COVID-19, usage pickup in a largely pre-pay market and reprieve from a particularly competitive environment.

More operators (Orange and Telecom Italia) cut their guidance at the Q2 results and others (Deutsche Telekom and Iliad) sounded a note of caution regarding the likelihood of them reaching their full year targets.

The outlook for next quarter is mixed—roaming revenues will be even harder hit and competitive intensity is bouncing back but where usage has been depressed it will begin to recover well post-lockdown.

Market revenue fell 6% in Q1 2020, largely due to lack of sports revenue (which will bounce back), but backbook pricing woes also hit.

Broadband volume growth accelerated though, and may accelerate further as supply constraints ease.

The increase in working-from-home may also enhance demand for ultrafast, the best hope for a return to industry revenue growth.