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.
BT had a weak December quarter, with revenue falling 3% and EBITDA 4%, despite a recovery at Openreach, mainly driven by tough competition and regulatory hits, with operating metrics solid but not noticeably improving.
These hits look set to continue, so the company’s hopes of a return to EBITDA growth in 2020/21 probably hinge on brand and service improvements actually becoming visible in operating performance.
A successful full fibre roll-out would be a boon for BT in the longer term, and regulatory developments are headed in the right direction, if not quite there yet. However, its affordability without a dividend cut remains questionable in the current challenging environment.
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.
Market revenue growth fell in Q3 to below 1%, and may drop below zero next quarter as existing customer pricing comes under more pressure
New customer pricing is however rising, and average pricing should rise much further as ultrafast increases in availability and popularity
Political enthusiasm for full fibre should be welcomed, although some specific plans are likely to do more harm than good if implemented literally
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
Champions League UK TV rights, at £394m/season, appear to have reached a ceiling, with costs on a per match basis now comparable to the more-desirable Premier League.
In the imminent auction, current rightsholder BT is the clear frontrunner. Potential competitors appear reluctant: Sky Sports has thrived since losing the rights in 2015, and no other players can reasonably compete at this spend.
This presents BT with a golden opportunity to rein in costs, with a view to moving BT Sport towards breakeven at an important time for the wider business, considering the financial pressure it is facing
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
Market revenue growth bounced back to all of 1% in Q2 after near zero in the previous quarter, with broadband volumes at a near standstill
Operators appear resigned to this however, with new customer pricing appearing to recover, and wholesale price cuts not to be repeated
On the downside, further regulatory and commercial pressure on existing customer pricing is likely, and pricing détentes are often short lived
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.
Market revenue growth dipped to around zero in Q1, with fierce competition on new customer pricing the major factor
All four of the big operators now suffer from declining ARPU, with existing customer price rises increasingly hard to land given falling prices for new customers
The rapid move to superfast is not helping as much as it should; the operators will hope that they fare better with the move to ultrafast